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SECTIONS 20-22IFRS on SME’s

CERA.CRUZ.MACARAIG.RODRIGUEZ.TAN

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+COVERAGE

• LeasesSection 20

• Provisions and Contingencies

Section 21

• Liabilities and Equity

Section 22

+SECTION 20

LEASES

+SECTION 20: Leases

Applies to all leases other than: Leases to explore for or use minerals, oil, natural gas and similar

non-regenerative resources Licensing agreements for items such as motion picture films,

video recordings, plays, manuscripts, patents and copyrights Measurement of property held by lessees for investment

property and by lessors under operating leases Measurement of biological assets by lessees under finance

leases and by lessors under operating leases Leases that could lead to a loss as a result of contractual terms

unrelated to changes in the price of the leased asset, changes in foreign exchange rates, or default by one of the counterparties

Onerous operating leases

SCOPE

+SECTION 20: Leases

A. Definition:

A lease is an agreement that transfers the right to use assets in return for payment Finance Lease – transfers substantially all the risks and rewards incidental to

ownership. Substantially all risks and rewards are presumed transferred if:o the lease transfers ownership of the asset to the lessee by the end of the lease

termo the lessee has a 'bargain purchase option'o the lease term is for the major part of the economic life of the asset even if title is

not transferred at the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset

o the leased assets are of such a specialized nature that only the lessee can use them without major modifications

o the lessee bears the lessor losses if cancelledo a secondary rental period at below market rateso the residual value risk is borne by the lessee.

Operating Lease – does not transfer substantially all the risks and rewards incidental to ownership

BASIC PRINCIPLES

+SECTION 20: Leases

B. Operating Lease

Initial Measurement Lessee

expenses on a straight-line basis or another basis that represents the use of the asset, unless payments to the lessor increase with expected inflation in which case the payments are expensed when payable

Lessor presents assets subject to operating leases in the Statement of Financial

Position according to the nature of the asset income is recognized on a straight-line basis or another basis that

represents the use of the asset, unless payments received increase with expected inflation, in which case the payments are recognized as income when payable

depreciation is recognized on the same basis as for similar assets Initial Direct Costs incurred in arranging leases are added to the carrying

amount of the leased asset and expensed over the lease term on the same basis as the lease income

BASIC PRINCIPLES

+SECTION 20: Leases

B. Operating Lease

Sale and Leaseback Selling Price = Fair Value – profit or loss is

recognized immediately Selling Price < Fair Value – profit or loss is

recognized immediately, except if compensated for by future below-market price payments, which are deferred and amortized

Selling Price > Fair Value > Carrying Value

Deferred Outright

BASIC PRINCIPLES

+SECTION 20: Leases

B. Operating Lease

Lease bonus – amortized over lease term

Initial direct costs – deferred over lease term

BASIC PRINCIPLES

+SECTION 20: Leases

D. Finance Lease Initial measurement

Lessee – measured at the lower of Fair Value of the leased property or present value of Minimum Lease Payments

Lessor – presented as receivables at amounts equal to the net investment: Gross Investment discounted at the interest rate implicit in the lease

BASIC PRINCIPLES

+SECTION 20: Leases

D. Finance Lease Subsequent measurement

Lesseeo Minimum Lease Payments are apportioned between

finance charges and reduction of the liability using the effective interest method

o Asset is depreciated over the shorter of the lease term and useful life

Lessor o Finance income reflects a constant rate of return on

net investment. Payments are applied against the gross investment to reduce both the principal and unearned finance income

BASIC PRINCIPLES

+SECTION 20: Leases

D. Finance Lease Sale and Leaseback

Seller/lessee defers any gain and amortizes it over the lease term

BASIC PRINCIPLES

+SECTION 20: Leases

E. Derecognition Leases are classified at inception of the lease

and this is not changed during the term unless there is an agreement between the lessee and lessor, in which case the classification is reevaluated

BASIC PRINCIPLES

+Key Differences

+SECTION 21

PROVISIONS

AND

CONTINGENCIES

+ SECTION 21: Provisions & Contingencies

Applies to all provisions, contingent liabilities and contingent assets except those covered by other sections of the IFRS for SME (e.g. leases, construction contracts, employee benefits and income tax)

SCOPE

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A. Provision An entity must recognize a provision if, and only

if A present obligation (legal or

constructive) has arisen as a result of a past event (the obligating event),

Payment is probable ('more likely than not'), and

The amount can be estimated reliably

BASIC PRINCIPLES

SECTION 21: Provisions & Contingencies

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A. Provision Initial recognition

Initially recognized at the best possible estimate at the reporting date.

This value should take into any time value of money if this is considered material.

When all or part of a provision may be reimbursed by a third party, the reimbursement is to be recognized separately only when it is virtually certain payment will be received.

