joint eccb and ifrs foundation regional train the...

Joint ECCB and IFRS Foundation

Regional Train the Trainer Workshop for the Non-banking Financial Institutions

hosted by the ECCB funded by the World Bank

Monday 25 to Friday 29 February 2013

St Kitts and Nevis

Joint ECCB and IFRS Foundation Regional Train the Trainer Workshop for the Non-banking Financial Institutions

hosted by the ECCB and funded by the World Bank

Monday 25 to Friday 29 February 2013 St Kitts and Nevis

Day 1 Day 2 Day 3 Day 4 (morning) Day 5 Framework-based

Understanding of IFRSs (main principles and estimates and judgements to apply)

Framework-based Understanding of IFRSs (main principles and estimates and judgements to apply)

Accounting for Financial Instruments in accordance with IFRSs

IASB’s project to improve accounting for financial instruments

A former banking and insurance CFO’s experience

08:30

Introduction ECCB

Overview of non-financial liabilities MW

Presenting financial instruments in accordance with IAS 32 DS

IASB’s project to replace IAS 39 DS

Regulatory filings DS

09:00

The Conceptual Framework MW

10:00 Tea Tea Tea Tea Tea 10:30 Quiz and discussion

MW Overview of non-financial liabilities continued MW

Accounting for financial instruments in accordance with IFRS 9 and IAS 39 continued DS

IASB’s project to replace IAS 39 DS

Regulatory filings DS

11:30 Overview of non-financial assets MW

Overview of reporting financial performance MW

Quiz and discussion DS

Questions from the audience and discussion DS

12:30 Lunch Lunch Lunch Lunch Lunch

1

Day 1 Day 2 Day 3 Day 4 Day 5 Framework-based

Understanding of IFRSs (main principles and estimates and judgements to apply)

Framework-based Understanding of IFRSs (main principles and estimates and judgements to apply)

Accounting for Financial Instruments in accordance with IFRSs

Accounting for Insurance Contracts in accordance with IFRSs

External audit standards and practices for NBFIs

13:30 Overview of non-financial assets MW

Overview of business combinations and consolidated financial statements in accordance with IFRSs MW

Quiz and discussion DS

Accounting for insurance contracts in (IFRS 4) DS

RJ

14:30 Overview of display related IFRSs MW

Disclosing financial instruments (IFRS 7) DS

15:30 Tea Case study and discussion Open Safari’s functional currency and its presentation currency MW

Tea Tea Tea

16:00 The Open Safari case study and discussion MW

Tea Quiz and discussion DS

IASB’s Insurance Contracts project DS

RJ

16:30 DG

17:00 Quiz and discussion DS

RJ

18:00 Close Close Close Close Close KEY: DG: Dave Grace DS: Darrel Scott, IASB member RJ: Rubin John, KPMG partner MW: Michael Wells, IASB staff

2

Joint ECCB and IFRS Foundation Regional Train the Trainer Workshop for the

Non-banking Financial Institutions


Introduction by the ECCB

3




Day 1

5

The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation.

International Financial Reporting Standards

Conceptual Framework

© 2013 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Joint ECCB and IFRS Foundation workshopwith the support of a World Bank financed project

Michael Wells, Director, IFRS Education Initiative, IASB

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© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

The requirements are set out in International Financial Reporting Standards (IFRSs), as issued by the IASB at 1 January 2013 with an effective date after 1 January 2013 but not the IFRSs they will replace.Disclaimer: The IFRS Foundation, the authors, the presenters and the publishers do not accept responsibility for any loss caused by acting or refraining from acting in reliance on the material in this PowerPoint presentation, whether such loss is caused by negligence or otherwise.

33


• relates IFRS requirements to the concepts in the Conceptual Framework

• reasons why some IFRS requirements do not maximise those concepts (eg application of the cost constraint or inherited requirements)

Concepts PrinciplesRules

Framework-based understanding… 44


• Yes, the starting point for understanding all IFRS information is the objective and the concepts that flow logically from that objective:– IASB uses Framework to set IFRSs– Teachers/Trainers use Framework-based teaching

to prepare students to make judgements that are necessary to apply IFRSs

– Preparers use Framework to make the judgements that are necessary to apply IFRSs

– Auditors and regulators assess those judgements– Investors, lenders and others consider those

judgements when using IFRS financial information to inform their decisions

Does the Framework help me understand IFRSs?

55


• Framework sets out agreed concepts that underlie IFRS financial reporting– the objective of general purpose financial

reporting– qualitative characteristics– elements of financial statements– recognition– measurement– presentation and disclosure

Other concepts all flow from the objective

The IASB’s Conceptual Framework 66


“Provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity.”

Those decisions involve buying, selling or holding equity and debt instruments, and providing or settling loans or other forms of credit

Objective of financial reporting

7

77


• Primary users – provide resources, but cannot demand

information – common information needs

• Assess the prospects for future net cash inflows– buy, sell, hold– efficient and effective use of resources

Objective of financial reporting 88


• Relevance– predictive value– confirmatory value– materiality, entity-specific

• Faithful representation (replaces reliability)

– completeness– neutrality– free from error

Fundamental qualitative characteristics

99


A large listed profitable manufacturer• financial statements in millions of CUs • recognises individual items of PPE that cost

less than CU1,000 as an expense on initial recognition

• In 20X1 this policy resulted in CU100,000 being recognised as an expense

Does the Entity’s policy contravene IFRSs?

Example: materiality 10Enhancing Qualitative Characteristics

• Comparability: like things look alike; different things look different

• Verifiability: knowledgeable and independent observers could reach consensus, but not necessarily complete agreement, that a depiction is a faithful representation

• Timeliness: having information available to decision-makers in time to be capable of influencing their decisions

• Understandability: Classify, characterise, and present information clearly and concisely

10


1111


• Objective• Concepts including qualitative characteristics

– faithful representation– comparability

• Principles – Prior period error: retrospective restatement– Change in policy: retrospective application– Change in estimate: prospective application

• Rules– impracticable exception– specified disclosures

Examples:errors and changes in policies and estimates 1212


• Cost – IASB assesses whether the benefits of reporting

particular information are likely to justify the costs incurred to provide and use that information.

Note: It is consistent with the Framework for an IFRS requirement not to maximise the objective of financial reporting when the costs of doing so would exceed the benefits.

Pervasive constraint

8

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• The concepts = objective and qualitative characteristics, particularly comparability

• The principle = retrospective application of new accounting policy

• The rule = transitional provisions for new and amended IFRSs

– application of the cost constraint

Example: new IFRS requirement1414


Asset• resource controlled by the

entity …• expected inflow of

economic benefits

Liability • present obligation … • expected outflow of

economic benefitsEquity = assets – liabilities

Income• recognised increase in

asset/decrease in liability in current reporting period

• that result in increased equity except…

Expense• recognised decrease in

asset/increase in liability in current reporting period

• that result in decreased equity except…

Elements

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The concepts

• Information about the nature and amounts of an entity’s economic resources and claims against the reporting entity help users identify the reporting entity’s financial strengths and weaknesses (see OB12–OB14).

– help assess entity’s prospects for future cash flows, its liquidity and solvency, its needs for additional financing and how successful it is likely to be in obtaining financing.

• Definition of asset, liability and equity (4.4)

Financial position 1616


Are the following assets?• fish farmer’s breeding stock• fish in the sea (fish harvester’s perspective)• an oil explorer’s exploration rig (10% chance of

oil)• A pharmaceutical manufacturer’s in-process

research and development• an clothing designer’s internally generated

brand

Examples:Financial position, assets?

1717


Are the following liabilities?• ‘provision’ for self-insurance• ‘provision’ for depreciation• ‘provision’ for doubtful debts

Examples:Financial position, liabilities? 1818


Does the entity have an asset at 31/12/20X1?• On 1/1/20X1

– gold is trading at $950 per ounce– a jewellery manufacturer contracts with a gold

miner to physically receive 100,000 ounces of gold on 1/1/20X2 at the fixed price of $1,000 per ounce

• On 31/12/20X1 gold is trading at $1,500 per ounce.

Examples: continued

Financial position, assets?

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Does the entity have a liability at 31/12/20X1?• on 01/01/20X2 an entity declared a final dividend for

the year ended 31/12/20X1.• At 31/12/20X1 an entity expects to undertake major

maintenance of its manufacturing plant in 20X9. • due to extraordinarily high snowfall in 20X1 a snow ski

operator received higher than average revenue for 20X1. Management wants to recognise a liability (and expense in 20X1) for the anticipated effects of expected future warmer years.

Examples:Financial position, liabilities? 2020


Does the entity have equity, liability or part equity and part liability?• non-controlling shareholders own 25% of the equity of a

subsidiary.• an entity issues a 3-year term convertible bond for

CU1,000 (= par = face value). Interest is payable at 6% pa. The bond is convertible at any time up to maturity into 250 ordinary shares. When the bonds are issued, the prevailing market interest rate for similar debt without conversion options is 9%.

Examples:Financial position, equity or liability?

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Concepts

• Information about an entity’s financial performance (particular changes in its economic resources and claims) helps users understand the return that the entity has produced on its economic resources and is usually helpful in predicting the entity’s future returns on its economic resources (see OB16)

• Definition of income and expense (see 4.25)

Financial performance the concepts 2222


• Accrual basis of accounting (the concepts)– depicts the effects of transactions and other events

and circumstances on a reporting entity’s economic resources and claims in the periods in which those effects occur (see OB17)

– financial performance during a period, reflected by changes in its economic resources and claims other than by obtaining additional resources directly from investors and creditors, is useful in assessing the entity’s past and future ability to generate net cash inflows (see OB18)

Recognition the concepts

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• Recognise item that meets element definition when– probable that benefits will flow to/from the entity– has cost or value that can measured reliably

(see 4.38)

• Accrual basis of accounting (the principle)– recognise elements (eg asset) when they satisfy the

definition and recognition criteria (see IAS1.28)

• Applying the principle (see individual IFRSs)

What does probable mean?

Recognition principle and rules 2424


Recognise the asset?• a hospital’s backup backup generator (expect

never to use)• advertising expenditure • research and development expenditure • internally generated brand• lessee—short-term car rental agreement• firm order to acquire gold, cannot settle net

Examples: asset recognition

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• The unit of account is the level at which an asset is aggregated or disaggregated for recognition purposes.

• Most IFRS do not prescribe the unit of account therefore judgement is required in applying recognition criteria to an entity’s specific circumstances. For example:

– individually insignificant items, such as moulds, tools and dies may be aggregated when applying the recognition criteria in IAS 16.

– cows would usually be recognised individually whereas bees would usually be recognised as a swarm when applying IAS 41.

Unit of account for recognition 2626


• Measurement is the process of determining monetary amounts at which elements are recognised and carried. (4.54)

• To a large extent, financial reports are based on estimates, judgements and models rather than exact depictions. The Framework establishes the concepts that underlie those estimates, judgements and models (OB11)

• IASB guided by objective and qualitative characteristics when specifying measurements.

Measurement concepts

2727


• Derecognition of an asset refers to when an asset previously recognised by an entity is removed from the entity’s statement of financial position

– derecognition requirements are specified at the standards level.

– derecognition does not necessarily occur when the asset no longer satisfies the conditions specified for its initial recognition (ie derecognition does not necessarily coincide with the loss of control of the asset )

• IASB guided by objective, qualitative characteristics and elements

Derecognition of assets 2828


• Objective of financial reporting• Presentation: financial statements portray financial

effects of transactions and events by:– grouping into broad classes (the elements, eg asset) – sub-classify elements (eg assets sub-classified by their

nature or function in the business)

• IAS 1– application of IFRSs with additional disclosures when

necessary results in a fair presentation (faithful representation of transactions, events and conditions)

– don’t offset assets & liabilities or income & expenses

Presentation and disclosure

2929


• a cohesive understanding of IFRSs – Framework facilitates consistent and logical

formulation of IFRSs

• a basis for judgement in applying IFRSs – Framework established the concepts that underlie

the estimates, judgements and models on which IFRS financial statements are based

• a basis for continuously updating IFRS knowledge and IFRS competencies

Framework-based understanding provides… 3030


Does the Framework help me apply IFRSs?• Yes, Framework is in IAS 8 hierarchy (see next

slide) – Preparers use the Framework to make the

judgements that are necessary to apply IFRSs– Auditors and regulators assess those

judgements– Investors, lenders and others consider those

judgements when using IFRS financial information to inform their decisions

Framework’s role in applying IFRSs

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• Use judgement to– develop a policy that results in relevant

information that faithfully represents (ie complete, neutral and error free)

– Hierarchy: 1st IFRS dealing with similar and related issue2nd Framework definitions, recognition crit. etc Can also in parallel refer to GAAPs with similar Framework

If no specific IFRS requirement 3232


Framework-based approach would ask:• What is the economics of the phenomenon (eg

transaction or event)?• What relevant information using the accrual

basis of accounting faithfully present that economic phenomenon to inform decisions of investors and lenders (potential and existing)?

• Is there anything in IFRSs that prevents me from providing that information?

In other words, if no IFRS requirement…

3333


Before IFRIC 17, entity distributes non-cash asset (eg land or shares in another) whose fair value = CU1 mill. Carrying amount of asset = cost = CU1K

• Economics = reduce owners’ claims against the entity by distributing to them an asset worth CU1 million.

• Relevant information for investors and lenders that faithfully represents the economics: – investors received CU1 million refund of capital. – value of assets available to meet lenders’ claims

reduced by CU1 million.

Example 5: non-cash distribution 34Example 5: non-cash distribution

Before IFRIC 17, entity distributes non-cash asset (eg land or shares in another) whose fair value = CU1 mill. Carrying amount of asset = cost = CU1K

• Economics = reduce owners’ claims against the entity by distributing to them an asset worth CU1 million.

• Relevant information for investors and lenders that faithfully represents the economics: – investors received CU1 million refund of capital. – value of assets available to meet lenders’ claims

reduced by CU1 million.

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3535


Before IFRIC 17… (continued)• Does IFRSs prevent providing that information?

No. Therefore:– recognise CU999K income (previously

unrecognised increase in the value of the asset derecognised).

– recognise CU1 million distribution to owners.

Example 5: non-cash distribution 3636


Before IFRS 2, entity pays employee in own shares. Par value of shares issued = CU1K. Fair value of services provided = CU1 million = fair value of shares.

• Economics = entity paid employees CU1 million for services. Employees invested CU1 million in entity.

• Relevant information for investors and lenders that faithfully represents the economics:– CU1 million services received = staff cost.– CU1 million invested = increased owner equity.

• Does IFRSs prevent providing that information? No. Therefore, recognise CU1 million expense and recognise CU1 million increase in owners’ equity.

Example 6: share-based payment

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3737


The Framework does not… Clarification—the Frameworkincludes

include a matching concept accrual basis of accounting—recognise elements when satisfy definition and recognition criteria

include conservatism concept neutrality concept

include an element other comprehensive income (or a concept for OCI)

only the following elements—asset, liability, equity, income and expense

mention management intent or business model

Common misunderstandings3838


Misunderstanding Clarification

Principles are necessarily less rigorous than rules

Rules are the tools of financial engineers

There are few judgements and estimates in cost-based measurements

Inventory, eg allocate joint costs and production overheadsPP&E, eg costs to dismantle/restore site, useful life, residual value, depreciation methodProvisions, eg uncertain timing and amount of expected future cash flows

Common misunderstandings continued

39

© IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Thank You

13



Quiz:Conceptual Framework




2



3

Quiz: purpose of the Conceptual Framework for Financial ReportingQuestion 1: The purpose of the Conceptual Framework for Financial Reporting is:

a. to assist the IASB in setting IFRSs?b. to assist preparers of financial statements

in applying IFRSs?c. to assist auditors in forming an opinion on

whether financial statements comply with IFRSs?

d. to assist users of financial statements in interpreting IFRS financial statements?

e. all of the above?© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

4

Quiz: objective of general purpose of financial reporting

Question 2: The objective of general purpose financial reporting is:

a. provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity?

b. to inform government statistics?c. to support the entity’s tax return?


5

Quiz: objective of general purpose of financial reportingQuestion 2: The objective of general purpose financial reporting is:

d. to meet all the information needs of all the users of an entity’s financial statements?

e. to inform economic decision-making by a broad range of users (including managers, investors, creditors and prudential regulators)?


66

Quiz: objective of general purpose financial reporting

Question 3: Which of the following could most closely be associated with the objective of financial reporting:

a. have a bias toward understating assets and income and overstating liabilities and expenses?

b. transparency and neutrality?c. financial stability through conservatism?d. management discretion in reporting

financial information?


14

77

Quiz: fundamental qualitative characteristics

Question 4: The fundamental qualitative characteristics are:

a. comparability and relevance?b. relevance and reliability?c. relevance, reliability and comparability?d. relevance and faithful representation?e. comparability, relevance and faithful

representation?


88Quiz: qualitative characteristics

Question 5: verifiability means knowledgeable and independent observers:

a. would reach complete agreement that a depiction is a faithful representation?

b. cannot reach consensus that a depiction is a faithful representation?

c. could reach consensus, but not necessarily complete agreement, that a depiction is a faithful representation?



Question 6: which statement/s are true?a. Relevance is a fundamental qualitative

characteristic.b. Financial information without both

relevance and faithful representation is not useful.

c. Financial information without both relevance and faithful representation cannot be made useful by being more comparable, verifiable, timely or understandable.



Question 6: which of the statements below are true?d. Financial information that is relevant and

faithfully represented may still be useful even if it does not have any of the enhancing qualitative characteristics

e. All of the above statements.f. None of the above statements.


1111Quiz: recognition

Question 7: Expenses are recognised in comprehensive income (profit or OCI):a. using the matching basis—on the basis of

a direct association between the costs incurred and the earning of specific items of income?

b. using the accrual basis—items are recognised as assets, liabilities, equity, income or expenses when they satisfy the definitions and recognition criteria for those items?

c. at the discretion of management?© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

12Quiz: uncertain future cash flows

Question 8: Recognition criteria determine when to recognise an item.Measurement is determining the monetary amounts at which to measure an item. Uncertainties about the extent of future cash flows:

12

a. only affect the decision about whether to recognise?

b. only affect the estimation of the amount at which to measure the item?

c. could affect both recognition and measurement?


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13Quiz: measurement

Question 9: How many measurement bases does IFRSs specify for the measurement of assets?

13

a. one—historical costb. one—fair value c. two—historical cost and fair valued. many—including historical cost, fair value,

value in use, estimated selling price less costs to complete and sell, etc


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Quiz: status of Conceptual Framework

Question 10: the Conceptual Framework:

14

a. is an IFRS?b. overrides all other IFRS requirements?c. does not define standards for any particular

measurement or disclosure issue?d. is in the hierarchy that management must in

the absence of a specific IFRS requirement apply in developing an accounting policy that results in information that is relevant and reliable?


15


Thank You

16



Non-financial asset




22




The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation

Classifying non-financial assets


44


• Objective of financial reporting• Financial statements portray financial effects of

transactions and events by:– grouping into broad classes (the elements, eg asset) – sub-classify elements (eg assets sub-classified by their

nature or function in the business)

• IAS 1– application of IFRSs with additional disclosures when

necessary results in a fair presentation (faithful representation of transactions, events and conditions)

– don’t offset assets & liabilities or income & expenses

Classification concepts

55


• Information about the nature and amounts of a reporting entity’s economic resources and claims can help users to identify the reporting entity’s financial strengths and weaknesses.

• That information can help users to: – assess the reporting entity’s liquidity and

solvency – its needs for additional financing and how

successful it is likely to be in obtaining that financing.

(CF.OB13)

Classification concepts—assets and claims 66


• Different types of economic resources affect a user’s assessment of the reporting entity's prospects for future cash flows differently.

– Some future cash flows result directly from existing economic resources (eg accounts receivable and investment property).

– Other cash flows result from using several resources in combination to produce and market goods or services to customers (eg PPE and intangible assets). Although those cash flows cannot be identified with individual economic resources (or claims), users of financial reports need to know the nature and amount of the resources available for use in a reporting entity’s operations. (CF.OB14)

Classification concepts—assets

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• Different assets exhibit different characteristics (nature) and can be put to a variety of uses (use) in order to generate future economic benefits

• Nature and use determine the classification of assets• IFRS defines a number of assets• For some assets significant judgement is required to

determine their classification

Classification of assets 88


ASSET TYPE USE IN BUSINESS ? FORM OF FUTURE ECONOMIC BENEFITS

Inventory (IAS 2) Sale or used in production of items for sale or in services

Usually cash or other asset received in exchange

PPE (IAS 16) Used in production or supply of goods or services, rental or administration (more than one period)

Usually cash through sale of ‘final’ product or service

Intangibles (IAS 38) Used in production or supply of goods or services

Usually cash through sale of ‘final’ product or service

Investment property IAS 40)

Earn rentals or capital appreciation

Usually cash inflows independent from other assets

Biological assets in agricultural activity(IAS 41)

managing biological transformation and harvest for sale or for conversion into agricultural produce or into additional biological assets

Usually cash inflows through sale of harvested produce or progeny

Non-financial asset classifications

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Definition

• Inventories are assets:• held for sale in the ordinary course of business;• in the process of production for sale; or• materials or supplies to be used in the production

for sale.

Definition of inventory (IAS 2) 1010


Definition

• Property, plant and equipment (PPE) are tangible items that are

• held for use in the production or supply of goods or services, for rental to others, or for administration purposes; and

• are expected to be used during more than one period.

Definition of property, plant and equipment (IAS 16)

1111


Intangible assets

• Management intention relating to intangible assets is similar to that of property, plant and equipment (ie to be used to generate future economic benefits as part of a production process or the provision of services for a period in excess of one year).

• An intangible asset is an identifiable non-monetary asset without physical substance. Such an asset is identifiable when it is separable, or when it arises from contractual or other legal rights.

Definition of intangible assets (IAS 38) 1212


• It is sometimes difficult to assess whether an internally generated intangible asset qualifies for recognition because of problems in:

a. identifying whether and when there is an identifiable asset that will generate expected future economic benefits; and

b. determining the cost of the asset reliably. In some cases, the cost of generating an intangible asset internally cannot be distinguished from the cost of maintaining or enhancing the entity's internally generated goodwill or of running day-to-day operations.

• Therefore, special requirements in addition to the general requirements for recognition of an internally generated intangible asset apply.

Recognition of intangible assets (IAS 38)

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• Expenditure on particular internally generated intangible assets must be recognised as an expense when incurred (eg research activities—the original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding.

Recognition of research costs(IAS 38) 1414


An intangible asset arising from the development phase of an internal project must be recognised if, and only if, an entity can demonstrate all of the following: a. the technical feasibility of completing the intangible asset so that

it will be available for use or sale.b. its intention to complete the intangible asset and use or sell it.c. its ability to use or sell the intangible asset.d. how the intangible asset will generate probable future economic

benefits. Among other things, the entity can demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset.

e. the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset.

f. its ability to measure reliably the expenditure attributable to the intangible asset during its development.

Recognition of development cost(IAS 38)

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Definition• Investment property is land or a building

(including part of a building) or both, held to earn rentals or for capital appreciation or both.

• It is neither owner-occupied (see IAS 16 Property, Plant and Equipment) nor held for sale in the ordinary course of business (see IAS 2 Inventories).

Definition of investment property (IAS 40) 1616


• Sometimes it is difficult to identify investment property. In such cases an entity develops criteria so that it can exercise that judgement consistently

• eg, owner of a hotel transfers some responsibilities to third parties under a management contract (PPE or investment property?)

Judgements and estimates (IAS 40)

1717


• IAS 41 specifies the accounting for: • biological assets (living plant or animal) whose

biological transformation (growth, degeneration, production and procreation) and harvest is managed by an entity for sale or for conversion into agricultural produce or into additional biological assets (ie agricultural activity); and

• agricultural produce up to the point of harvest. • It does not address the processing of agricultural

produce after harvest (eg processing grapes into wine, or wool into yarn).

Introduction (IAS 41) 1818


• Biological assets that are attached to land (eg trees in a plantation forest) are classified separately from the land. If owner-occupied the land is property accounted for in accordance with IAS 16.

Classification (IAS 41)

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IAS 41 Agriculture 2020


• It can be difficult to determine whether particular biological assets are engaged in agricultural activity and therefore in the scope of IAS 41—eg the breeding stock of an exotic bird breeding zoo.

Judgements and estimates (IAS 41)

2121


• A non-current asset is classified as ‘held for sale’ if its carrying amount will be recovered principally through a sale transaction, rather than through continuing use (paragraph 6).

• To be classified as a non-current asset held for sale:

• The asset must be available for immediate sale in its present condition (subject only to terms that are usual and customary for sales of such assets).

• The sale must be highly probable (appropriate management commitment, actively seeking a buyer, reasonable price, 12 month limit).

Non-current Assets Held for Sale (IFRS 5) 2222


Which IFRS applies to the following assets? • a bird breeder’s birds• a non-breeding zoo’s birds• a breeding zoo’s birds• a vintner’s grape bearing vines, harvested grapes,

partially fermented wine and mature bottled wine• a mushroom farmer’s mushrooms• a farmer’s cattle (breeding stock) and tractor used

to transport feed to the herd• gold

Assets—classification examples

2323


Which IFRS applies to the following assets? • a property trader’s (ie it buys property to sell it

at a profit near-term) land• a licence trader’s transferable taxi licences• an entity owns digital films and audio

recordings which it licenses to its customers• a manufacturer’s lubricants—expected to be

consumed by its machines in producing goods • Entity B buys a building to earn rentals under

an operating lease from Entity A (its parent). The parent sells its products from the building

Assets—classification examples 2424


Which IFRS applies to the hotel building? • An entity operates a hotel from a building it

owns– it rents out hotel rooms for short-stays– guest services included in the room rate =

breakfast and television– services charged for separately = other

meals, room bar, gymnasium facilities & guided tours

Assets—classification examples continued

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– when unclear what purpose of acquiring property is (inventories, IP or PP&E?)

– when property owner provide ancillary services to the occupants of a property (IP or PP&E?)

– mixed use property (IP or PP&E?)– when is undue cost or effort necessary to

measure the fair value of an IP on an ongoing basis (IP or PP&E?)

Examples of classification judgementsInternational Financial Reporting Standards


Measurement

© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org

2727


• Measurement is the process of determining the monetary amounts at which the recognisedelements are carried.

• Many measurements for assets in IFRS, eg:– cost-based measures (eg historical cost and

depreciated historical cost)– fair value– other (eg net realisable value and value in use).

• IFRS measurements are largely based on estimates, judgements and models.

• Most IFRS measures require significant estimates and judgements.

MeasurementInternational Financial Reporting Standards


Cost

© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org

Cost-based IFRS measures 29

• Few things measured at historical cost – unimpaired land (IAS 16 + IAS 40 cost model)– unimpaired indefinite life intangibles (IAS 38)– unimpaired inventories (IAS 2)

• Cost-based measures are more common– unimpaired depreciated historic cost (IAS 16)– unimpaired amortised historical cost (IAS 38)– amortised cost (IFRS 9) Impairment changes to a fair value or other measure

29


3030


• The cost of an item is: – the amount of cash or cash equivalents

paid; or– the fair value of the other consideration

given to acquire an asset at the time of its acquisition or construction; or

– where applicable, the amount attributed to that asset when initially recognised in accordance with other IFRSs (eg IAS 16.6)

• Cost is described further (eg IAS 16.7–28)

The historical cost ‘concept’

21

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Question: what is the cost of the asset received? • transferable option exercised to acquire

an lear jet• decommissioning liability for a nuclear

power plant (and changes therein)• deferred payment/advance payment• exchange used lear jet and landing

rights (consequently discontinue that route) for new lear jet

• exchange similar used lear jets

Historical cost of an asset 3232


ASSET TYPE MEASUREMENT AT INITIAL RECOGNITION

COST MODEL BASIS OF IMPAIRMEN

T TESTIAS 2 Inventory Cost of purchase and/or conversion

costs and costs to get the item to the location and condition for sale

Cost unless impaired Lower of cost (initial recognition) and net realisable value

IAS 16 Property, Plant and Equipment

Purchase costs + construction costs + costs to bring to the location and condition necessary to be capable of operating in the manner intended by management.

Accounting policy choice: cost less accumulated depreciation and impairment, if any

Compare carrying amount to recoverable amount.

Recoverable amount is greater of value in use and fair value less disposal costs (IAS 36)

IAS 38 IntangiblesAssets

Purchase costs + development costs + costs to bring to the location and condition necessary to be capable of operating as intended by management

Accounting policy choice: cost less accumulated amortisation (unless indefinite life asset) and amortisation, if any

IAS 40 Investment Property

Cost including transaction costs Accounting policy choice: cost less accumulated depreciation (unless land) and impairment (if any)

3333


• Inventories are initially measured at cost. • The cost of inventory includes costs of purchase

and production or conversion.– cost does not include abnormal wastage,

administrative overheads that are not production costs and selling costs.

• Cost is assigned to each item of unique inventory using specific identification. FIFO or weighted average cost are used for ordinarily interchangeable inventory items. LIFO is prohibited.

• Inventory can be a qualifying asset in terms of IAS 23 Borrowing Costs

IAS 2 Inventories: measurement 3434


• A buys a good priced at CU500 per unit from Z. Z awards A a 20% discount on orders of +100 units and 10% discount when A buys +999 units in 1 year. The discounts apply to all units acquired in a year. A buys as follows: 800 units on 1/1/20X1 and 200 units on 24/12/20X1.

On 31/12/20X1, 150 units were unsold (ieinventories of A).

IAS 2 Inventories:example—cost of purchase

3535


A measures the cost of the inventories in 20X1 at CU350,000 [ie 1,000 units × (CU500 list price less 30%(CU500) volume discount)], because all units purchased in the year get the full 30% discount.

• A recognises: – expense (cost of sales) of CU297,500 [ie

850 units sold × (CU500 list price less 30%(CU500) volume discount)] in profit or loss in 20X1

– asset (inventories) of CU52,500 [ie 150 units unsold × (CU500 less 30%(CU500) discount)] at 31/12/20X1.

IAS 2 Inventories:example—cost of purchase 3636


• A makes concrete blocks in reusable moulds. Blocks dry in a drying room for 2 weeks. Dried blocks & raw mat’s stored in separate rooms.

A front-end loader (man 1) adds materials to the mixing machine operated by man 2. Casual labourers remove blocks from moulds. Man 3 supervises the factory. Man 4 does admin, finance and sales.

A operates from rented premises (fixed payments).

IAS 2 Inventories:example—conversion costs

22

3737


Costs of conversion include– direct costs: casual labour.– production overheads: factory rent (incl.

raw mat’s area & drying room but excl. finished goods room); staff cost of man 1,2 & 3; depreciation of equipment (front end loader, mixing machine and moulds).

IAS 2 Inventories:example—conversion costs 3838


• Inventories are reduced to NRV when this is lower than cost.

– NRV is estimated selling price less estimated costs to complete and sell (entity specific value).

• The write-down is made on an item by item basis. The write-down of groups of items may occur when the grouped items have similar uses, are produced or marketed in the same area and cannot be practicably evaluated separately from other items in that product line.

• Write-downs can be reversed.

IAS 2 Inventories: impairment to net realisable value (NRV)

3939


• Ex 1: At reporting date– CA (cost) of raw materials = 100– replacement cost = 80 – est. selling price of finished good = 200 – est. costs to convert the raw material into

finished good = 60– est. costs to sell the finished good = 30

• Ex 2: Same as Ex 1 except est. selling price = 180

IAS 2 Inventories:examples—NRV write-down 4040


• At 31/12/20X1 – because of a decline in economic

circumstances recognised an impairment loss on an item of inventory of 30 (ie cost = 100 & SP-CTC&S = 70)

At 31/12/20X2

– because of an improvement in economic circumstance the SP-CTC&S of that item is 120

IAS 2 Inventories:example—reverse impairment

4141


• Inventory may qualify as a qualifying asset in accordance with IAS 23—borrowing costs incurred on qualifying assets may be considered for capitalisation.

• Unlike IAS 23, Section 25 Borrowing Costs of the IFRS for SMEs prohibits the capitalisation of borrowing costs—all borrowing costs are expensed.

IAS 2 Inventories:comparison to IFRS for SMEs 4242


• Calculating the cost of a manufacturer’s inventory involves a number of judgements, including:

• normal wastage• allocating overheads (including plant

depreciation)• allocating joint costs to joint products.

IAS 2 Inventories:judgements and estimates

23

4343


• Impairment• identifying impaired inventories• estimating net realisable value.

• Net realisable value is an entity-specific measure and therefore judgement is required in order to determine the amounts expected to be realised upon sale of the inventory.

IAS 2 Inventories:judgements and estimates continued 4444


• PPE is initially recognised at cost• Cost includes:

• purchase costs • construction costs • costs to bring to the location and condition

necessary to be capable of operating in the manner intended by management

• Subsequent costs qualify for capitalisation if they meet the asset recognition criteria

IAS 16 PPE: measurement

4545


• After initial recognition entity chooses to measure PPE either:

• at cost less accumulated depreciation and accumulated impairment (cost model); or

• at fair value less subsequent accumulated depreciation and accumulated impairment (revaluation model).

IAS 16 PPE: measurement continued 4646


• Depreciation represents the consumption of the assets service potential in the period.

– land’s service potential generally does not reduce with time

• Systematic allocation (application guidance):– depreciation method must closely reflects the pattern in

which the asset’s future economic benefits are expected to be consumed by the entity

– unit of measure for depreciation is different from that for an item of PPE. By depreciating significant parts of an item of PPE separately, depreciation more faithfully represents the consumption of the assets service potential. (IAS16.BC26)

IAS 16 PPE: measurement continued

allocating depreciation: concepts

4747


• On 1/1/20X1 buy machine for CU100,000. Initial estimates & judgements: – useful life = 10 yrs & residual value = 0 – straight-line depreciation is appropriate

At 31/12/20X5 year-end reassess:– useful life = 24 yrs (from the date of acq)

and residual value = CU20,000– straight-line depreciation is appropriate

IAS 16 PPE: example—depreciation 4848


• Full IFRSs require an annual review of residual value, useful life and depreciation method of property, plant and equipment. Section 17 Property, Plant and Equipment of the IFRS for SMEs requires a review only if there is an indication that there has been a significant change since the last annual reporting date.

IAS 16 PPE: comparison to the IFRS for SMEs

24

4949


• Cost of some items includes significant estimates

• costs of dismantling, removal, restoration• costs of self constructed PPE

• Depreciation requires: • identifying significant components to be

depreciated separately • estimating useful life and residual value• identifying the depreciation method that reflects

most closely the consumption of the service potential of the item of PPE

IAS 16 PPE: judgements and estimates 5050


• Determining the classes of PPE for presentation purposes.

IAS 16 PPE: judgements and estimates continued

5151


• Intangible assets are measured initially at cost. • Thereafter, intangible assets are usually measured

using the cost model—cost less accumulated amortisation (unless indefinite life) and impairment, if any.

• An intangible asset with a finite useful life is amortised and tested for impairment similarly to PPE.

• An intangible asset with an indefinite useful life is not amortised, but is tested annually for impairment or where evidence of impairment exists.

IAS 38 Intangible Assets:measurement 5252


• Ex 1: A acquires a customer list. Expects to benefit from list for 1–3 years.

• Ex 2: B acquires a 5-year airline route authority (ARA) that is renewable every 5 years at no cost– renewal is routine if specified rules and

regulations are complied with– B is compliant and expects to fly the route

indefinitely– an analysis of demand and cash flows

supports those assumptions

IAS 38 Intangible Assets:examples—estimating useful life

5353


• The primary differences between IAS 38 and Section 18 Intangible Assets other than Goodwill of the IFRS for SMEs include that, in accordance with Section 18:

• all intangible assets are considered to have definite useful lives and, therefore, must all be amortised

• amortisation estimates need only be reviewed where there is an indication of a significant change

IAS 38 Intangible Assets: comparison with the IFRS for SMEs 5454


• Control of an asset arises when the entity has the power to obtain future economic benefits from the underlying resource and to restrict the access of other to those benefits. Intangible items of value to an entity may not be controlled by it, eg the assembled workforce and customer relationships.

• Research phase expenditures cannot be capitalised as assets. Development phase expenditures are capitalised when the specified criteria for asset recognition are satisfied.

IAS 38 Intangible Assets: judgements and estimates

25

5555


• Amorisation requires: • identifying a finite useful life intangible asset• estimating useful life• (residual value is usually assumed to be zero

unless there is an active market)• identifying the amortisation method that reflects

most closely the consumption of the service potential of the item of the intangible asset.

• Impairment testing requires many estimates (see IAS 36).

IAS 38 Intangible Assets: judgements and estimates continued 5656


• An investment property is measured initially at cost.

• The cost of a property interest held under a lease is measured in accordance with IAS 17 Leases at the lower of the fair value of the property interest and the present value of the minimum lease payments.

IAS 40 Investment Property:initial measurement

5757


• For subsequent measurement an entity must adopt either the fair value model or the cost model for all investment properties.

• All entities must estimate the fair value of investment property, either for measurement (if the entity uses the fair value model) or for disclosure (if it uses the cost model).

• Measure fair value in accordance with IFRS 13 Fair Value Measurement.

IAS 40 Investment Property: subsequent measurement 5858


• Investment property is measured at cost less accumulated depreciation and any accumulated impairment losses (ie using the cost model in IAS 16 Property, Plant and Equipment).

• Similar impairment consideration and principles must be applied.

IAS 40 Investment Property: cost model

5959


• The main differences between IAS 40 and Section 16 Investment Property of the IFRS for SMEs include:

– the IFRS for SMEs does not have an accounting policy choice for measurement. The accounting for investment property is driven by circumstances. If an entity knows or can measure the fair value of an item of investment property without undue cost or effort on an ongoing basis, it must use the fair value through profit or loss model for that investment property. It must use the cost-depreciation-impairment model

– unlike IAS 40, the IFRS for SMEs does not require disclosure of the fair values of investment property measured on a cost basis.

IAS 40 Investment Property: comparison to the IFRS for SMEs 6060


• Sometimes it is difficult to identify investment property. In such cases an entity develops criteria so that it can exercise that judgement consistently

• eg, owner of a hotel transfers some responsibilities to third parties under a management contract (PPE or investment property?)

• In some cases measuring fair value (see IFRS 13)• When cost model used measuring depreciation

(see IAS 16 for estimating residual value, depreciation method and useful life)

IAS 40 Investment Property: judgements and estimates

26

6161


• IAS 23 prescribes the accounting treatment for borrowing costs.

• Borrowing costs are interest and other costs incurred in connection with borrowing.

IAS 23 Borrowing Costs:introduction 6262


• An entity shall capitalise borrowing costs that are directly attributable to the acquisition, construction or production of an asset that takes a substantial time to get ready for its intended use or sale (a qualifying asset).

• Other borrowing costs are recognised as an expense in the period in which they are incurred.

IAS 23 Borrowing Costs: recognition

6363


• Borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset are those that would have been avoided if the expenditure on the asset had not been made.

• They may be borrowing costs incurred on funds borrowed specifically for obtaining a qualifying asset or a calculated amount based on a weighted average borrowing rate applied to expenditure on the asset.

IAS 23 Borrowing Costs: recognition continued 6464


• Capitalisation of borrowing costs takes place during the development of the asset, and ends when the asset is ready for its intended use or sale.

• When the asset is completed in parts, capitalisation of borrowing costs ceases when each part is ready for intended use or sale.

IAS 23 Borrowing Costs: recognition continued

6565


• Determining the amount of borrowing costs that are directly attributable to the acquisition of a qualifying assets requires judgement. For example:

• it might be difficult to identify a direct relationship between particular borrowings and a qualifying asset and to determine the borrowings that could otherwise have been avoided, particularly when financing is co-ordinated centrally.

IAS 23 Borrowing Costs: judgements and estimates 6666


• IAS 36 applies to all assets other than those not within the scope of the Standard (IAS 36.2)

• Assets not within the scope include:• Inventories• Deferred tax assets• Financial assets within the scope of IFRS 9• Investment property measured at fair value

IAS 36 Impairment of Assets:which assets?

27

6767


• An entity must, at the end of every reporting period, assess whether there is any indication that an asset (or cash-generating unit) is impaired

• Irrespective of whether an indication of impairment exists, annual impairment tests must be conducted for:

• Intangible assets with an indefinite useful life; • Intangible assets not yet available for use; and• Goodwill acquired in a business combination.