BASIC PRINCIPLES

SECTION 21: Provisions & Contingencies

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A. Provision Subsequent measurement

Subsequently, provisions are to be reviewed at each reporting date and adjusted to meet the best current estimate

Any adjustments are recognized in profit and loss while any unwinding of discounts is to be treated as a finance cost

BASIC PRINCIPLES

SECTION 21: Provisions & Contingencies

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A. Provision Restructuring

Must accrue provisions for:o Onerous contractso Warrantieso Restructuring if legal or constructive obligation to

restructureo Sales refunds

May NOT accrue provisions for:o Future operating losses, no matter how probableo Possible future restructuring (plan but not yet a legal or

constructive obligation)

BASIC PRINCIPLES

SECTION 21: Provisions & Contingencies

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B. Contingencies Contingent liabilities

o These are not recognized as liabilitieso Unless remote, disclose an estimate of the financial

effect, indications of the uncertainties relating to timing or amount, and the possibility of reimbursement

Contingent assetso These are not recognized as assets.o Disclose a description of the nature and the financial

effect if probable

BASIC PRINCIPLES

SECTION 21: Provisions & Contingencies

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Full IFRS (IAS 37) provides significantly more guidance on provisions relating to restructurings

Key Differences

+SECTION 22

LIABILITIES

AND

EQUITY

+SECTION 22: Liabilities and

Equity Classifies financial instruments as either

liabilities or equity

Applies to the accounting for equity instruments issued to owners of the entity

Does not include: Interest in joint ventures, subsidiaries and

associates Employers’ rights and obligations under

employee benefit plan Contracts for contingent consideration in a

business combination (acquirer only) Share-based payment transactions (Sec 26)

SCOPE

+SECTION 22: Liabilities and

EquityA. Classification between liabilities and

equity

Liabilities - obligation of an entity arising from past events, the settlement of which is expected to result in an outflow of resources embodying economic benefits

Equity - residual interest of assets in an entity after paying all obligations

BASIC PRINCIPLES

+SECTION 22: Liabilities and

Equity Special Cases:

A. Financial instruments that meets the definition of a liability can be classified as equity

1. Puttable Instruments Pro rata share of the entity's net assets in the event of liquidation. The instrument is the most subordinate class.

o Has no priority over other claims to the assets of the entity on liquidation

o Does not need to be converted into another instrument before it is in the class of instruments that is subordinate to all other classes of instruments

All financial instruments in the most subordinate class have identical features.

Apart from the puttable features, there must be no other contractual obligation to deliver cash or other assets associated with the instrument.

The total expected cash flows attributable to the instrument over the life of the instrument are based substantially on the profit/loss or change in the net assets of the whole entity over the life of the instrument

BASIC PRINCIPLES

+SECTION 22: Liabilities and

EquitySpecial Cases:

A. Financial instruments that meets the definition of a liability can be classified as equity

2. Instruments subordinate to all other classes of instruments that impose an obligation on the entity to deliver a pro rata share of the net assets of the entity only on liquidation.

3. Members' shares in co-operative entities and similar instruments are equity if:

o the entity has an unconditional right to refuse redemption of the members' shares, or

o redemption is unconditionally prohibited by local law, regulation or the entity's governing charter.

BASIC PRINCIPLES

+SECTION 22: Liabilities and

EquitySpecial Cases:

B. Instruments classified as liability rather than equity1. If the distribution of net assets on liquidation is subject

to a maximum amount (a ceiling).

2. If it obliges the entity to make payments to the holder before liquidation, such as a mandatory dividend.

3. Mandatorily redeemable preference shares

4. A puttable instrument that entitles the holder to an amount measured on some other basis not under IFRS for SMEs (like local GAAP) is a financial liability.

5. A puttable instrument that is classified as equity in a subsidiary’s financial statements is classified as a liability in the consolidated group financial statements.

6. Cumulative, redeemable preference share

BASIC PRINCIPLES

+SECTION 22: Liabilities and

EquityBASIC PRINCIPLES

B. Original Issue of shares or other equity instruments

Recognition: Recognized as equity when another party is obliged

to provide cash or other resources in exchange for the instruments. Applies equally to the sale of options, rights, warrants and similar equity instruments.

Instrument is issued before cash is received = receivable, offset to equity

Subscribed shares = no increase in equity

+SECTION 22: Liabilities and

EquityBASIC PRINCIPLES

B. Original Issue of shares or other equity instruments

Measurement: At fair value, net of direct issuance costs. If payment is deferred, measure at present value. Transaction costs = deduction from equity, net of

income tax benefit

+SECTION 22: Liabilities and

EquityBASIC PRINCIPLES

C. Stock dividends and stock splits

Stock dividends and splits do not result in changes to total equity.

An entity shall reclassify amounts within equity in accordance with applicable laws.

+SECTION 22: Liabilities and

EquityBASIC PRINCIPLES

D. Convertible debt or similar compound financial instruments

Proceeds on the issue are allocated between the liability and equity component.

Liability component is measured at fair value of a similar liability that does not have a conversion feature. Uses effective interest method for the bond discount or premium.

Residual amount is allocated to the equity component. Transaction costs shall be allocated between the debt

and equity component based on their relative fair values

+SECTION 22: Liabilities and

EquityBASIC PRINCIPLES

E. Treasury SharesMeasured at the fair value of the consideration

paid

Deducted from equity

No gain or loss is recognized on the purchase, sale, issue or cancellation

+SECTION 22: Liabilities and

EquityBASIC PRINCIPLES

F. Distributions to OwnersEquity is reduced by the amount of distributions

to owners, net of any income tax benefits.

Liability to distribute non-cash assets to its owners is recognized at the fair value of the assets to be distributed

+SECTION 22: Liabilities and

EquityBASIC PRINCIPLES

G. Non-controlling interest and transactions in shares of a consolidated subsidiary

Changes in a parent’s controlling interest in a subsidiary that do not result in a loss of control are treated as equity transactions with the owners.

No gain or loss is recognized.An entity shall not recognize any change in the

carrying amounts of assets (including goodwill) or liabilities as a result of such transactions.

+Key Differences

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Thank you!