IAS 36 Impairment of Assets: when to test for impairment? 6868


• Impairment (IAS 36):• Comparison of the asset’s (or cash-generating unit’s) carrying

amount to its recoverable amount• Recoverable amount is the higher of fair value less costs to

sell and value in use. – Fair value less costs to sell is the arm’s length sale price

between knowledgeable, willing parties less the costs of disposal.

– The value in use of an asset is the expected future cash flows the asset in its current condition will produce, discounted to present value using an appropriate pre-tax discount rate.

IAS 36 Impairment of Assets: measurement

6969


• Impairment (per IAS 36):• An impairment loss is recognised immediately in the

statement of comprehensive income. • When an impairment loss is recognised, the

carrying amount of the asset (or cash-generating unit) is reduced.

• In a cash-generating unit, goodwill is reduced first, then other assets are reduced pro rata.

• The depreciation charge is adjusted in future periods to allocate the asset’s revised carrying amount over its remaining useful life.

IAS 36 Impairment of Assets: measurement 7070


• At 31/12/20X1 CA of a CGU’s assets = 210 (ie150 taxis, 50 taxi licence & 10 goodwill)Impairment indicated & RA = 170. Fair value of taxis = 140.

Impairment loss = 40 (ie 210 CA less 170 RA)1st allocate 10 loss to goodwill2nd allocate remaining 30 loss, ie 22.5 to taxis & 7.5 to licence (pro rata on CA)3rd reallocate 12.5 loss from taxis to licence

IAS 36 Impairment of Assets: example—CGU impairment

7171


• Reversing an impairment loss (per IAS 36)• Consistent with the ‘principle’ of not recognising

an asset for internally generated goodwill, an impairment loss for goodwill is never reversed.

• For other assets, when the circumstances that caused the impairment loss are resolved, the impairment loss is reversed.

• However, the reversal is limited to the amount that the asset would have been had there been no impairment loss in prior years.

IAS 36 Impairment of Assets: measurement continued 7272


• Facts from CGU impairment example. At 31/12/20X2 CA of CGU = 120 (ie 100 taxis & 20 licence)

Impairment reversal indicated & RA estimated = 150

Potential impairment reversal = 30 (ie 150 RA less 120 CA) but limited to 20 (as follows)1st allocate to assets pro rata on CAs, ie 5 to licence & 25 to taxis2nd limit amt allocated to taxis to 7 (if no impairment in 20X1, CA at 20X2 = 107)

IAS 36 Impairment of Assets: example—impairment reversal

28

7373


3rd reallocate 18 reversal from taxis to licenceTotal reversal provisionally allocated to licence = 23 (ie 5 + 18)4th limit amt allocated to licences to 13 (if no impairment in 20X1, CA at 20X2 = 33)5th as there are no other assets to reallocate the unallocated 10 (ie 23 less 13) reversal to, limit the total impairment reversal to 20 (ie 7 for taxis and 13 for licence)

IAS 36 Impairment of Assets: example—impairment reversal 7474


• Identifying some indicators of impairment requires judgement (eg decline in an asset’s market value; adverse changes in the technological, market, economic or legal environment; increase in market interest rates, among others).

• Identifying the lowest level of independent cash inflows for some groups of assets (ie cash-generating unit) requires judgement.

• Allocating goodwill to cash-generating units requires judgement.

IAS 36 Impairment of Assets: judgements and estimates

7575


• Identifying some indicators of impairment requires judgement (eg decline in an asset’s market value; adverse changes in the technological, market, economic or legal environment; increase in market interest rates, among others).

• Identifying the lowest level of independent cash inflows for some groups of assets (ie cash-generating unit) requires judgement.

• Allocating goodwill to cash-generating units requires judgement.

IAS 36 Impairment of Assets: judgements and estimates 7676


• Measuring the value in use (an entity-specific measure) of an asset or group of assets involves

• estimating future cash flows that the entity expects to derive from the assets (its use and subsequent disposal) taking account of expectations about possible variations in the amount or timing of those cash flows

• adjusting for risks specific to the asset that market participants would reflect in pricing the asset

• identifying appropriate discount rates.

IAS 36 Impairment of Assets: judgements and estimates continued

7777


• Measuring the fair value less costs to sell of an asset or group of assets involves judgement

• see IFRS 13 for judgements and estimates in measuring fair value.

• estimating costs to sell can involve significant estimates.

IAS 36 Impairment of Assets: judgements and estimates continued



Fair value


29

7979


• Fair value is the price that would be received to sell an asset or paid to transfer a liability (exit price) in an orderly transaction (not a forced sale) between market participants (market-based view) at the measurement date (current price).

• Fair value is a market-based measurement (it is not an entity-specific measurement)

• Consequently, the entity’s intention to hold an asset or to settle or otherwise fulfil a liability is not relevant when measuring fair value.

IFRS 13 Fair Value Measurement: definition 8080


Excluded from the scope

• IFRS 2 and IAS 17

Disclosures in IFRS 13 not required for

• Plan assets (IAS 19)• Retirement benefit plan investments

(IAS 26)• Assets for which recoverable amount is fair

value less cost of disposal (IAS 36)

Not required for measurements similar

to fair value

• IAS 2 (net realisable value) • IAS 36 (value in use)

IFRS 13 Fair Value Measurement: when does IFRS 13 not apply?

8181


• When measuring fair value use assumptions that market participants would use when pricing the asset or liability under current market conditions, including assumptions about risk.

• Characteristics of a particular asset or liability that a market participant would take into account when pricing the item at the measurment date, include:

– age, condition and location of the asset– restrictions on the sale or use.

IFRS 13 Fair Value Measurement: application guidance 8282


• Measured using the price in the principal market for the asset or liability (ie the market with the greatest volume and level of activity for the asset or liability) or, in the absence of a principal market, the most advantageous market for the asset or liability.

IFRS 13 Fair Value Measurement: transaction and price

8383


• Must reflect the use of a non-financial asset by market participants that maximises the value of the asset

– physically possible – legally permissible– financially feasible

• Highest and best use is usually (but not always) the current use.

IFRS 13 Fair Value Measurement: non-financial assets 8484

IFRS 13 Fair Value Measurement: the fair value hierarchy

Is there a quoted price in an active market for an identical

asset or liability?(Level 1 input)

Are there any observable inputs* other than quoted

prices for an identical asset or liability?

Use the Level 1 input = Level 1 measurement

Must use without adjustment

No use of significant unobservable

(Level 3) inputs‡ = Level 2

measurement

Use of significant unobservable

(Level 3) inputs‡ = Level 3

measurement

* Maximise the use of relevantobservable inputs. Observable inputs include market data (prices and other information) that is publicly available

‡ Unobservable inputs include the entity’s own data (egbudgets, forecasts), which must be adjusted if market participants would use different assumptions

Yes

Yes No

No

30

8585


• Information about an entity’s valuation processes is required for fair value measurements categorised within Level 3 of the fair value hierarchy.

• A narrative discussion is required about the sensitivity of a fair value measurement categorised within Level 3.

• Quantitative sensitivity analysis is required for financial instruments measured at fair value.

IFRS 13 Fair Value Measurement: disclosure 8686


• An entity must take all information that is reasonably available to search for a principal market.

• determining fair value and the highest and best-use.for a non-financial asset.

• Assumptions that a market participant would use (including assumptions about risk).

• Determining the correct valuation technique to use and the inputs to the techniques, particularly on the income approach, require a wide range of estimates as:

• discount rates• future cash flows• risks and uncertainty

IFRS 13 Fair Value Measurement: judgements and estimates

8787


• The inputs used in the valuation techniques should primarily be based on observable inputs (where possible) to minimise the use of unobservable inputs.

IFRS 13 Fair Value Measurement: judgements and estimates continued 8888


ASSET TYPE MEASUREMENT AT INITIAL

RECOGNITION

MODEL BASEDON FAIR VALUE

BASIS OF IMPAIRMENT

TEST

IAS 16 Property, Plant and Equipment

Purchase costs + construction costs + costs to bring to the location and condition necessary to be capable of operating in the manner intended by management.

Accounting policy choice: revaluation model

Compare carrying amount to recoverable amount.

Recoverable amount is greater of value in use and fair value less disposal costs (IAS 36)

IAS 38 IntangibleAssets

Purchase costs + development costs + costs to bring to the location and condition necessary to be capable of operating as intended by management

Accounting policy choice: revaluation model

IAS 40Investment Property

Cost including transaction costs

Accounting policy choice: fair value

IAS 41 Agriculture Fair value less costs to sell Fair value less costs to sell

8989


• Biological assets (and agricultural produce at the point of harvest) are measured at fair value less costs to sell (initial and subsequent measurement)

• changes in fair value less costs to sell are presented in profit or loss.

• Biological assets that are attached to land (eg trees in a plantation forest) are measured separately from the land. If owner-occupied the land is accounted for in accordance with IAS 16.

IAS 41 Agriculture:measurement 9090


• The value accretion of agricultural assets is unique• Fair value measurement provides relevant, reliable,

comparable and understandable measurement of future economic benefits

• Historical cost cannot accurately portray the value of an accreting asset

Exception—when on initial recognition estimates of fair value are determined to be clearly unreliable, the cost-depreciation-impairment model should be used

IAS 41 Agriculture: why fair value measurement?

31

9191


• In some cases, measuring fair value requires judgements and estimates

• A PwC study observed 3 different methods for valuing standing timber:

• discounted cash-flow (of expected or current log prices), • historical cost (of newly planted trees) and • market value (of trees approaching harvest age at

current market prices).

IAS 41 Agriculture: judgements and estimates 9292


• The PwC study observed that in applying DCF-models management made several important assumptions including:

• expected income at harvest—variables included growth rate and price per unit of volume

• expected costs during growth—including silvicultural costs, eg maintenance and thinning

• expected point-of-sale-cost—including harvesting and transport to market

• Determining the appropriate discount rate.

IAS 41 Agriculture: judgements and estimates continued

9393


• After initial recognition, an entity chooses to measure PP&E either at:

(i) cost less accumulated depreciation and accumulated impairment (cost model); or (ii) fair value less subsequent accumulated depreciation and accumulated impairment (revaluation model).

• Revaluations must occur with sufficient regularity to ensure that the carrying amount of an asset does not differ materiality from that which would be determined with a fair value at the end of the period.

IAS 16 PPE: measurement at fair value 9494


• Revaluation increases are recognised in other comprehensive income and are accumulated in equity (Revaluation surplus)

• Revaluation decrease should first reduce the credit balance of revaluation surplus to zero and are then recognised in profit or loss

• Depreciation and impairment considerations are similar to those of the cost model

IAS 16 PPE: measurement at fair value continued

9595


• Section 17 of the IFRS for SMEs does not permit the use of a revaluation model for PPE

IAS 16 PPE: comparison to the IFRS for SMEs 9696


• Revaluation model requires measuring fair value (see IFRS 13 for estimates and judgements)

• Impairment testing requires many estimates (see IAS 36).

IAS 16 PPE: judgements and estimates

32

9797


• Intangible assets are usually measured using the cost model

• An entity may choose to revalue (measure the asset at fair value), only if fair value can be determined by reference to an active market.

• If an intangible asset is revalued, all assets within that class of intangible assets must be revalued.

• The principles of the revaluation model in IAS 16 apply to IAS 38.

IAS 38 Intangible Assets:measurement 9898


• An intangible asset with a finite useful life is amortised.• An intangible asset with an indefinite useful life is not

amortised, but is tested annually for impairment.

IAS 38 Intangible Assets: measurement continued

9999


• Section 18 Intangible Assets of the IFRS for SMEs does not permit the use of a revaluation model for intangible assets

• There are no indefinite useful life intangible asset in the IFRS for SMEs.

IAS 38 Intangible Assets: comparison to the IFRS for SMEs 100100


• For subsequent measurement an entity must adopt either the fair value model or the cost model for all investment properties

• All entities must estimate the fair value of investment property, either for measurement (if the entity uses the fair value model) or for disclosure

IAS 40 Investment Property:subsequent measurement

101101


• Investment property is remeasured to its fair value at the end of each reporting period

• Changes in fair value are recognised in profit or loss in the period they occur.

• In rare cases (exceptional circumstances) when fair value is not from inception reliably measurable on a continuing basis, the entity measures that property on the cost basis.

• this does not affect the measurement of other investment properties.

IAS 40 Investment Property: fair value model 102102


• IFRS for SMEs does not have an accounting policy choice for measurement.

• The accounting for investment property is driven by circumstance

– If an entity can measure the fair value of an item without undue cost or effort on an ongoing basis, it must use the fair value model

– It uses the cost model for all other investment property

IAS 40 Investment Property: comparison to the IFRS for SMEs

33

103103


• Non-current assets held for sale are measured at the lower of fair value less costs to sell and carrying amount (on the date of classification as held for sale)—they are not depreciated

• If still on hand at the end of a reporting period, remeasured to fair value less cost to sell at that date. Changes are recognised in profit or loss (IFRS 5.21).

IFRS 5 Non-current Assets Held for Sale 104104


• Commodity broker-traders may measure inventories at fair value less costs to sell

• Changes in fair value less costs to sell are recognised in profit or loss

IAS 2 Inventories:measurement exception

105105


• Recognition (IFRS 3.10–17):• separate recognition of identifiable assets

acquired and liabilities assumed• Measurement (IFRS 3.18–20):

• assets and liabilities that qualify for recognition are measured at their acquisition-date fair values

IFRS 3 Business Combinations:principles 106106


Exceptions to measurement principle

• Reacquired rights• Measured at FV based on remaining contractual

term ignoring the FV effect of renewal • Share-based payment transactions

• Replacement awards: measured in terms of IFRS 2

• Assets held for sale• Measured in terms of IFRS 5 (ie FV less costs to

sell)

IFRS 3 Business Combinations: exceptions

107107


Exceptions to both recognition and measurement

• Income taxes• Deferred tax assets or liabilities arising from

acquired assets or liabilities accounted for in terms of IAS 12

• Employee benefits• Accounted for in terms of IAS 19

• Indemnification assets• May not be recognised at FV if it relates to an item

not recognised or measured in accordance with IFRS 3

IFRS 3 Business Combinations: exceptions continued 108108


Goodwill • classify as an asset• measured initially indirectly as the difference

between:• the consideration transferred (IFRS 3.37–

40) not including transaction costs in exchange for the acquiree and

• the acquiree’s identifiable assets and liabilities

IFRS 3 Business Combinations: goodwill

34

109109


Consideration transferred• measured at fair value of sum of assets transferred and

liabilities assumed• acquisition-related costs are not included• contingent consideration included at its fair value at

acquisition date (changes are not included in the consideration transferred at acquisition-date)

IFRS 3 Business Combinations: goodwill continued 110110


• IAS 19 Employee Benefits

• the plan assets associated with a funded defined benefit plan are measured at their fair value at reporting date

• IAS 20 Accounting for Government Grants and Disclosure of Government Assistance

• grants (including some non-monetary grants) are recognised at fair value

• IAS 27 Separate Financial Statements

• investments in subsidiaries, joint ventures and associates may be measured at fair value in accordance with IFRS 9.

Also measured at fair value



Derecognition


112112


• Derecognition occurs when a recognised item is removed from the statement of financial position

• There is no explicit concept for derecognition in the Conceptual Framework. Consequently:

• derecognition requirements are specified at the Standards level

• inconsistencies exist between the derecognitionrequirements of different IFRSs

• derecognition does not necessarily coincide with no longer meeting the requirements specified for recognition

Derecognition of assets

113113


• Is derecognition the mirror image of recognition or does history matter?

• Mirror image – when lose control of the asset or entity is no longer

bound by the liability, derecognise the asset/liability

• History matters = stickiness– Some previously recognised assets and liabilities

continue to be recognised even though they no longer meet the definition of an asset or liability or meet the recognition criteria

Source: agenda paper 9C, January 2013 IASB meeting

January 2013 IASB meetingEducation session 114114


Entity A transfers an asset with a carrying amount of CU70 to Entity B for its fair value (CU100). At the same time, Entity A agrees to repurchase that asset for CU100 in 1 year. (For simplicity, ignore time value of money)

Mirror image of recognitionCash 100Repo 0

Gain 30Asset 70

History matters—’stickiness’

Cash 100

Liability 100

However, if Entity A had never owned the asset but entered into a forward purchase contract with Entity B, it would simply have a forward contract

Example illustrating inconsistency

35

115115


• IAS 16.67 specifies: the carrying amount of an item of PPE shall be derecognised:

(a) on disposal; or(b) when no future economic benefits are

expected from its use or disposal.• Note: derecognition of PPE does not necessarily occur

when the asset no longer satisfies the conditions specified for its initial recognition. In particular, derecognition of PPE does not necessarily coincide with the loss of control of the asset.

Derecognition of PPE 116116


Must the entity derecognise the asset?• item of PPE is classified as a non-current

asset held for sale• a machine is ‘moth-balled’• a machine is abandoned• a building sold to a bank and leased back• trade receivables ‘sold’ to a bank

Derecognition examples—assets



Accounting for joint arrangements

and associates




IFRS 11Joint Arrangements


119119


• IFRS 11 Joint Arrangements establishes principles for financial reporting by parties to a joint arrangement.

• The standard must be applied by all entities who are party to a joint arrangement.

Introduction 120120


IFRS 11 establishes a principle-based approach for the accounting for joint arrangements:

Parties to a joint arrangement recognise theirrights and obligations arising from

the arrangement, regardless of its structure or legal formInformation about those rights and obligations assists users to better assess the prospects for future net cash inflows to

the entity which is useful in making decisions about providing resources to the entity.

Principle

36

121121


• Parties that have rights to the assets and obligations for the liabilities relating to the arrangement are parties to a joint operation.

• A joint operator accounts for assets, liabilities and corresponding revenues and expenses arising from the arrangement.

• Parties that have rights to the net assets of the arrangement are parties to a joint venture.

• A joint venturer accounts for an investment in the arrangement using the equity method.

Application of the principle 122122

Not structured through a separate vehicle *

Structured through a separate vehicle *

Assess the parties’ rights and obligations arising from the arrangement

by considering:

(a) the legal form of the separate vehicle (b) the terms of the contractual

arrangement, and, if relevant, (c) other facts and circumstances

Joint operation Joint venture

Accounting for assets, liabilities, revenues and expenses in accordance with the

contractual arrangements

Accounting for an investment using the

equity method

Parties have rights to the net assets

Parties have rights to the assets and obligations for the liabilities

Assessment of the parties’ rights and obligations

Accounting reflects the parties’ rights and obligations

(*): A separate vehicle is a separately identifiable financial structure, including separate legal entities or entities recognised bystatute, regardless of whether those entities have a legal personality.

Classification

123123


Do the parties have rights to the assets and obligations for the liabilities?

Do the parties have contractual rights to the assets, and obligations for the

liabilities?

Is the arrangement designed so:a) Its activities primarily aim to provide

parties with an output, and (b) It depends on the parties for settling

liabilities?

Joint Venture

Join

t O

pera

tion

Legal form

Contractual terms

OtherYes

Yes

Yes

No

No

No

Separate vehicles 124124


• A separate vehicle is established, over which two parties have joint control.

• The purpose of the Joint Arrangement is to construct and sell residential units to the public

• Neither the legal form nor the contractual terms give the parties rights to the assets or obligations for the liabilities of the arrangement

• Contributed equity by the parties is sufficient to buy the land and raise debt finance for the construction

• Sales proceeds will be used to repay external debt and remaining profit is distributed to parties

• Parties provide guarantee to financier

Example: Construction and real estate

125125


• A and B jointly establish a corporation D over which they have joint control to process the ore from the mine C

• A & B have agreed to the following:• A & B will purchase all the output produced by D in a

ratio of 60:40 (in proportion to ownership interest in D)• D cannot sell the output to third parties• Price of the output is set by A and B at a level to cover

production and admin costs (i.e. D breaks even)

Example: Mining 126126


• Section 15 Investments in Joint Ventures of the IFRS for SMEs differs from IFRS 11 in the following instances:

• Section 15 has different methods of accounting for jointly controlled entities to full IFRSs. The IFRS for SMEs permits use of the equity method, cost or the fair value model.

• If the equity method is used, any implicit goodwill is systematically amortised over its expected useful life—full IFRS does not allow amortisation of goodwill.

Comparison to the IFRS for SMEs

37

127127


The rules in Section 15 require fewer judgementsThe principle-based approach in IFRS 11• enhances verifiability and understandability

• the accounting in IFRS 11 reflects more faithfully the economic phenomena that it purports to represent

• improves consistency

• it provides the same accounting outcome for each type of joint arrangement

• increases comparability among financial statements • it will enable users to identify and understand similarities in,

and differences between, different arrangements

Evaluating the differences 128128


• Assessing whether the parties, or a group of parties, have joint control of an arrangement (see IFRS 10 for judgements about control).

• Determining whether the joint arrangement is a joint operation or a joint venture requires consideration of the structure and legal form of the arrangement, the terms agreed and when relevant other facts and circumstances.

Judgements and estimates



IFRS 12Disclosure of Interests in

Other Entities


130130


• The IFRS requires an entity to disclose information that enables users of financial statements to evaluate:

• the nature of, and risks associated with, its interests in other entities; and

• the effects of those interests on its financial position, financial performance and cash flows.

• That evaluation assists users in making decisions about providing resources to the entity.

Objective

131131


Disclosures

• significant judgements and assumptions made• information about interests in:

• subsidiaries• joint arrangements and associates

• unconsolidated structured entities• any additional information that is necessary to meet the

disclosure objectiveStrike a balance between overburdening financial statements with excessive detail and obscuring information as a result of

too much aggregation

Requirements 132132


Nature, extent and financial effects of interests in joint arrangements and associates, eg*• List and nature of interests• Quantitative financial information• Unrecognised share of losses of JVs and associates• Fair value (if published quoted prices available)• Nature and extent of any significant restrictions on transferring

fundsNature of, and changes in, the risks associated with the involvement• Commitments and contingent liabilities

* for individually-material joint ventures and associates

Joint arrangements and associates

38

133133


• An entity must disclose information about significant judgements and assumptions it has made in determining…

• joint control (see IFRS 11) of an arrangement or significant influence (see IAS 28) over an entity

• type of joint arrangement when the arrangement has been structured through a separate vehicle




IAS 28Investments in Associates

and Joint Ventures


135135


• IAS 28 must be applied by all entities that are investors with joint control of, or significant influence in an investee.

• An associate is any entity over which the investor has significant influence.

• A joint venture is joint arrangement whereby the parties have joint control of the arrangement.

• the contractually agreed sharing of control of an arrangement

Scope and introduction 136136


• Significant influence is the power to participate in the financial and operating policy decisions of the investee.

• significant influence is not control (which indicates a subsidiary)

• significant influence is not joint control (which indicates an interest in a joint arrangement)

Significant influence

137137


• Significant influence is usually evidenced in one or more of the following ways:

• representation on the board of directors; • participation in policy making, including decisions

about dividends; • a close relationship involving transactions between

investor and investee;• interchange of managerial personnel; or • provision of essential technical information.

Significant influence continued 138138


Measurement rule

• Associates and joint ventures are accounted for using the equity method.

Exemptions from the equity method

• Entity is a parent and the scope exemption in paragraph 4(a) of IFRS 10

• A venture capital organisation or similar entity can elect to measure its investments in associates or joint ventures at fair value through profit or loss in accordance with IFRS 9.

Measurement

39

139139


• Recognise the investment initially at cost, then adjusting for the post-acquisition change in the investor’s share of net assets of the associate or joint venture.

• Presentation: • a one-line entry in the statement of comprehensive

income ‘investor’s share of the associate or joint venture’s profit or loss’ and a separate line item for other comprehensive income.

• a one-line item in the statement of financial position—Investment in associate or joint venture.

Equity method 140140


• On 1/3/20X1 A buys 30% of B for 300,000 (assume no implicit goodwill & fair value adjustments).B’s profit = 80,000 for the year ended 31/12/20X1 (including 66,667 from March to Dec). On 31/12/20X1 B declared a dividend of 100,000. At 31/12/20X1 the recoverable amount of A’s investment in B = 290,000 (ie fair value 293,000 less costs to sell 3,000).No published price quotation for B.

Example—equity method

141141


• Equity accounting for an associate’s losses continues until the investment is reduced to zero.

• Additional losses may be recognised as a liability if an entity has a legal or constructive obligation or made payments on behalf of the associate or joint venture

• Recognition of future share of profits only after share of profits equals losses

Equity method continued 142142


• The ‘investment’ includes not only shares in the associate, but also some non-equity interests such as some long-term receivables.

• Uniform accounting policies should be used• If the associate or joint venture’s year end differs from

the investor’s adjustments must be made for significant transactions that occurred between the dates

• Difference in year-ends may not exceed three months

Equity method continued

143143


• Goodwill forms part of the investment in associate or joint venture

• Therefore, the goodwill is tested for impairment as part of a single asset—the investment

• Application of the equity method is discontinued when:• The investment becomes a subsidiary• Significant influence or joint control of the investment is

lost• IFRS 9 application to interest retained (if any)• Profit or loss on disposal

Equity method continued 144144


• The main difference between IAS 28 and Section 14 Investments in Associates and Section 15 Investments in Joint Ventures is in an investor’s primary financial statements

• full IFRSs require investments in associates and joint ventures to be accounted for using the equity method

• the IFRS for SMEs requires an entity to elect one of three models to account for its investment in associates and joint ventures—the equity method, the cost model and the fair value model. A different model can be used for associates as compared to joint ventures.


40

145145


• If an SME elects the equity method, the IFRS for SMEs requires that implicit goodwill be systematically amortised throughout its expected useful life (see paragraph 14.8(c))—full IFRS does not allow amortisation of goodwill

Comparison to the IFRS for SMEs continued 146146


• Investors must exercise judgement in the context of all available information to determine whether they have significant influence over an investee.

• There is no exemption from equity accounting when severe long-term restrictions impair the associate’s ability to transfer funds to the investor.

• However, the investor should consider whether such restrictions, taken with other factors, indicate that the investor does not have significant influence.




IAS 21The Effects of Changes inForeign Exchange Rates

K


148148


• IAS 21 prescribes how to: • determine an entity’s functional currency • account for foreign currency transactions• account for foreign operations (ie entities

that are consolidated or accounted for using the equity method)

• translate financial statements into a presentation currency

Introduction

149149


• Initially recognise in the functional currency using the spot exchange rate at the date of the transaction

• At the end of each reporting period:• translate monetary items at the closing spot rate • translate non-monetary items at the spot rate at

the date their amount (cost or fair value) was determined

• exchange differences are recognised as income or expense for the period in which they arise.

Reporting foreign currency transactions 150150


• Ex 1: A’s functional currency is CU.

On 1/12/20X1 A buys goods on credit for FCU100,000 (FCU denominated) when spot currency exchange rate = FCU1:CU2.

On 1/12/20X1 A recognises inventories and trade payables of CU200,000.

Reporting foreign currency transactions

41

151151


• Ex 1 continued:

On 31/12/20X1 (A’s year-end) the spot currency exchange rate = FCU1:CU2.1. On 1/2/20X2 when the spot rate = FCU1:CU2.05 A pays CU205,000 to settle the FCU100,000 liability.

At 31/12/20X1 A reports the trade payable at CU210,000 and recognises loss of CU10,000 in profit or loss.On 1/2/20X2 A derecognises the FCU100,000 payable and recognises gain of CU5,000.



• Ex 2: A’s functional currency is CU.

On 1/12/20X1 A buys an investment property for FCU100,000 when the spot currency exchange rate = FCU1:CU2 (ieA pays CU200,000).

A accounts for the investment property at its fair value.

On 1/12/20X1 A recognises its investment property at CU200,000.


153153


• Ex 2 continued: On 31/12/20X1 (A’s financial year-end) the fair value of the investment property = FCU100,000 (ie coincidentally no change) and the spot currency exchange rate = FCU1:CU2.1.

At 31/12/20X1 A remeasures the investment property at CU210,000 and records a gain of CU10,000 as a change in fair value (rather than exchange difference) in profit or loss.



• Ex 3: Same as Ex 2 except: – A accounts for its investment property

using the cost model.

At 31/12/20X1 A records the investment property at CU200,000 (ie no remeasurement because it is a non-monetary asset carried at historical cost).


155


Thank You

42




Day 2

43



Non-financial liabilities




22


The requirements are set out in International Financial Reporting Standards (IFRSs), as issued by the IASB at 1 January 2013 with an effective date after 1 January 2013 but not the IFRSs they will replace.

Disclaimer: The IFRS Foundation, the authors, the presenters and the publishers do not accept responsibility for any loss caused by acting or refraining from acting in reliance on the material in this PowerPoint presentation, whether such loss is caused by negligence or otherwise.



Classifying non-financial liabilities


Classification concepts

• Objective of financial reporting

• Financial statements portray financial effects of transactions and events by:

– grouping into broad classes (the elements, egliability)

– sub-classify elements

• IAS 1– application of IFRSs with additional disclosures

when necessary results in a fair presentation (faithful representation of transactions, events and conditions)

– don’t offset assets and liabilities or income and expenses

4


Classification concepts—assets and claims

• Information about the nature and amounts of a reporting entity’s economic resources and claims can help users to identify the reporting entity’s financial strengths and weaknesses.

• That information can help users to: – assess the reporting entity’s liquidity and

solvency – its needs for additional financing and how

successful it is likely to be in obtaining that financing.

(CF.OB13)

5


Classification concepts—claims

• Information about priorities and payment requirements of existing claims helps users to predict how future cash flows will be distributed among those with a claim against the reporting entity (CF.OB13)

6


45

Concept—liability definition 7


A liability is defined as a:

• present obligation

• arising from past event

• the settlement of which is expected to lead to an outflow of future economic benefits from the entity

Concept—liability recognition

A liability is recognised when:

• it is probable that any future economic benefit associated with the item will flow from the entity; and

• the item has a value that can be measured with reliability.

8


For some items that satisfy the definition of a liability, significant judgement is required to evaluate whether such items satisfy the recognition criteria. Individual IFRSs provide principles and application guidance and in some cases override the concepts.

IAS 37 Provisions, Contingent Liabilitiesand Contingent Assets 9


A provision is a liability of uncertain timing or amount (ie recognition is uncertain).

• A liability may be a legal obligation or a constructive obligation.

• A constructive obligation arises from the entity’s actions, through which it has indicated to others that it will accept certain responsibilities, and as a result has created an expectation that it will discharge those responsibilities.

IAS 37: contingent liabilities 10


Contingent liabilities are: • possible obligations whose existence will be

confirmed by uncertain future events that are not wholly within the control of the entity.

• obligations that are not recognised because their amount cannot be measured reliably or settlement is not probable (eg litigation against the entity when the occurrence of any wrongdoing by the entity is uncertain and it is more likely than not that the entity will successfully defend the case).

Note: contingent liabilities are not recognised.

Scope of IAS 37 11


• IAS 37 applies to all provisions and contingent liabilities except for:

• those that result from executory contracts unless the contract is onerous; and

• those covered by another IFRS (ie income taxes and employee benefits).

• IAS 37 does not apply to financial instruments within the scope of IFRS 9.

IAS 37: judgements and estimates 12


• In some cases judgement is used to determine whether an entity has a provision (liability) or a contingent liability.

• eg, when defending a court case in which it is difficult to predict the outcome.

46

IAS 17 Leases 13


• A lease is an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time.

• IAS 17 applies to all leases other than:

• leases for resource exploration; and

• licencing agreements for certain items (egplays)

IAS 17 Leases:classification of leases 14


• A finance lease transfers to the lessee substantially all the risks and rewards incidental to ownership of the leased asset.

– all other leases are operating leases.

• When a lease includes both land and buildings elements, the classification of the land and building elements are considered separately.

– in determining whether the land element is an operating or finance lease, an important consideration is that land normally has an indefinite economic life.

IAS 17: classification of leases continued 15


• Situations that individually or in combination normally indicate a finance lease:– lease transfers ownership of the asset to

lessee– from inception lessee reasonably certain to

exercise bargain purchase option– lease term is for the major part of asset’s

economic life– at inception PV of MLPs = substantially all

asset’s fair value– specialised asset (only lessee can use

without major modifications)

16

IAS 17:classification of leases continued


• Situations that individually or in combination could indicate a finance lease– lessee can cancel the lease but

compensates the lessor’s for associated losses

– gains or losses from the fluctuation in the residual value of the leased asset accrue to the lessee

– lessee can continue the lease for a secondary period at a rent that is substantially lower than market rent

17IAS 19 Employee Benefits


• IAS 19 specifies accounting for and disclosure of employee benefits by employers.

• It is applied by an employer in accounting for all employee benefits, except those to which IFRS 2 Share-based Payment applies.

• Information about employee benefits expenses and obligations can help users assess the extent and uncertainty of an entity’s future employee benefit cash outflows. Uncertainties can be significant (eg some pension promises).

Employee Benefits 18


Employee benefits are all forms of consideration paid for services of employees or for termination of employment.

• IAS 19 categories of employee benefits :

• short-term benefits

• post-employment benefits

• other long-term benefits

• termination benefits

Note: IFRS 2 applies to equity compensation schemes

47

IAS 19: short-term employee benefits 19


• Short-term employee benefits are expected to be settled wholly before 12 months after the period in which the employee rendered the related service.

• recognise as an expense as the employee provides the related service

• measure obligations at undiscounted amounts (application of the cost constraint)

• no disclosures specified in IAS 19.

IAS 19: examples of short-term employee benefits 20


– wages, salaries & social security contrib;– S/T compensated absences (paid annual

leave & paid sick leave) for absences expected to occur within 12 month limitation;

– profit-sharing & bonuses payable within 12 month limitation; &

– non-monetary benefits (such as medical care, housing, cars and free or subsidised goods or services) for current employees.

IAS 19: post-employment benefits 21


• Post-employment benefits are payable after the completion of employment.

• Two types:

• defined contribution plan, entity pays fixed contributions to a separate entity (a fund) and has no legal or constructive obligation to pay further contributions if the fund cannot pay the employee.

• all other post-employment plans are defined benefit plans.

IAS 19: post-employment benefits—defined contribution 22


• Employees (not the employer) are exposed to risks.

• Employer:

• recognises contributions payable as an expense as the employee provides services in exchange for the contributions.

• measures obligations for unpaid contributions at undiscounted amounts (application of the cost constraint).

• disclose amount recognised as an expense.

IAS 19: post-employment benefits—defined benefit 23


• Recognise the defined benefit liability as follows:

• use the projected unit credit method based on actuarial assumptions to measured the obligation at its present value; less

• the fair value of plan assets (if any).

• Recognise all changes in the defined benefit liability (asset) when they occur:

• service costs and net interest in profit and loss

• remeasurements in other comprehensive income.

• Extensive disclosures specified.

IAS 19: other long-term benefits 24


• Other long-term benefits are all employee benefits other than short-term employee benefits, post-employment benefits and termination benefits (eg long-service leave)

• Recognition and measurement is the same as that for post-employment benefits: defined benefit plans.

• No disclosures specified in IAS 19.

48

IAS 19: termination benefits 25


• Termination benefits arise only on termination, rather than during employment.

• Principle—the event that gives rise to an obligation is the termination of employment rather than employee service

• Recognise expense and a liability at the earlier of:

• when the entity can no longer withdraw the offer of those benefits

• when the entity recognises the related restructuring provision in accordance with IAS 37.


IFRS 2 Share-based Payment 26


• IFRS 2 applies to transactions in which (IFRS 2.2): • shares or other equity instruments are issued in return

for goods or services (eg employee share options)

• the payment amount is based on the price of the entity’s shares (eg share appreciation rights).

• The scope is broader than employee share options

• Exceptions—IFRS 2 does not apply to (IFRS 2.3A–6): • IFRS 3 applies to shares or other equity instruments

issued as consideration in a business combination

• Assets contributed at the formation of a joint venture as defined in IFRS 11

• Goods or services acquired under a contract within the scope of IAS 32 or IAS 39.

Cash-settled share-based payment transaction 27


• Cash-settled share-based payment transaction—a share-based payment transaction in which the entity acquires goods or services by incurring a liability to transfer cash or other assets to the supplier of those goods or services for amounts that are based on the price (or value) of equity instruments (including shares or share options) of the entity or another group entity.

Note: equity-settled share-based payment transactions are classified as equity.

Liabilities—classification examples 28


Which sub-classification applies to the following liability?• Waste from A’s factory contaminated the

groundwater. Lawsuit: local community seek compensation for damages to health from contamination. A acknowledges wrongdoing. Court is deciding extent of the compensation. Lawyers expect ruling in +2 yrs & compensation in the range of CU1,000,000 to CU30,000,000.




groundwater. Required by law to restore the environment. Estimates restoration cost between 1,000,000 & 15,000,000. Unsure of period to complete restoration.

• A manufacturer gives warranties to the purchasers of its goods. Warranty = make good, by repair or replacement, manufacturing defects that become apparent within 3 years of sale.




groundwater. A is not required by law to restore the contaminated environment & there is no court case. However, in the reporting period the entity publicly announced that it would restore the contaminated environment within the next 12 months.

49



Which sub-classification applies to the following liability?• A community is seeking compensation from A

for damages to their health as a result of contamination believed to be caused by A’s plant.

It is doubtful whether A is the source of the contamination because

– many entities operate in the same area producing similar waste & it is unclear which entity is the source of the leak

– A has taken precautions to avoid leaks and is vigorously defending the case.

Liabilities—classification examples continued 32


… continued

• However, it is not certain that it did not caused the leak and the true offender will only become known after extensive testing has been performed.

A’s legal counsel expects a court ruling in approximately 2 years. If A loses the case, compensation is likely to be in the range of CU1,000,000 to CU30,000,000.

In this case it is uncertain whether the entity has a present obligation—this is the matter being determined by the court.



Which sub-classification applies to the following liability?• On 1 January 20X2 A jewellery manufacturer

contracts to purchase a 1,000 ounces of gold on 1/1/20X3 at the fixed price of CU1,500.

• On 31 December 20X2 gold is trading at CU1,000 per ounce.

• Scenario 1: the contact must be settled net in cash.

• Scenario 2: the contact is for the jeweller’s expected usage (physical delivery) and cannot be settled net.

IAS 17:examples—lease classification 34


Is each leases below a finance lease or an operating lease?Ex 1: On 1/1/20X1 enter into 5-yr non-cancellable lease over a machine.

• Machine’s cash cost = 100,000, economic life = 10 yrs and residual value = 0.

• Annual lease payments on 31/12: 4 ×23,000 & 23,539 at end of yr 5 when ownership transfers to the lessee.

• The interest rate implicit in the lease is 5% p.a. which approximates lessee’s incremental borrowing rate.

IAS 17:examples—lease classification continued 35


Is each leases below a finance lease or an operating lease?

Ex 2: Same as Ex 1 except ownership of the machine does not automatically transfer to the lessee at the end of the lease. Instead, the lessee has an option to acquire the machine from the lessor on 1/1/20X6 for CU1.

Ex 3: Same as Ex 1 except economic life of the machine is five years and ownership of the machine does not transfer to the lessee at the end of the lease.



Is each leases below a finance lease or an operating lease?

Ex 4: Same as Ex 1 except ownership does not transfers to lessee at the end of the lease. Instead lessee has an option to continue the lease asset for a further 5 years at a rent of CU1 per year.

Ex 5: Same as Ex 1 except ownership transfers to the lessee at the end of the lease for a variable payment equal to the asset’s then fair value (instead of 23,539).

50



Ex 6: Tripartite lease agreement. – Lessor transfers substantially all risks and

rewards to 2 unrelated parties:–the lessee obtains the right of use of the

leased asset for a period of time; and –the other party contracts to acquire the

leased asset from the lessor at the end of the lease term at a fixed price.

IAS 19: examples—employee benefit classification 38


Ex 1: A’s employees are each entitled to 20 days of paid holiday leave per calendar year. Unused holiday leave cannot be carried forward and does not vest. The entity has a 31 December annual reporting date. The holiday leave is:

a. a short-term employee benefit?b. a post-employment benefit?c. an other long-term employee benefit?d. a termination benefit?e. an equity-settled share-based payment? f. a cash-settled share-based payment?

IAS 19: examples—employee benefit classification continued 39


Ex 2: Same as example 1, except unused holiday leave is paid out on 31 December of each year (ie it vests at the end of each calendar year but does not accumulate). The holiday leave is:

a. a short-term employee benefit?b. a post-employment benefit?c. an other long-term employee benefit?d. a termination benefit? e. an equity-settled share-based payment? f. a cash-settled share-based payment?



Ex 3: Same as example 1, except unused holiday leave may be carried forward for two calendar years (ie it accumulates but does not vest).

The holiday leave is:




Ex 4: A publicly announces its commitment to a voluntary redundancy plan. It has an obligation to pay a lumpsum to employees that elect redundancy.

The obligation is:a. a short-term employee benefit?b. a post-employment benefit?c. an other long-term employee benefit?d. a termination benefit?e. an equity-settled share-based payment? f. a cash-settled share-based payment?



Ex 5: A reimburses 50% of past employees’ post-employment medical costs if the employee provides +25 years of service.

The obligation is:


51



Ex 6: A profit sharing plan requires A pay a specified portion of its cumulative profit for a 5-year period to employees who serve throughout the 5-year period.

The obligation is:a. a short-term employee benefit?b. a post-employment benefit?c. an other long-term employee benefit?d. a termination benefit?e. an equity-settled share-based payment? f. a cash-settled share-based payment?



Ex 7: An entity grants 100 share appreciation rights to an employee as part of the employees remuneration package. The employee will become entitled to a future cash payment, based on the increase in the entity's share price from a specified level over a specified period of time.




Accounting and reporting liabilities in accordance with IAS 37


Measurement of provisions 46


• A provision is measured at the amount that the entity would rationally pay to settle the obligation at the end of the reporting period or to transfer it to a third party at that time.

• risks and uncertainties are taken into account in the measurement of a provision.

• if measured using risk adjusted cash flow forecasts a provision is discounted to its present value.

Measurement of provisions continued 47


Measurement of provisions continued 48


• If large population of items, best estimate reflects probability weighting of all possible outcomes.

• If single obligation, best estimate is the adjusted individual most likely outcome

• Present value using pre-tax discount rate/s that reflect current market assessments of the time value of money (& risks specific to the liability if not already reflected in estimated cash flows).

52

Examples—measurement of provisions 49


• Ex 1: A has 1,000 units of a product sold with active warranties (ie A will repair defects found up to 6 months after sale). Probabilities & repair cost: major defect = 5% chance of CU400 repair; minor defect = 20% chance of CU100 repair; 75% chance of no defects.

• Best estimate (expected value) = CU40,000Calculation: (75% x 1,000 units x nil) + (20% x 1,000 units x CU100) + (5% x 1,000 units x CU400)

Examples—measurement of provisions continued 50


• Ex 2: Personal injury lawsuit brought by customer. Lawyers estimate 30% chance compensation = CU2,000,000 & 70% chance = CU300,000.

• Ruling expected in 2 years. Discount rate = 4% per year (ie 2-year government bonds = 5% less 1% risks specific to liability). Individual most likely outcome = CU300,000. Because only other possible outcome is higher, the best estimate to settle the obligation at 31/12/20X1 will be higher than PV of the most likely outcome of CU300,000, eg PV of CU810,000 at 4% = ±CU748,890

Examples—measurement of provisions continued 51


• Ex 3: Provision for a lawsuit = CU40,000 at 31/12/20X1 & remeasured to CU90,000 at 31/12/20X2. CU3,000 of the increase = unwinding of the discount & the remainder is for better information becoming available. The increase of CU50,000 will be recognised as an expense in the determination of the entity’s profit or loss for the year ended 31/12/20X2– CU3,000 = finance cost– CU47,000 = change in estimate

Disclosure 52


• By class: brief description; expected timing of outflows and indication of the uncertainties about the amount or timing of those outflows; major assumptions made concerning uncertain future events; reimbursement.

• Exception: rare cases when disclosure would prejudice seriously the position of the entity in a dispute—disclose only general nature of the dispute and reason why.

• Note: no exemption from recognition and measurement.

Comparison to the IFRS for SMEs 53


• IAS 37 and Section 21 Provisions and Contingencies of the IFRS for SMEs share the same principles and, other than simplified language, there are no significant differences between the two.

Judgements and estimates 54


• Measuring a provision requires estimating the amount that the entity would rationally pay to settle the obligation at the end of the reporting period or to transfer it to a third party at that time.

• the risks and uncertainties that inevitably surround many events and circumstances are taken account in measuring a provision (eg measure a provision at its expected value by weighing all possible risk adjusted outcomes by their associated probabilities).

53



Accounting and reporting liabilities in accordance

with IAS 17


Introduction 56


• Finance leases are accounted for as in-substance purchases (ie recognise the asset ‘acquired’ (eg PPE) and the obligation to make lease payments—a liability)

• Operating leases—generally no asset/liability recognition

Scope 57


• IAS 17’s measurement requirements are not applied to:

• lessee-held property accounted for as investment property

• investment property provided under an operating lease

• biological assets held under finance leases

• biological assets provided under an operating lease

Operating leases 58


• The leased asset remains in the statement of financial position of the lessor.

• Operating lease payments are usually recognised in profit or loss on a straight-line basis.

• From the perspective of the lessee, if payments are subject to escalation, straight-line recognition is profit or loss may give rise to a liability on the statement of financial position

• the liability reduces as future payments are made

Examples—operating leases 59


• Ex 1: On 1/1/20X1 A entered into a 5-year non-cancellable operating lease over a building. Rentals X1–X4 = 0. Rental X5 = 5,000.

• Ex 2: Same as Ex 1 except lessor agrees to pay the lessee’s relocation costs (ie 500) as an incentive to the lessee for entering into the new lease

• Ex 3: Operating lease payments increase by expected CPI (10% p.a.) to compensate the lessor for expected inflation. X1 = 1,000; X2 = 1,100; X3 = 1,210; etc

Finance leases 60


• Finance leases are accounted for by lessees as an asset purchased (other IFRSs then apply to the asset) on credit (a liability).

• Initially, the liability is recognised at: • the fair value of the leased property, or if lower

• the present value of the minimum lease payments—the implicit interest rate is used as the discount rate

• Lease payments are apportioned between a reduction in the lease liability and interest expense.

54

Example—finance lease 61


On 1/1/20X1 enter into 5-yr non-cancellable lease over a machine.

Machine’s cash cost = 100,000, economic life = 10 yrs and residual value = 0.

Annual lease payments on 31/12: 4 × 23,000 & 23,539 at end of yr 5 when ownership transfers to the lessee.

The interest rate implicit in the lease is 5% p.a. which approximates lessee’s incremental borrowing rate.

Example—finance lease continued 62


Finance lease obligation amortisation table:

1 Jan Finance cost

Payment 31 Dec

20X1 100,000 5,000 (23,000) 82,000

20X2 82,000 4,100 (23,000) 63,100

20X3 63,100 3,155 (23,000) 43,255

20X4 43,255 2,163 (23,000) 22,418

20X5 22,418 1,121 (23,539) –

15,539 115,539

Example—finance lease continued 63


1/1/20X1 (initial recognition) recognise:– asset (PPE) 100,000; and– liability (finance lease obligation) 100,000

For the year ended 31/12/20X1 recognise:– allocate payment of 23,000 (5,000 finance cost

in profit or loss & 18,000 repayment of finance lease obligation)

– CU10,000 depreciation expense in profit or loss and as a reduction to the asset

Sale and leaseback 64


• A sale and leaseback transaction involves the sale of an asset and the leasing back of the same asset. – the lease payment & the sale price are usually

interdependent because they are negotiated as a package

– the accounting treatment of a sale and leaseback transaction depends on the type of lease (finance or operating).

Examples—sale and lease-back 65


Ex 1: On 1/1/20X1 A sold a machine to a bank and leased it back for 3 yrs. Facts about the machine & the leaseback: SP = CU200,000; CA = CU70,000; FV = CU200,000; remaining economic life = 3 yrs; residual value = 0; lease payments = CU77,606 per year (payable in arrears); interest rate implicit in the lease = 8% per year.

What would A recognise in profit or loss for the year ended 31/12/20X1?

Quiz: liabilities 66


Ex 1 continued:a. CU130,000 gain on sale of PPE &

CU77,606 lease rental expense.b. CU23,333 depreciation expense &

CU16,000 finance cost (no income).c. CU43,333 income (amortised deferred gain

on sale of PPE); CU23,333 depreciation expense; & CU16,000 finance cost.

d. CU43,333 income (amortised deferred gain on sale of PPE); CU66,667 depreciation expense; & CU16,000 finance cost.

55



Ex 2: Same as example 1, except the remaining economic life of the machine = 30 years & the lease rental = CU23,000 per year of the three-year lease term.

What would A recognise in profit or loss for the year ended 31/12/20X1?



Ex 2 continued:a. CU130,000 gain on sale of PPE &

CU23,000 lease rental expense.b. CU23,333 depreciation expense &

CU16,000 finance cost (no income).c. CU43,333 income (amortised deferred gain

on sale of PPE); CU23,333 depreciation expense; & CU16,000 finance cost.

d. CU43,333 income (amortised deferred gain on sale of PPE); CU66,667 depreciation expense; & CU16,000 finance cost.



• Section 20 Leases of the IFRS for SMEs does not require lease payments in an operating lease that are structured to increase in line with expected general inflation to be recognised by the lessee or lessor on a straight-line basis, unlike IAS 17.



• Identifying arrangements that contain a lease

• Classifying a lease—finance or operating lease

• Determining the interest rate implicit in a lease (particularly for a lessee)

• For manufacturer or dealer lessors, bifurcating the sale and financing transactions.



Accounting and reporting liabilities in accordance with IAS 19


Employee benefits 72


• IAS 19 specifies separate accounting and reporting for each of the 4 categories of employee benefits identified:

• short-term benefits

• post-employment benefits

• other long-term benefits

• termination benefits

56

Short-term employee benefits 73


• Short-term employee benefits are expected to be settled wholly before 12 months after the period in which the employee rendered the related service.

• recognise as an expense as the employee provides the related service

• measure obligations at undiscounted amounts (application of the cost constraint)

• no disclosures specified in IAS 19.

Examples—short-term employee benefits 74


• Ex 1: An employee is entitled to 5 days paid sick leave a year. Unused sick leave is carried forward for 1 calendar year. It is allocated on a FIFO basis. No sick leave is expected to lapse.Employee 1 earns 400 per working day. Sick leave record: 4.5 days accumulated at 1/1/20X1; 2 days taken in 20X1. Salary increase = 5% effective 1/1/20X2.

31/12/20X1 liability = CU2,100 (ie CU400 wage rate × 1.05 increase × 5 (max) days due at 31/12/20X1 & expected to be taken in 20X2.



• Ex 2: Same as Ex 1 except sick leave cannot be carried forward to the next calendar year & does not vest (ie is not paid out in cash). No liability at 31/12/20X1 (no obligation).

• Ex 3: Similar to Ex 1 and Ex 2 except sick leave is paid out in cash in January 20X2 payroll at 20X1 salary rate. 31/12/20X1 liability = CU1,200 (ie CU400 wage rate × 3 (5 earned less 2 taken) days due at 31/12/20X1 & paid out in 20X2.



• Ex 4: A pays 3% of year’s profit (before profit sharing) to employees who serve throughout the current year & who will continue to serve throughout the following year. A expects to save 10% through staff turnover. The bonus will be paid on 31/12/20X2.

Profit for 20X1 before profit sharing = CU1,000,000.

Liability at 31/12/20X1 & expense = CU27,000 (ie 3% × CU1,000,000 × 90%)

Post-employment benefits—defined contribution plan 77


• Employees (not the employer) are exposed to risks.

• Employer:

• recognises contributions payable as an expense as the employee provides services in exchange for the contributions.

• measures obligations for unpaid contributions at undiscounted amounts (application of the cost constraint).

• disclose amount recognised as an expense.

Post-employment benefits—defined benefit plan 78


• Recognise the defined benefit liability as follows:

• use the projected unit credit method based on actuarial assumptions to measured the obligation at its present value; less

• the fair value of plan assets (if any).

• Recognise all changes in the defined benefit liability (asset) when they occur:

• service costs and net interest in profit and loss

• remeasurements in other comprehensive income.

• Extensive disclosures specified.

57

Example—defined benefit plan 79


Lump sum benefit payable on retirement = 1% of final salary for each year of service. Must retire at end of Y5. Salary Y1 = 100,000 (salary Y2 = 105,000).• Actuarial assumptions at 31/12/Y1: expected

salary increase 5% pa compounded; 20% probability employee will terminate employment before retirement an forfeit lump sum; discount rate = 10% pa.

• Actuarial assumptions at 31/12/Y2: expected salary increase 15% pa compounded; 10% probability employee will terminate employment before retirement an forfeit lump sum; discount rate = 10% pa.

• Y3–Y5 no changes in actuarial assumptions.

Example—defined benefit plan continued 80

Year 1 2 3 4 5

Attributed to:

– prior years – 1,597 3,194 4,791 6,388

– current year (1% of final salary)

1,216 1,597 1,597 1,597 1,597

– current and prior years 972 3,194 4,791 6,388 7,985

Opening obligation – 664 2,160 3,563 5,226

Interest at 10% – 66 216 356 523

Effects of change in actuarial assumptions – 350 – – 798

Current service cost 664 1,080 1,188 1,307 1,437

Closing obligation 664 2,160 3,563 5,226 7,985© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org



Calculations at 31/12/Y1:

• expected final salary: CU100,000 × 1/(1.05)4 = CU121,551

• benefit current year = 80% (vesting condition) of 1% of CU121,551 exp final salary = CU973

• present value = CU973 × 1/(1.1)4 = CU664


• exp final sal: CU105,000 × 1/(1.15)3 = CU159,692• benefit current year = 90% (vesting condition) of 1% of

CU159,692 exp final salary = CU1,437• present value = CU1,437 × 1/(1.1)3 = CU1.080• interest = CU664 × 10% = CU66• actuarial loss = balancing figure



Defined benefit plan obligation (liability) account

1/1/Y2 Opening balance 664

Y2 Current service cost 1,080

Y2 Finance cost 66

31/12/Y2Closing balance

2,160 Y2 Actuarial loss (balancing figure)

350

2160 2,160

1/1/Y3 Opening balance 2,160

Other long-term benefits 83


• Other long-term benefits are all employee benefits other than short-term employee benefits, post-employment benefits and termination benefits

• Recognition and measurement is the same as that for post-employment benefits: defined benefit plans.


Example—other long-term employee benefits 84


The facts are the same as example provided for defined benefit plans. However, in this example the employee is not required to retire at the end of Y5 and that the benefits vests and is payable on the employee’s 65th birthday (the end of Y5).

The recognition and measurement is the same as in the example provided for defined benefit plans above.

58

Example—other long-term employee benefits continued 85

Year 1 2 3 4 5

Attributed to:

– prior years – 1,597 3,194 4,791 6,388

– current year (1% of final salary) 1,216 1,597 1,597 1,597 1,597

– current and prior years 972 3,194 4,791 6,388 7,985

Opening obligation – 664 2,160 3,563 5,226

Interest at 10% – 66 216 356 523

Effects of change in actuarial assumptions – 350 – – 798

Current service cost 664 1,080 1,188 1,307 1,437

Closing obligation 664 2,160 3,563 5,226 7,985© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Example—other long-term employee benefits continued 86



• expected Y5 salary: CU100,000 × 1/(1.05)4 = CU121,551

• benefit current year = 80% (vesting condition) of 1% of CU121,551 exp final salary = CU973

• present value = CU973 × 1/(1.1)4 = CU664


• exp Y5 salary: CU105,000 × 1/(1.15)3 = CU159,692• benefit current year = 90% (vesting condition) of 1% of

CU159,692 exp final salary = CU1,437• present value = CU1,437 × 1/(1.1)3 = CU1.080• interest = CU664 × 10% = CU66• actuarial loss = balancing figure

Termination benefits 87


• Termination benefits arise only on termination, rather than during employment.

• Principle—the event that gives rise to an obligation is the termination of employment rather than employee service

• Recognise expense and a liability at the earlier of:

• when the entity can no longer withdraw the offer of those benefits

• when the entity recognises the related restructuring provision in accordance with IAS 37.




• The primary differences between IAS 19 and Section 28 Employee Benefits are:

• Section 28 allows simplification of measurement principles meaning that external specialists may not need to be engaged (ie full application of the projected unit credit method may not be required)

• Less detailed disclosures are required



• To measure the liability for a defined benefitpost-employment plan (eg mortality, employee turnover, age at and date of retirement, future salary and benefit levels, future medical costs, the discount rate and fair value of plan assets).

• extensive disclosures required to: explain characteristics of the plan and associated risks; identify and explain related amounts in financial statements; possible affects on the amount, timing and uncertainty of future cash flows.

Judgements and estimates continued 90


• Measuring obligations for profit-sharing plans often require estimates of expected payments to employees and expected forfeitures if loyalty period applies.

• Accumulating compensated absence schemes (eg some sick leave, holiday leave, maternity leave, military leave and long-service leave schemes) require estimates of expected employee compensated absences.

59



Income taxes


Introduction 92


• IAS 12 specifies the accounting treatment for income taxes, including how to account for the current and future tax consequences.

• An entity expects to recover the carrying amount of its assets and to settle its liabilities.

• Recovery or settlement of that carrying amount affects the amount of future tax payments a deferred tax liability (or deferred tax asset) is recognised, with certain limited exceptions.

Income tax defined 93


• Income tax: all domestic and foreign tax based on taxable profit

• Taxable profit = a net amount in accordance with taxation authorities’ rules for determining income taxes

• Income tax = tax rate × taxable profit

note: tax based on revenue ≠ income tax– sales tax, VAT, tax on capital, and

social security tax ≠ income tax

Judgement 94


• Determining whether a tax is an income tax

• hybrid taxes (eg those comprising both production and profit-based components) must be decomposed and only the profit-based component is subject to IAS 12.

Current tax defined 95


• Current tax: amount of income tax payable/refundable based on taxable profit/loss for the current period or past periods

Accounting for current tax 96


• Measure using tax law enacted or substantively enacted at reporting date

• Current period expense or income

• usually presented in profit or loss

• if relates to an item of OCI, that tax is also presented as part of OCI

• Liability for any tax payable on current or prior taxable profit

• Asset if overpayment is recoverable

60

Example: current tax 97


• Tax rate 15%

• Profit (accounting) for 20X1 = CU150,000

• CU20,000 royalty income is tax exempt

• CU5,000 meals expense is not deductible

• Bad debt expense CU2,500 included CU500 estimate not deductible until write-off

• Tax depreciation (accelerated) is CU43,000, accounting depreciation is CU35,000.

• No provisional tax payments

Example: current tax continued 98


Accounting profit 150,000Less nontaxable royalty (20,000)Plus nondeductible meals 5,000Plus nondeductible bad debts 500Less additional tax depreciation (8,000)Taxable profit 127,500

Current tax expense/liability 19,125Calculation: 15% × CU127,500 = CU19,125

Note: because no provisional tax has been paid the liability = current tax expense

Current taxJudgements and estimates 99


• Accounting for uncertain tax positions

• Judging when a tax rate becomes substantively enacted

Recognition—deferred tax balances 100


• Deferred tax: tax payable/recoverable in the future period as a result of past transactions

• Carrying amount: measurement under IFRSs

• Tax base: measurement under tax law• Temporary difference: difference in

carrying amount of an item in the statement of financial position and its tax base

Recognition—deferred tax balances 101


• Recognise deferred tax asset (liability) for all temporary difference

• initial recognition exemptions

• other exemptions

• special recognition requirements for deferred tax assets (next slide)

Recognition—deferred tax assets 102


• Deferred tax assets are recognised only if it is probable that future taxable profit will be available to absorb the losses or credits or deductible differences.

• The existence of unused tax losses may indicate that future taxable profit is not probable.

• The tax consequences of transactions and events are recognised in the same financial statement as the transaction or event.

61

Recognition—deferred tax assetsExample: tax loss 103


• Loss for 20X1 (accounting) = tax loss = CU120

• Can be carried forward three years then unutilised portion (if any) expires (and cannot be carried back)

• Of the CU120 tax loss, based on forecasts of future taxable profits and other factors (see IAS12.34–36) it is probable that only CU30 will be utilised

• Tax rate 20%

Recognition—deferred tax assetscontinued Example: tax loss 104


Journal entry at 31/12/20X1 Debit

Credit

Asset—deferred tax [calculation: CU120 × 20%]

24

Asset—deferred tax—unrecognised[calculation: CU90 × 20%]

18

Income—profit or loss: income tax (deferred tax) [calculation: CU30 × 20%]

6

Recognition—deferred tax assetsJudgements and estimates 105


• Determining whether it is probable that the entity will generate sufficient taxable profit to allow for the recognition of a deferred tax asset for:

• deductible temporary differences (for application guidance see IAS 12.27–31)

• unused tax losses and unused tax credits (for application guidance see IAS 12.34–36)

Recognition exemptions—deferred tax Initial recognition exemptions 106


• initial recognition of goodwill• initial recognition of an asset or liability in a

transaction which:(i) is not a business combination; and(ii) at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss).

Recognition exemptions—deferred taxExample—initial recognition exemption 107


• On 1/1/20X1 item of PPE cost = CU1,000• Estimates in accordance with IAS 16

• useful life = five years• residual value = nil

• Tax information• tax rate = 40%• depreciation not deductible• on disposal, any capital gain would not be

taxable and any capital loss would not be deductible.

Calculate deferred tax liability at 31/12/20X1

Recognition exemptions—deferred taxExample—initial recognition exemption 108


• At 1/1/20X1:

• Carrying amount = CU800

• tax base = CU0 (no future deductions)

• temporary difference = CU800

• Deferred tax liability = CU0 (because initial recognition exemption applies)

62

Recognition exemptions—deferred tax: investments in subsidiaries 109


• Recognise a deferred tax liability for all taxable temporary differences associated with investments in subsidiaries, branches and associates, and interests in joint arrangements, except to the extent that both of the following conditions are satisfied:

• (a) the parent, investor, joint venturer or joint operator is able to control the timing of the reversal of the temporary difference; and

• (b) it is probable that the temporary difference will not reverse in the foreseeable future

Measurement—deferred tax 110


• Deferred tax asset (liability) is measured: • at tax rates expected to apply when the

deferred tax asset (liability) is realised(settled); and

• reflect the tax consequences that would follow from the manner in which the entity expects to recover (settle) the carrying amount of its assets (liabilities)

• exceptions when revaluation model used for non-depreciable asset and fair value model used for investment property

Measurement—deferred tax continued 111


• The tax rate expected to apply in future is generally indicated by the tax rate that is substantively enacted at end of the reporting period.

• for graduated tax rates forecast the effective tax rate using substantively enacted tax rates based on expected income at the time of reversal of the temporary difference

• Deferred tax assets and liabilities are not discounted

Example 1: deferred tax 112


• On 1/1/20X1 acquire machine for CU100,000

• Accounting estimates made in accordance with IAS 16 Property, Plant and Equipment

• straight-line depreciation

• useful life = 5 years

• residual value = nil

Example 1: deferred tax continued 113


• Relevant income tax information:• tax depreciation on machine = straight-line

historical cost over 2 years• when entity sells machine, government recoups

past tax depreciation to the extent that the selling price exceeds the tax base

• substantively enacted tax rates:• operating profits/losses taxed at 20%• capital gains/losses (eg proceeds from sale in

excess of historical cost) taxed at 10%



Calculate 20X1 deferred tax liability and expense• Carrying amount = CU80,000• Tax basis = CU50,000 (future tax

deductions)• Taxable temporary difference = CU30,000• Deferred tax liability = CU6,000• Deferred tax expense = CU6,000Calculation: 20% × CU30,000 temporary difference = CU6,000 deferred tax liability

63



Facts the same as Example 1, except at 31/12/20X1 intend to sell the machine in 1/20X2

• Assume carrying amount still = CU80,000

• Tax basis = CU50,000 (future tax deductions)

• Taxable temporary difference = CU30,000

• Deferred tax liability = CU6,000

• Deferred tax expense = CU6,000Calculation: 20% × CU30,000 temporary difference = CU6,000 deferred tax liability



Facts the same as Example 1.On 31/12/20X2 when carrying amount was CU60,000 machine is revalued to CU120,000Calculate deferred tax liability at 31/12/20X2 • Carrying amount = CU120,000• Tax basis = nil (no future tax deductions)• Taxable temporary difference = CU120,000• Deferred tax liability = CU24,000 (ie

CU120,000 × 20% because expect to recover through use, ie profit on sale of inventory)


Journal entry for revaluation of machine31/12/X2 Debit Credit

Asset—PPE (machine) 60,000

Income—other comprehensive income

48,000

Liability—deferred tax 12,000

Reconciliation of deferred tax liability:1/1/20X2 opening balance CU6,00020X2 depreciation CU6,00031/12/20X2 revaluation CU12,00031/12/20X2 closing balance CU24,000



Facts the same as Example 3. On 30/6/20X3 when carrying amount = CU105,000 decided to sell machine = fair value less costs to sell.Calculate deferred tax liability at 30/6/20X3• Carrying amount = CU105,000• Tax basis = nil (no future tax deductions)• Taxable temporary difference = CU105,000• Deferred tax liability = CU20,500 (ie

CU100,000 expected tax recoupment × 20% + CU5,000 expected capital profit × 10%)



Reconciliation of deferred tax liability:

1/1/20X3 opening balanceCU24,000

30/6/20X3 6 months depreciation(CU3,000)

30/6/20X3 change of intention(CU500)

31/12/20X2 closing balanceCU20,500



Facts the same as Example 4 except investment property (building). Presume recovery by sale.

Calculate deferred tax liability31/12/20X1 31/12/20X2 30/06/20X3

Carrying amount 80,000 120,000 105,000

Tax base 50,000 0 0

Temporary difference

30,000 120,000 105,000

Deferred tax liability 6,000 22,000 20,500

Calculations:

- recoup depreciation 20% ×30,000

20% ×100,000

20% × 100,000

- capital gain 10% × 20,000 10% × 5,000© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

64


Reconciliation of deferred tax liability:31/12/20X1 31/12/20X2 30/06/20X3

Opening balance 0 6,000 22,000

Fair value change (4,000) 6,000 (1,500)

Tax depreciation 10,000 10,000 0

Closing balance 6,000 22,000 20,500

Calculations:

- fair value change 20% × -20,000 20% × 20,000 +10%×20,000

10% × -15,000

- tax depreciation 20% × 50,000 20% × 50,000



Facts the same as Example 5 except measurement presumption rebutted in 20X1 and 20X2 (not 20X3).

Calculate deferred tax liability

31/12/20X1 31/12/20X2 30/06/20X3

Carrying amount 80,000 120,000 105,000

Tax base 50,000 0 0

Temporary difference

30,000 120,000 105,000

Deferred tax liability 6,000 24,000 20,500

Calculations:

- rental income 20% ×30,000

20% ×120,000

- recoup depreciation 20% × 100,000

- capital gain 10% × 5,000© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org


Reconciliation of deferred tax liability:

31/12/20X1 31/12/20X2 30/06/20X3

Opening balance 0 6,000 24,000

Fair value change (4,000) 8,000 (3,000)

Tax depreciation 10,000 10,000 (500)

Closing balance 6,000 24,000 20,500

Calculations:

- fair value change 20% × -20,000 20% × 40,000 20% × -15,000

- tax depreciation 20% × 50,000 20% × 50,000

- Change intention 10% × -5,000


Example 7: deferred taxgraduated tax rates 124

• Temporary difference arises CU7,500 in 20X1, expected to reverse in 20X3

• Tax rate:

• 15% on first CU500,000 of profit

• 25% on excess over CU500,000

• Taxable profit 20X1 = CU400,000

• Expected taxable profit 20X3 = CU600,000

Calculate deferred tax liability at 31/12/20X1


Example 7: deferred tax continued

graduated tax rates 125


• First calculate expected effective tax rate for 20X3

• (CU500,000 × 15%) + (CU100,000 × 25%) = CU100,000 expected tax expense for 20X3.

• CU100,000/CU600,000 = 16.67%

• Deferred tax liability at 31/12/20X1 = CU1,250

• Calculation: 16.67% expected effective tax rate for 20X3 × CU7,500 temporary difference = CU1,250

Measurement—deferred tax continued

tax rate change 126


• Deferred tax assets or liabilities are adjusted when a new tax rate is substantively enacted

–the adjustment is accounted for as a revision to an accounting estimate (ie it affects that period’s profit)

65

Example: tax rate change 127


• At 31/12/20X1 deferred tax liability = CU200

• (ie CU1,000 temporary difference × 20% tax rate)

• On 1 January 20X2 tax rate changes to 30% (ie becomes substantively enacted)

• On 1 January 20X2 deferred tax liability = CU300

• (ie CU1,000 temporary difference × 30% tax rate)

Measurement—deferred taxJudgements and estimates 128


• Estimating the tax rates that are expected to apply when temporary differences reverse (eg when tax rates are graduated)

• Judging when a tax rate becomes substantively enacted

Presentation 129


• Classification: – All deferred tax assets and liabilities as

non-current• Offsetting:

– Do not offset current tax assets and liabilities or deferred tax assets and liabilities unless entity has legal right to offset and it intends either to settle net or simultaneously

Disclosure 130


• Current tax and deferred tax – see IAS 12.79–88



Accounting for share-based payments


Recognition 132


• Principle—a share-based payment transaction is recognised when the entity obtains the goods or services.

• Goods or services received are recognised as assets or expenses as appropriate.

• The transaction is recognised in equity (if equity-settled) or as a liability (if cash-settled).

66

Measurement—equity-settled 133


• Principle—measured at the fair value at measurement date of the goods or services received.

• If the FV of the goods or services cannot be estimated reliably, the fair value of the equity instruments at grant date is used—only if this is undeterminable, use of the intrinsic value measurement method is permitted.

• For arrangements with employees must measure FV of services with reference to the FV of the instruments granted.



• Non-market vesting conditions—eg service conditions are not taken into account in measuring fair value at measurement date.

• Market vesting conditions—eg achieving a specified share price are taken into account in measuring fair value at measurement date.



Example 1 – non-market vesting condition

Entity grants 1 share to each of its 10 staff.

Vesting period = 2 yrs continuous service.

1 staff is expected to leave before vesting.

Grant date fair value = CU10 per share.

Year 1

Dr Expense CU45

Cr Equity CU45Calculation: 9 staff x CU10 x 1 ÷ 2 years = CU45



Example 1 continued

Year 2

3 employees left in the vesting period.Dr Expense CU25

Cr Equity CU25

Calculation: 7 staff x CU10 = 70 total expense

CU70 less 45 recognised in year 1 = CU25



Example 2 – market vesting conditions Entity grants 1 share option to each of its 10 staff.

Vesting period = 2 yrs continuous service.

Condition = share price increase from CU5 1/1/20X1 to CU6 at 31/12/20X2.

At 1/1/20X1 fair value (measured taking into account the market condition) = CU2 per option.



Example 2 – continued Year 1Dr Expense CU10

Cr Equity CU10Calculation: 10 staff x CU2 x 1 ÷ 2 years = CU10Year 2Dr Expense CU10

Cr Equity CU10Calculation (irrespective of outcome of market condition): 10 staff x CU2 x 2 ÷ 2 years = CU20. CU20 less CU10 recognised in 20X1 = CU10

67



Modifications to terms and conditions• includes the repricing of options granted (IG Ex 7 to

IFRS 2—see Part B of A Guide through IFRS) and modification of vesting conditions (IG Ex 8 to IFRS 2—see Part B of A Guide through IFRS)

• Modifications involve a minimum expense equal to that based on services rendered and the grant date FV and, in addition, any increased expense (from modification date) should a modification lead to an increased FV or lead to increased benefit to an employee.

Measurement—cash-settled 140


• Principle—measure at the fair value of the liability at the end of each reporting period (ie remeasure) and at settlement date.

• Changes in fair value are recognised in profit or loss.



Example 3

On 31/12/20X1 entity granted 10 cash-settled share appreciation rights (SAR) to each of its 10 staff conditional upon the staff remaining in service for the next 2 yrs.

Fair value of SAR: 31/12/20X1 = CU5 and 31/12/20X2 = CU6. On 31/12/20X3 entity paid CU800 to redeem the 100 vested SARs.

One staff member was expected to leave in 20X2.



Example 3 continued

31/12/20X1Dr Expense CU0

Cr Liability CU0Calculation: 10 SAR x CU5 x 9 staff x 0 ÷ 2 years

31/12/20X2Dr Expense CU300

Cr Liability CU300Calculation: 10 SAR x CU6 x 10 staff x 1 ÷ 2 years



Example 3 continued

31/12/20X3Dr Expense CU500 Dr Liability CU300

Cr Cash CU800

Measurement—cash alternatives 144


• If counterparty has the option = compound financial instrument, therefore split accounting (ie determine liability component and the residual of total fair value is equity).

• If counterparty is third party, FV of total instrument = FV of goods or services received

• If counterparty is employee, FV of total instrument = FV of equity instruments granted

• If the entity has the option = a liability is recognised only to the extent that the entity has an established practice of selling in cash.

68

Group entities 145

• Separate or individual financial statements– Recipient of goods or services: recognise a SBP

transaction

• Determining whether the transaction is recognised as equity-settled or cash-settled in the group financial statements is based on whether equity must be issued in settlement an obligation to settle in cash exists (IFRS 2.43C).


Disclosures 146


• Information that enables users to understand the nature and extent of share-based payment arrangements.

• Information that enables users to understand how fair value of the goods or services received was determined.

• Information that enables users to understand the effect of share-based payment transactions on profit or loss and financial position.


• Differences between Section 26 Share-based Payment and IFRS 2 include:

– less application guidance is provided in the IFRS for SMEs.

– when the fair value is not determined using observable data, IFRS 2 allows use of the intrinsic valuation method—this is not permitted in Section 26.




• Identifying share-based payment transactions may not always be straightforward.

• Distinguishing equity-settled and cash-settled plans.

• Understanding of plan terms.

• Estimating the fair value of an options and use of valuation models (Black-Scholes, binomial, Monte Carlo).

• Estimating vesting periods and vesting conditions.

149


Thank You

69



Reporting financial performance



22





The concepts


4

• Provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity.

– The information provided about financial performance helps existing and potential investors, lenders and other creditors to understand the return the entity has produced on its economic resources.

Objective of financial reporting 4


Objective of financial reporting continued

• Decisions by investors about buying, selling or holding equity and debt instruments depend on the returns that they expect from an investment in those instruments, egdividends, principal and interest payments or market price increases.

• Decisions by lenders about providing or settling loans and other forms of credit depend on the principal and interest payments or other returns that they expect.

• Information must reflect the effect on performance of changes in market prices and/or interest rates.

55


Objective of financial reporting continued

• Information about an entity’s financial performance in a period, reflected by changes in economic resources (other than by obtaining additional resources directly from investors or creditors) is useful in assessing the entity’s past and future ability to generate net cash inflows (see CF.OB18)

66


70

7ElementsAsset

• resource controlled by the entity…

• expected inflow of economic benefits

Liability

• present obligation… • expected outflow of

economic benefitsEquity = assets – liabilities

Income

• recognised increase in asset/decrease in liability in current reporting period

• that result in increased equity except…

Expense

• recognised decrease in asset/increase in liability in current reporting period

• that result in decreased equity except…


77 Examples—applying the concepts 8

• Fair value model—measure element at fair value with changes in fair value recognised as income or expense for the period in which it arises

• Depreciation represents the consumption of the assets service potential in the period.

8




IAS 1Presentation of Financial Statements


Introduction

• IAS 1 provides guidance on the presentation of financial statements.

• Financial performance is presented in the form of the statement of profit or loss and other comprehensive income

• One statement or two statements

10


Income and expenses

• Concepts for income and expenses• no concepts for other comprehensive income (OCI)

• IAS 1 defines profit or loss as the total of income less expenses, excluding the components of OCI

• OCI includes items of income or expense (including reclassification adjustments) that are not recognised in profit or loss as required or permitted by other IFRSs

11


Profit or loss

• IAS1.82 prescribes line-items for profit or loss (egrevenue and finance costs)

• In addition, items required by other IFRSs must also be presented

• Additional line items, headings and sub-totals should be used only when relevant to an understanding of financial performance

• no extraordinary items• Expenses may be classified by nature or function (IAS

1.102–105)

12


71

Other comprehensive income

• Items to be classified by nature• Grouped based on those that will:

• Not be reclassified subsequently to profit or loss; and

• Be reclassified to profit or loss when specified conditions are met

• Income tax effects must be disclosed (net versus aggregate)

• Reclassification adjustments must be disclosed

13


Other comprehensive income continued

• Items included in OCI include:• gains on property revaluation

• remeasurements of defined benefit pension plans

• exchange differences on translating foreign operations

• cash flow hedges

14




IAS 18Revenue


Conceptual context

• Financial information must be relevant• Relevant financial information is capable of making a

difference in decisions about providing resources to the entity, ie the information has

• predictive value• confirmatory value• both predictive and confirmatory value (these

concepts are interrelated)• For example, current year revenue information can be

used as a basis for predicting future revenue and can be compared to revenue predictions made in previous years (CF.QC10)

16


Introduction

• Revenue is income that arises in the course of ordinary activities of the entity

• IAS 18 prescribes accounting for revenue from sale of goods, from rendering of services, and from the use by others of entity assets yielding interest, royalties and dividends.

• Revenue from construction contracts is accounted for in accordance with IAS 11 Construction Contracts

17


Scope exclusions

• IAS 18 does not deal with revenue from:• Lease agreements;• Dividends accounted for in accordance with the

equity method;• Insurance contracts;• Changes in the fair value of financial instruments

and biological assets; • Initial recognition of agricultural produce; and• Extraction of mineral ores

18


72

Revenue recognition

• In general, revenue is recognised when it is probable that economic benefits from the transaction will flow to the entity and those benefits can be measured reliably.

• Revenue from the sale of goods is recognised when:– significant risks and rewards of ownership have

been transferred to the buyer; and– the entity has neither continuing managerial

involvement in, nor effective control over, the goods.

19


Revenue recognition continued

• For the rendering of services, revenue is recognised as work is performed (percentage of completion method).

• However, when the outcome of a service contract cannot be estimated reliably, revenue is recognised only to the extent of expenses recognised that are recoverable.

20


Revenue recognition continued

• Interest is recognised over time, computed on the effective yield on the asset.

• Royalties are recognised in accordance with the substance of the agreement.

• Dividends are recognised when the shareholder has the right to receive payment.

21


Measurement

• Revenue is measured at the fair value of the consideration received or receivable by the entity on its own account.

• revenue does not include amounts collected on behalf of third parties.

• when receipt of cash is deferred, the nominal consideration is split between sales revenue and interest revenue.

22


Example: cash discount

• Goods sold for 500, due in 60 days. Customer can take 10% discount if paid in 30 days.

• If customer gets the discount, revenue is 450. • Would be wrong to have revenue 500 and interest

or some other expense of 50.

23


Example: ‘sale’ to agent

• We sell goods for 100 through an intermediary (agent) who gets a commission of 10. We own goods until sold to end users. We are responsible for defects and returns from end users.

• We have revenue of 100 and commission expense of 10 only when agent sells goods to end user.

• Would be wrong to recognise revenue when goods are shipped to agent.

24


73

Example: deferred payment

• Example: We sell goods costing 1,500,000 for 2,000,000 due in 2 years interest free. Current cash price would have been 1,652,893.

• Financing transaction. Up front revenue is 1,652,893. Profit is 152,893.

• PV = (FV) / ((1+int)^periods)• 1,652,893 = (2,000,000) / ((1+int)^2)• Int = .10 (10%) by solving the equation

25


Exampledeferred payment continued

– Interest income year 1 = 1,652,893 x 10% = 165,289, unpaid, bringing receivable up to 1,818,182.

– Interest income year 2 = 1,818,182 x 10% = 181,818, bringing receivable up to 2,000,000, which is then repaid.

26


Exampledeferred payment continued 27

1 Jan 01 Account receivable 1,652,893Revenue 1,652,893

31 Dec 01 Account receivable 165,289Interest revenue 165,289

31 Dec 02 Account receivable 181,818Interest revenue 181,818

31 Dec 02 Cash 2,000,000Account receivable 2,000,000


Measurement continued

• An exchange for dissimilar items generates revenue measured at the fair value of the goods or services received.

• An exchange of goods or services for similar items does not generate revenue.

28


Comparison with the IFRS for SMEs

• IAS 18 and Section 23 Revenue of the IFRS for SMEs share the same principles. However, the IFRS for SMEs is written in simplified language.

29



• The primary issue in accounting for revenue is determining when to recognise revenue.

• whether the risks and rewards have been transferred to the buyer (sale of goods or financing arrangement?)

• measuring the fair value of consideration received or receivable.

• bifurcating multiple element sales (ie determining different elements).

• services—estimating the stage of completion.

30


74

Judgements and estimates continued

• Examples of circumstances in which the timing of recognition of revenue requires careful consideration include:

–sales with delayed delivery–sales subject to conditions, eg installation, inspection and right of return–sale and repurchase agreements–consignment sales–sales to others for resale–multiple element contracts.

31




IAS 33Earnings per Share


Introduction

• IAS 33 deals with the calculation and presentation of earnings per share (EPS).

• It applies to entities whose ordinary shares or potential ordinary shares (for example, convertibles, options and warrants) are publicly traded.

• An entity must present basic EPS and diluted EPS with equal prominence in the statement of comprehensive income.

33


Dilution

• Dilution is a notional reduction in Earnings (losses) per share resulting from the assumption that

• convertible instruments are converted, • options or warrants are exercised, • or ordinary shares are issued

upon the satisfaction of specified conditions.

34


Earnings

• The ‘earnings’ of two entities subject to identical transactions and events could differ because they have adopted different accounting policies.

• These differences are not adjusted for when calculating EPS.

• The numerators used in the calculation of basic and diluted EPS must be reconciled to profit or loss attributable to the ordinary equity holders of the parent.

35


Shares

• The denominators (weighted average number of ordinary shares ‘WANOS’) used in the calculation of basic and diluted EPS might be affected by:

– share issues during the year– shares to be issued upon conversion of a

convertible instrument– contingently issuable or returnable shares; – bonus issues– share splits and share consolidation– the exercise of options and warrants– contracts that may be settled in shares– written put options

36


75

Example:share split

An entity issued 100 ordinary shares at incorporation on 1 January 20X1. • The only change to the issued share capital occurred

on 1 January 20X2 when all ordinary shares were split—each ordinary share became two ordinary shares

• The entity earned a profit of CU1,000 in each period, 20X1 and 20X2

37


Exampleshare split continued

• What is the basic EPS for the entity in 20X1?Profit: CU1,000WANOS : 100Basic EPS: CU10 (CU1,000 ÷ 100 shares)


38


Exampleshare split continued

• In the 20X2 financial statements, what EPS figures will be disclosed for each 20X2 and 20X1?

20X2: CU520X1: CU5IAS 33.26—the WANOS must be adjusted for all periods presented that have resulted in a change in ordinary shares without an increase in resources, ie a share split

39


Exampleshare issue

An entity issued 100 ordinary shares at incorporation on 1 January 20X1. • The only change to the issued share capital occurred

on 1 January 20X2 when an additional 100 ordinary shares were issued for CU30 per share

• The entity earned a profit of CU1,000 in each period, 20X1 and 20X2

40


Exampleshare issue continued



41


Example—share issue continued

• In the 20X2 financial statements, what EPS figures will be disclosed for each 20X2 and 20X1?

20X2: CU520X1: CU10 Shares were issued and the issue led to a corresponding change in the entity’s resources.

42


76


• The calculation of EPS includes (as the numerator) a profit or loss figure. This amount is determined in accordance with IFRSs and, therefore, the judgements and estimates made in applying other IFRS will affect EPS.

• Judgements must also be made relating to the extent of EPS-related explanations provided in management commentary.

43




IAS 20Accounting for Government Grants

and Disclosure of Government Assistance


Requirements

• IAS 20 specifies the accounting for government grants and the disclosure of government assistance from which the entity has directly benefited.

• Government grants are transfers of resources to an entity in return for compliance with specified conditions.

– they include reductions in liabilities to the government and the benefit of a government loan at below market rate of interest.

• Government assistance is a benefit available to entities that satisfy qualifying criteria.

45


Recognition

• Government grants are recognised when there is reasonable assurance that the entity will comply with any specified conditions and that the grants will be received.

• Non-monetary grants (eg taxi licence, fishing quota) are either recognised at fair value or both the asset and the grant are recognised at a nominal amount.

• Receipt of a grant is not always conclusive evidence that conditions will be fulfilled.

46


Recognition continued

• Government grants are recognised in profit or loss in the same periods as the costs they are intended to compensate for, ie they are not recognised directly in equity.

• If there are no future related costs, a grant is recognised in profit or loss when receivable.

47


Recognition continued

• Government grants that relate to assets are initially recognised in the statement of financial position as deferred income or as a deduction from the related assets.

• The grant is then recognised in profit or loss over the life of the asset, by reducing deferred income over that period, or by way of reduced depreciation.

48


77


• The main differences in the recognition and measurement requirements exist between IAS 20 and Section 24 Government Grants the IFRS for SMEs include:

• IAS 20 contains numerous options for accounting for government grants. The IFRS for SMEs contains only one option

• IAS 20 requires that grants should not be recogniseduntil there is reasonable assurance that the entity will comply with the conditions and the grants will be received. Under Section 24, a grant is not recogniseduntil the conditions are actually satisfied.

49


Comparison to the IFRS for SMEs continued

• IAS 20 requires government grants to be recognised as income over the periods necessary to match them with the related costs for which they are intended to compensate, on a systematic basis.

• Section 24 does not allow an entity to match the grant with the expenses for which it is intended to compensate or the cost of the asset that it is used to finance.

• Section 24 does not prescribe any presentation requirements relating to government grants.

50



• The main area of judgement is whether the entity will comply with conditions attached to a government grant.

• Measuring the fair value of some non-monetary grants received (if accounting policy is to recognise at fair value not nominal amount).

51


52


Thank You

78



Business combinations and

consolidated financial statements



22


The requirements are set out in International Financial Reporting Standards (IFRSs), as issued by the IASB at 1 January 2013 with an effective date after 1 January 2013 but not the IFRSs they will replace.

Disclaimer: The IFRS Foundation, the authors, the presenters and the publishers do not accept responsibility for any loss caused by acting or refraining from acting in reliance on the material in this PowerPoint presentation, whether such loss is caused by negligence or otherwise.



ControlIFRS 10 Consolidated Financial Statements

[[[


Why consolidation?

• Question: Why are entities required to present consolidated financial statements?

– Provide information about economic entity– investors need information about all assets and

liabilities of combined entity

– Definition of asset based on control: – control through an entity is indirect control– with control, entity can dictate use or settlement

– Do not want legal form to dictate financial reporting?

4


5Link to the Conceptual FrameworkObjective : information that is useful to users in making decisions about providing resources to the entity.

Decision-making requires assessment of entity’s prospects for future net cash inflows.

Information about resources of the entity, claims against the entity, and how efficiently and effectively is the use the entity’s resources.

Core principle of IFRS 10: reporting entity presents consolidated financial information (ie including information about controlled entities)


6Link to the Conceptual Framework

ENTITY DENTITY B ENTITY C

ENTITY A (INVESTOR)

CONTROLS CONTROLS DOES NOT CONTROL

ECONOMIC ENTITY

Investors Lenders Othercreditors

PRIMARY USERS OF FINANCIAL INFORMATION

Consolidatedfinancial

information(A+B+C)

Investment in D is an asset in A’s

statement of financial position


79

7The control model—an overview

control

Link power-returns

Exposure to

variable returns

Power

An investor controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee.


8Assessing control of an investee

Purpose and design

Relevant activities

Decision making

Rights

Exposure (or rights) to variable returns of

the investee

Ability to use power over the

investee to affect its

own returns


9Assessing power over an investee

Purpose and design

Relevant activities

Decision making

Rights

• Power over an investee = existing rights that give it the current ability to direct the relevant activities

• Relevant activities: significantly affect the investee’s returns.

• Power arises from rights (eg voting rights, rights from contractual arrangements).

• An investor need not have absolute power to control an investee.


10Power—the ‘ability approach’

• Power over an investee = existing rights that give it the current ability to direct the relevant activities, ie the activities that significantly affect the investee’s returns.

• Current ability to direct the relevant activities = investor is able to make decisions at the time that those decisions need to be taken.

– Can have current ability even if it does not actively direct– An investor is not assumed to have current ability to

direct simply because is actively directing activities

• Having the current ability is not limited to being able to act today.


11Power—rights

• Only substantive rights must be considered in assessing power.

• For a right to be substantive, the holder must have the practical ability to exercise that right.

• To be substantive, rights also need to be exercisable when decisions about the direction of the relevant activities need to be made.


Power—rights

• Voting rights

• Potential voting rights

• Contractual rights

• Removal or ‘kick out’ rights

• Protective rights

12


80

Example 1A: rights

• An investor acquires 48% of the voting rights of an investee.

• Remaining voting rights held by thousands of shareholders, with less than 1% each

• Based on the relative size of the other shareholders, investor concluded that a 48% interest would be sufficient to give it control.

13


Example 1B: rights

• Investor A holds 35% of the voting rights of an investee.

• Three other investors each hold 5 % of the voting right.

• Remaining voting rights are held by numerous other shareholders (each holding 1% or less).

• Decisions about relevant activities require approval of a majority of votes.

• Recent relevant meetings: 75% of voting rights have been cast

14


Example 2A: rights


• Eleven other investors each hold 5% of the voting right.

• No contractual agreement among shareholders to consult any of the others or make collective decisions.

15


Example 2B: rights


• Twelve other investors each hold 5% of the voting right.

• Shareholder agreement: investor A has the right to appoint, remove and set the remuneration of management responsible for directing the relevant activities. Two-thirds majority vote of the shareholders is required to change the agreement.

16


Example 3: rights

• Investor A holds 48% of the voting rights of an investee. The remaining voting rights are held by numerous other shareholders, none individually holding more than 1% of the voting rights.

• None of the shareholders has arrangements to consult any of the others or make collective decisions.

• Decisions about the relevant activities require the approval of a majority of votes cast at relevant shareholders’ meetings. 70% of the voting rights of the investee have been cast at recent relevant shareholder meetings—except for one meeting when 78% of the voting rights were cast. Decisions taken at that meeting included changing the financing arrangements that could affect future dividend payments to shareholders.

• There are no other contractual arrangements that would affect the assessment of power.

17


Example 4: rights


• Two other investors each hold 26% of the voting right.

• Remaining voting rights are held by three other shareholders (each with 1%).

• No other arrangements that affect decision-making.

18


81

Example 5A: rights


• Investor B has 30% of the voting rights of the investee as well as an option to acquire half of investor A’s voting rights.

• Option exercise = anytime in next two years, fixed price (deeply out of the money and is expected to remain so)

• Investor A: exercises its votes + actively directs relevant activities of the investee.

19


Example 5B: rights

• Investor A and two other investors each hold a third of the voting rights of an investee.

• Investor A: also holds debt instruments that are convertible into ordinary shares, fixed price, out of the money but not deeply out of the money.

• If converted, investor A would hold 60% of the voting rights

• The investee’s business activity is closely related to investor A (ie there are synergies).

20


Example 5C: rights

• Investor A holds 40% of the voting rights of Investee B as well as an option to acquire another 20% of the voting rights from Investor C, who holds 30% of the voting rights.

• The option is exercisable during 51 weeks in each calendar year; however, it is not exercisable during the last week of every year. The option is exercisable for a nominal amount.

• Decisions about the relevant activities require the approval of a majority of the votes cast at relevant shareholders’ meetings, which are generally held during the first or second quarter of the year.

21


Examples 6A–D: rights

Fact pattern:

• The next scheduled shareholders’ meeting is in eight months.

• Shareholders with at least 5% of the voting rights can call a special meeting to change the existing policies (notice requirement prevents meeting to be held for at least 30 days).

• Policies over the relevant activities: changed only at special or scheduled shareholders’ meetings.

22


Examples 6A–D: rights

• Ex 6A: An investor holds a majority of the voting rights.

• Ex 6B: An investor is party to a forward contract to acquire the majority of shares (forward contract’s settlement date in 25 days).

• Ex 6C: An investor holds a substantive option to acquire the majority of shares (exercisable in 25 days, deeply in the money).

• Ex 6D: An investor is party to a forward contract to acquire the majority of shares (forward contract’s settlement date in six months).

23


Example 7: rights

• Investor A, whose business is the production and sale of cheese, establishes and initially owns 100% of an operation, Investee B, which also produces and sells cheese.

• Investor A then decides to make Investee B a publicly traded entity, retaining 30% of voting rights (the other 70% are widely distributed among thousands, none individually holding more than 1%).

• Investor A also signed a contract with Investee B to manage and operate all of the activities of Investee B. Investee B has no employees of its own.

• A supermajority vote of 75% is required to cancel the management and operations contract.

24


82

Power—relevant activities

• For many investees, a range of operating and financing activities significantly affect their returns. Examples of activities that, depending on the circumstances, can be relevant activities include, but are not limited to:

– selling and purchasing of goods or services;– managing financial assets during their life (including

upon default);– selecting, acquiring or disposing of assets;– researching and developing new products or

processes; and– determining a funding structure or obtaining funding.

25


Power—relevant activities

• Examples of decisions about relevant activities include but are not limited to:

– establishing operating and capital decisions of the investee, including budgets; and

– appointing and remunerating an investee’s key management personnel or service providers and terminating their services or employment.

26


Example 8: relevant activity

• Two investors (A and B) form an investee to develop and market a medical product.

• Investor A: in charge of developing and obtaining regulatory approval of the medical product.

• Once the regulator has approved the product, investor B will manufacture and market it.

• Obtaining regulatory approval and patent for the product has significant uncertainty and effort required. Patent provides exclusive manufacturing and marketing rights over a period of ten years.

• Business plan: ten-year period of exclusivity corresponds to 95% of the fair value of the patent

27



• Investee’s only business: purchase receivables and service them on a day-to-day basis for its investors.

• Upon default of a receivable the investee automatically puts the receivable to Investor A (put agreement between the investor and the investee).

• Managing the receivables upon default is relevant because it is the only activity that can significantly affect the investee’s returns.

28



• Bank A enters into a credit default swap with Investee B (created for the purpose of providing investment opportunities to investors). The credit default swap passes credit risk to Investee B in return for a fee paid by Bank A.

• Investee B issues notes linked to the credit risk transferred to multiple unrelated investors and uses the proceeds to invest in a portfolio of high-quality financial assets; that portfolio serves as collateral.

• There are very few, if any, decisions to be made after initially setting up Investee B.

• Neither Bank A nor the investors have any voting or other rights that give them the ability to direct activities that significantly affect Investee B’s returns.

29


Example 11: relevant acitivity

• Investor A transfers receivables to Investee B (created solely for purchasing and servicing those receivables).

• Investee B fully funds the acquisition of the receivables by issuing two different tranches of debt: a senior tranche (90% of the debt) to the market and a junior tranche (10% of the debt) to Investor A.

• There are few, if any, activities to perform once Investee B is set up unless the counterparties to the receivables default on payment. Investor A retains the customer relationships and manages receivables in the event of default. A third-party servicer collects the cash flows from the receivables and passes them to the investors.

30


83

Example 12: relevant activitiy• Corporation A (credit card company) enters into an arrangement with

Investee B whereby it transfers a pool of short-term credit card receivables to Investee B. Those receivables must meet particular criteria relating to credit quality.

• Investee B fully funds the acquisition of the receivables by issuing securities to market investors that are backed by the credit card receivables in two different tranches: the senior tranche to market investors, while the junior tranche to Corporation A. The senior tranche receives priority in the event of default; the junior tranche is expected to absorb a majority of the risks and rewards of Investee B.

• This is a revolving structure; Corporation A continuously transfers receivables to Investee B as the original receivables are settled.

• Corporation A retains ongoing customer relationships with the counterparties to the credit card receivables. Corporation A maintains the responsibility for managing recoverability of the receivables in default by renegotiating the terms of current outstanding receivables or future transactions with those customers. A third party servicer is employed to collect the receivables and pass the cash flows on to Investee B.

31


32Assessing control of an investee

Purpose and design

Relevant activities

Decision making

Rights


the investee



own returns


Assessing exposure (or rights) to variable returns 33


the investee

• Broad definition of returns:– dividends– remuneration from services to an investee,

fees and exposure to losses– residual interests on liquidation– tax benefits– access to future liquidity– returns not available to other investors (eg

synergies)

• Returns that have the potential to vary as a result of the performance of the investee.


Exposure or rights to variable returns

• An investor is exposed, or has rights, to variable returns from its involvement with the investee when the investor’s returns from its involvement have the potential to vary as a result of the investee’s performance.

• The investor’s returns can be only positive, only negative or both positive and negative.

• Although only one investor can control an investee, more than one party can share in the returns of an investee. For example, holders of non-controlling interests can share in the profits or distributions of an investee.

34


Examples 13: exposure to variable returns• Fund Manager A manages a mutual fund, Fund B, which is

created to maximise profit for its investors. Fund Manager A determines the investment policy and strategy for the mutual fund.

• Corporation C owns 55% of the shares (the rest of the shares are distributed among the other investors, with none of them individually holding more than 1%)

• None of the investors can unilaterally change the investment policy and strategy of Fund B, and nor can the investors remove Fund Manager A without cause. The investors can redeem their interests at any time within particular limits established in the fund’s constitution.

• Fund Manager A receives a market-based management fee of 2% of the net asset value in the fund, which is commensurate with the services that Fund Manager A provides to Fund B.

35


Assessing control of an investee 36

Purpose and design

Relevant activities

Decision making

Rights


the investee



own returns


84

Assessing the link between power and returns 37



own returns

• Power + rights to varible returns from its involvement with the investee are necessary conditions for control (but still not enough).

• To control an investee, an investor must also have the ability to use its power to affect investor’s returns from its involvement with the investee.

• Control = power that can be used to benefit the investor.


Link between power and returns

• A case of power without control is the agency relationship.

• Agency relationship a principal + an agent.

• An agent is a party contracted by a principal to perform some service on behalf of the principal which involves delegating some authority to the agent.

• Delegated power does not mean control.

38


Link between power and returns

• Consider all of the following factors in assessing if an investor is acting as a principal or as an agent:

– rights held by other parties (ie kick-out rights)– scope of the decision-making authority– remuneration of the decision-maker– other interests that the decision maker holds in the

investee

39


Example 14: link between power and returns

• An investment vehicle is created to purchase a portfolio of financial assets, funded by debt and equity instruments issued to a number of investors.

• The equity tranche is designed to absorb the first losses incurred by the portfolio and to receive residual returns of the investment vehicle.

• Investor A holds 35% of the equity tranche and is also the asset manager, managing the vehicle’s asset portfolio within portfolio guidelines. This includes decisions about the selection, acquisition and disposal of the assets within those portfolio guidelines and the management upon default of any asset in the portfolio.

• Investor A also receives market-based fixed and performance-related fees for its asset management services.

40


Example 15: agency relationship

• A fund manager establishes, markets and manages a fund according to narrowly defined parameters.

• Fund manager:– has discretion about the assets in which to invest.

Investors do not hold any substantive rights.– holds a 10% investment in the fund;– does not have any obligation to fund losses beyond

its 10% investment;– receives a market-based fee for its services equal

to 1% of the net asset value of the fund (fees are commensurate with the services provided).

41


Example 16A–C: agency relationship

Fact pattern:

• A fund manager establishes, markets and manages a fund and must make decisions in the best interests of all investors (can be removed by simple majority but only for breach of contract).

• Fund manager has wide decision-making discretion.

• The fund manager receives a market-based fee for its services (fixed and performance-related). The fees are commensurate with the services provided.

42


85

Example 16A–C: agency relationship

• Ex 16A: fund manager also has 2% in the fund. No obligation to fund losses beyond investment.

• Ex 16B: fund manager also has a more substantial investment in the fund. No obligation to fund losses beyond investment.

• Ex 16C: fund manager has 20% investment. However, in this example the fund manager can be removed by the board of directors who are all independent of the fund manager and are appointed by the other investors).

43


Examples 16A–C: main judgements 44

Aggregate returns—magnitude and variability

Rights to remove the manager (protective vs other)



• Investee: portfolio of fixed rate asset-backed securities, funded by fixed rate debt instruments + equity instruments.

• Equity instruments represent 10 % of the value of assets purchased.

• Asset manager holds 35 % of the equity in the investee (remaining equity and all the debt instruments are held by a large number of widely dispersed unrelated third party investors) and manages the active asset portfolio by making investment decisions within parameters.

• Asset manager is paid fixed and performance-related fees that are commensurate with the services provided.

• Asset manager can be removed, without cause, by a simple majority decision of the other investors.

45


Example 18: agency relationship 46

Conduit

Sponsor

Debt holdersSellers

Sell asset porfolioServices assets

sold (market fee)Provide first loss

protection

Provide fundingReceive interest from debt instruments

Entitled to any residual returnAbsorb losses of up to 5% of assets

Manages operation (market fee)Provides credit enhancement and

liquidity facilities



• Fund Manager A has a 45% shareholding in Fund B, which it also manages within defined parameters.

• The constitution of the fund defines the fund’s purpose and sets out the investment parameters within which the fund manager can invest. The constitution also requires Fund Manager A to act in the best interests of the shareholders. Within the defined parameters, however, the investment manager (Fund Manager A) has discretion about the assets in which Fund B will invest.

47


Judgements and estimatesin applying IFRS 10: summary

• Determining whether control exists requires an assessment of all relevant facts and circumstances, including:

– an evaluation of the purpose and design of the investee;

– the activities of the investee;– how decisions about those activities are made; and– rights held by the party involved with the investee.

• Particularly challenging for some structured entities:– relevant activities in those entities are not usually

directed by voting or similar rights.;– benefits or returns expected from such investments

can be more difficult to assess.

48


86



IFRS 3Business Combinations

[[[


Introduction

• A business combination is a transaction or other event in which a reporting entity (the acquirer) obtains control of one or more businesses (the acquiree).

• IFRS 3 does not apply to the following:

• the formation of a joint venture

• the acquisition of an asset or group of assets that is not a business as defined

• a combination of entities or businesses under common control

50


The acquisition method

• Business combinations are accounted for using the acquisition method, ie

• identifying the acquirer;

• determining the acquisition date;

• recognise and measure the identifiable assets acquired and the liabilities assumed and any non-controlling interest; and

• recognise and measure any goodwill or bargain purchase.

51


Identifying the acquirer

• The acquirer is the entity that obtains control of another entity

52


Example: Who is the acquirer?

• On 31/12/20X0 A has 100 shares in issue.

• On 1/1/20X1 A issued 200 new A shares to the owners of B in exchange for all of B’s shares.

5353


Determining the acquisition date

• The acquisition date is the date on which the acquirer obtains control

• often the date the consideration is transferred, assets are acquired and liabilities assumed—closing date

• may be other dates (earlier or later than the closing date) at which control is assumed

54


87

Recognition and measurement

• Recognition principle (IFRS 3.10–17):

• separate recognition of identifiable assets acquired, liabilities and contingent liabilities assumed (think Conceptual Framework)

• Measurement principle (IFRS 3.18–20):

• assets and liabilities that qualify for recognition are measured at their acquisition-date fair values

• measurement at fair value provides relevant information that is more comparable and understandable (IFRS 3.BC198)

55


Exceptions to the measurement

• Reacquired rights

• measured at fair value based on remaining contractual term ignoring the fair value effect of renewal

• Share-based payment transactions

• replacement awards: measured in accordance with IFRS 2

• Assets held for sale

• measured in accordance with IFRS 5 (ie fair value less costs to sell)

56


Exceptions to both the recognition and measurement principles

• Income taxes

• deferred tax assets or liabilities arising from acquired assets or liabilities accounted for using IAS 12

• Employee benefits

• accounted for using IAS 19

• Indemnification assets

• may not be recognised at fair value if it relates to an item not recognised or measured in accordance with IFRS 3

57


Consideration transferred

• The consideration transferred is measured at the fair value of the sum of assets transferred and liabilities assumed

• acquisition-related costs are excluded

• contingent consideration is included at its fair value at acquisition date (subsequent changes in fair value are not included in the consideration transferred at acquisition-date)

58


Example:What is the cost of the Bus Com?

• Entity A acquires 75% of entity B in exchange for CU85,000 cash and 1,000 entity A shares (fair value = CU10,000) issued for the transfer.

• Entity A incurred CU5,000 advisory and legal costs directly attributable to the business combination and CU1,000 share issue expenses.

5959


Goodwill

Goodwill (an asset) is measured initially indirectly as the difference between the consideration transferred (see IFRS 3.37–40) excluding transaction costs in exchange for the acquiree’s identifiable assets, liabilities and contingent liabilities (measured as set out above)

60


88

Goodwill continued

• If the value of acquired identifiable assets and liabilities exceeds the consideration transferred, the acquirer immediately recognises a gain (bargain purchase)

• Goodwill is not amortised, but is subject to an impairment test.

• If less than 100% of the equity interests of another entity is acquired in a business combination, non-controlling interest is recognised.

• Choice in each business combination to measure non-controlling interest either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s identifiable net assets.

61


Disclosure

• Comprehensive disclosure requirements designed to enable users to evaluate the nature and financial effects of business combinations (and any adjustments made to prior period business combinations).

• Refer to IFRS 3.B64–B67.

62


Comparison to the IFRS for SMEs• The main differences between IFRS 3 and Section 19

Business Combinations and Goodwill of the IFRS for SMEs include:

• the costs associated with acquisition are included in the consideration transferred rather than being expensed

• changes in the recognised amount of contingent consideration affect goodwill

• goodwill is amortised over its estimated useful life (or 10 years if a reliable estimate cannot be made)

• non-controlling interest must be measured using the proportionate share method

63



• Determining whether a particular set of assets and activities is a business requires assessing their capabilities of being conducted and managed for the purpose of providing economic benefits.

• Identifying the acquirer in some business combinations that combine two or more entities can require judgement.

64


Judgements and estimates continued

• Accounting for business combinations requires broad use of fair value estimates. Level 3 fair value measurement can require significant judgements and estimates (see IFRS 13).

• The acquiree’s identifiable intangible assets at the acquisition date are recognised separately and might include assets that have not been recognised by the acquiree.

65




IFRS 10Consolidated Financial Statements

[[[


89

Scope of IFRS 10

• An entity that is a parent shall present consolidated financial statements (IFRS 10.4)

– A parent is an entity that controls one or more entities.

– A subsidiary is an entity that is controlled by another entity (ie the parent).

– A group is a parent and its subsidiaries.

• Consolidated financial statements are the financial statements of a group in which the assets, liabilities, equity, income, expenses and cash flows of the parent and its subsidiaries are presented as those of a single economic entity.

67


Scope of IFRS 10—exceptions

A parent need not present consolidated financial statements if:

• it is itself a wholly-owned subsidiary;

• its securities are not publicly traded or in the process of becoming publicly traded; and

• its parent publishes IFRS-compliant financial statements that are available to the public.

This is also the case for a partly-owned subsidiary if its other owners have been informed about, and do not object to, it not presenting consolidated financial statements.

68


Scope of IFRS 10—exceptions continued

• IFRS 10 does not apply to post-employment benefit plans or other long-term employee benefit plans to which IAS 19 Employee Benefits applies.

• IFRS 10 provides an exception from the requirements of consolidation for an investment entity which instead is required to measure its subsidiaries at fair value through profit or loss (annual periods beginning on or after 1 January 2014).

69


Consolidation principle

• Consolidated financial statements present the parent and all its subsidiaries as financial statements of a single economic entity

• uniform accounting policies

• same reporting periods

• eliminate intragroup transactions and balances

• non-controlling interest (the equity in a subsidiary that is not attributable, directly or indirectly, to the parent) is presented within equity, separately from the parent shareholders’ equity.

70


71

Example: consolidation procedures

• On 1/1/20X1 entity A acquires 100% of entity B for CU1,000 when B’s share capital & reserves = CU700 (net FV of B’s assets & liabilities = CU800).

• B has no contingent liabilities. The CU100 difference between CA & FV is i.r.o. a machine with 5 yrsremaining useful life and nil residual value.

• B’s profit for the year ended 31/12/20X1 = CU400.

• In 20X1 A sold inventory which cost it 100 to B for 150. At 31/12/20X1 B’s inventory included CU60 inventory bought from A.

• Ignore taxation effects.

71


72

Example:consolidation procedures continued

• The proforma journal entry at acquisition to eliminate

A’s investment in B; recognise goodwill; & eliminate B’s

share capital & reserves accumulated before it became

part of the group.

72

Property, plant & equipment 100

B’s at-acquisition share capital & reserves

700

Goodwill (asset) 200

A’s investment in B 1,000


90

73


• Proforma journal entry to increase depreciation to

group values (remaining estimated useful life = 5

years):

73

Profit or loss 20



74


• Proforma journal entry to eliminate intragroup sale of

inventory and the unrealise profit in inventories

(ignoring tax effects):

74

Profit or loss (revenue) 150

Profit or loss (COS) 150


Inventory (asset) 20


75Non-controlling interest (NCI)

• Non-controlling interest (NCI) in net assets consists of:

• the amount of the NCI recognised in accounting for Bus Com at date of acquisition; plus

• the NCI’s share of recognised changes in equity (ierecognised changes in Sub’s net assets) since the date of the combination.

75


76Example: NCI

• On 1/1/20X1 entity A acquires 75% of entity B for CU1,000 when B’s share capital & reserves = CU700(net FV of B’s assets & liabilities = CU800).

• B has no contingent liabilities. The CU100 difference between CA & FV is i.r.o. a machine with 5 yrsremaining useful life and nil residual value.

• Ignore taxation effects. B’s profit for the year ended 31/12/20X1 = CU400.

• In 20X1 A sold inventory which cost it 100 to B for 150. At 31/12/20X1 B’s inventory included CU60 inventory bought from A.

76


77Example: NCI continued

Eliminate Investment

• Proforma journal entry at acquisition is:

77

Property, plant & equip. 100

B’s at-acquisition share capital & reserves

700

Goodwill 400

Non-controlling interest 200

A’s investment in B 1,000



Adjust consolidated depreciation

• Proforma journal entry to increase depreciation to group values (remaining estimated useful life = 5 years):

78

Profit or loss 20



91


Allocate profit

• Proforma journal entry allocating the NCI their share of B’s profit for the year:

79

NCI profit allocation 95

NCI (equity) 95

Calculation: Profit 400Depreciation adjust (20)

38025% attributable to NCI 95



• Proforma journal entry to eliminate downstream intragroup sale of inventory and the unrealised profit in inventories (ignoring tax effects):

80

Profit or loss (revenue) 150



Inventory (asset) 20


81Example: NCI upstream sale

• Same as previous example except upstream sale of inventory (ie from B to A)

• Same proforma journal entries as in previous example and an additional journal entry (below) to eliminate from NCI their share of the unrealised profit:

81

NCI (equity) 5

NCI profit allocation 5


Loss of control

• If a parent no longer controls a subsidiary, the parent:

• Derecognises the assets and liabilities of the former subsidiary.

• Recognises any retained investment at fair value when control is lost. This investment is subsequently accounted for as a financial instrument or, if appropriate as an associate or joint venture.

• Recognises a gain or loss associated with loss of control.

82


Comparison with the IFRS for SMEs

• Section 19 Business Combinations and Goodwill of the IFRS for SMEs differs from full IFRSs—in Section 19:

• goodwill is amortised over its estimated useful life (or 10 years if a reliable estimate cannot be made)

• non-controlling interest must be measured using the proportionate share method

• there is no specified maximum allowable difference between the reporting periods of the parent and the subsidiary.

83




IFRS 12Disclosure of Interests in

Other Entities

[[[


92

IFRS 12 Disclosure of Interests in Other Entities

• Applies to entities that have an interest in a subsidiary, a joint arrangement, an associate or an unconsolidated structured entity.

• Requires an entity to disclose information that enables users of financial statements to evaluate:

– the nature of, and risks associated with, its interests in other entities; and

– the effects of those interests on its financial position, financial performance and cash flows.

85


Main disclosure requirements

• Significant judgements and assumptions made (and changes to those judgements and assumptions) in determining that it has control of another entity

• Information about interest in subsidiaries– composition of the group– interest that non-controlling interest (NCI) have in

activities and cash flows– signficant restrictions– risks– consequences of changes in ownership interest– consequences of losing control

86


Subsidiaries that have materialnon-controlling interests

An entity shall disclose for each of its subsidiaries that have NCI that is material to the reporting entity:

• name of each of its subsidiaries.

• principal place of business.

• proportion of ownership held by NCI.

• the proportion of voting rights held by NCI

• profit or loss allocated to NCI.

• accumulated NCI at the end of reporting period.

• summarised financial information.

87


Disclosure of significant restrictions

• Significant restrictions:– acess or use of assets. – settlement of liabilities.

• Protective rights of NCI that restrict acess/use group assets or settlement of liabilities.

• Carrying amounts in consolidated financial statements of the assets and liabilities to which restrictions apply.

88


Disclosure of consolidated structured entities

• Terms of contractual arrangements that could require the parent or its subsidiaries to provide financial support

• Financial or other support to a consolidated structured entity (without contractual obligation):

– type and amount of support provided; and– reasons for providing the support.

• Financial or other support to a previously unconsolidated structured entity (without contractual obligation) to which such support resulted in control: explanation of relevant factors in reaching decision.

• Current intentions to provide support to a consolidated structured entity.

89


Disclosure of changes in parent’s ownership interest

• Without loss of control: schedule that shows the effects on the equity attributable to owners of the parent of any changes in its ownership interest

• With loss of control during the reporting perior:– the portion of that gain or loss attributable to

measuring any investment retained in the former subsidiary at its fair value at the date when control is lost; and

– the line item(s) in profit or loss in which the gain or loss is recognised (if not presented separately).

90


93



Investment EntitiesAn exception to the consolidation principle

Investment entities: exception to consolidation

• Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27), issued in October 2012, introduced an exception to the principle that all subsidiaries shall be consolidated.

• Investment entities measure investments in subsidiaries at fair value through profit or loss (in accordance with IFRS 9 Financial Instruments) instead of consolidating those subsidiaries (except for subsidiaries providing investment related services).

• Disclosure requirements related to investment entities are in IFRS 12 Disclosure of Interests in Other Entities

92


What is an investment entity?

• An investment entity is an entity that:

a) obtains funds from one or more investors for the purpose of providing those investor(s) with investment management services;

b) commits to its investor(s) that its business purpose is to invest funds solely for returns from capital appreciation, investment income, or both; and

c) measures and evaluates the performance of substantially all of its investments on a fair value basis.

93


Business purpose of an investment entity

• Purpose = capital appreciation, investment income or both

• It may provide investment-related services (directly or through a subsidiary), to third parties as well as to its investors.

• It may provide management services/strategic advice and financial support to an investee if undertaken to maximise the investment return (cannot be a separate business activity or substantial source of income)

• Investment entities hold investment for a limited period (ie an exit strategy must exist for any investment that can be held indefinitely).

94


Typical characteristics of an investment entity

• More than one investment

• More than one investor

• Unrelated investors

• Ownership interests

95


Example 20: investment entities

• Limited Partnership: formed in 20X1 with a 10-year life.

• Offering memo states purpose as to invest in entities with rapid growth potential with the objective of realisingcapital appreciation.

• Entity GP=1% of capital; 75 partners (unrelated to GP)=remaining 99% of capital.

• 20X1 → no investment; 20X2 → one controlling interest; 20X3 → investment in five additional companies.

• No other activities other than investing.

• Measures and evaluates investments in FV basis.

• Plan to dispose interests.

96


94


• High Technology Fund → invest in technology start-up companies for capital appreciation.

• Technology Corporation controls HT Fund (70% interest); remaining 30% owned by 10 unrelated investors.

• TC holds option to acquire investments from HT Fund.

• No plans for exiting investments.

• HT Fund is managed by an adviser that acts as agent for the investors.

97



• Real Estate Entity → develop, own and operate retail, office and other commercial properties. Typically holds its property in separate wholly-owned subsidiaries.

• Does not have a set time frame for disposing of its property investments.

• Fair value is one performance indicator. Other measures are used (expected cash flows, rental revenues and expenses).

• Real Estate Entity undertakes extensive property and asset management activities. Development activity forms a separate substantial part of Real Estate Entity’s business activities.

98


Thank You 99


95



Overview of display related IFRSs




2





IAS 1Presentation of Financial Statements

K


4


• IAS 1 sets out overall requirements for presenting financial statements, guidelines for their structure and minimum requirements for content.

• the nature and amount of economic resources (and claims) is useful because different types of resources affect a user’s assessment of the entity’s prospects for future cash flows differently.

• information about the variability and components of the return produced is useful in assessing the uncertainty of future cash flows.

Introduction

5


• A complete set of financial statements comprises a statement of financial position, statement of profit or loss and comprehensive income, statement of changes in equity, statement of cash flows & notes (paragraph 10).

• Refer to the Implementation Guidance to IAS 1 in Part B.

• Financial statements must present fairly the financial position, financial performance and cash flows of an entity (paragraph 15).

• complying with IFRSs (with additional disclosures) is presumed to result in a fair presentation.

Financial Statements 6


• Going concern• financial statements may only be prepared on this basis if

management assess that this is appropriate

• Accrual basis of accounting• Materiality

• Each material class of similar items is presented separately • Dissimilar items are presented separately, unless they are

immaterial

• Materiality is determined by the potential of the information, or its omission, to influence economic decisions made by users of the financial statements

• Materiality is entity specific

General features(paragraphs 25–46)

96

7


Is the error material?• Ex 1: Before its 20X8 FS approved for

issue discovered depreciation expense for 20X8 overstated by CU150. Ignored the error (reported profit for 20X8 at CU600,000, ie understated by CU150).

• Ex 2: Same as Ex 1, except had the error been corrected the entity would have breached a borrowing covenant on a significant long-term liability.

Examples—materiality decisions 8


• Offsetting– not applicable unless required or permitted by IFRS

• Frequency of reporting– at least annually

• Comparative information– required unless IFRS specifies not– consider comparatives when changing the presentation

or classifications of items• Consistency of presentation

– retain the presentation and classification of items unless IFRS requires a change or due to changes in an entity’s operations another alternative would be more appropriate.

General features continued

9


• Presentation of current and non current assets and liabilities as separate classifications on the Statement of Financial Position

• The distinction is based on:– timing of realisation or settlement of the asset or

liability– primary purpose for holding the asset or liability

Current/non-current distinction 10


• Make current/non-current distinction unless liquidity presentation is reliable and more relevant

• In liquidity presentation present assets and liabilities in order of liquidity

• Current assets and current liabilities are defined

• All other assets and liabilities are non-current

• Deferred tax balances are non-current

Current/non-current distinction continued

11


• Current asset if

– expect to realise, sell or consume in entity’s normal operating cycle

– held for trading– expects to realise in next 12 months– cash or equivalent, unless restricted for

+12 months

Current asset 12


• Entity A produces whisky from barley, water and yeast in a 24-month distillation process. Inventories include barley and yeast raw materials, partly distilled whisky and distilled whisky.

Current assets—expected to be realised (ie turned into cash) in the entity’s normal operating cycle.

Example 1—current assets

97

13


• On 1/1/20X7 B invested CU900,000 in corporate bonds.

Fixed interest of 5% per year is payable on 1 January each year.

Capital is repayable in 3 annual instalments of CU300,000 each starting 31/12/20X8.

Example 2—current assets 14


• At 31/12/20X7 A presents– current assets—CU45,000 accrued

interest & CU300,000 capital repayable on 31/12/20X8—expected to be realised within 12 months

– non-current asset—CU600,000 in +12 months

Example 2 continued

15


• Current liability if

– expect to settle in entity’s normal operating cycle

– held for trading– due to be settled in next 12 months– entity does not have an unconditional

right to defer settlement for at least 12 months after reporting date

Current liability 16


• An obligation to suppliers for the purchase of raw materials.

Current liability—expected to settle (ie pay) the supplier in the entity’s normal operating cycle.

Example 1—current liabilities

17


• At 31/12/20X7 A was in breach of a covenant in a loan that is otherwise repayable 3 years later. The breach entitles (but does not oblige) the bank to require immediate repayment.

At 31/12/20X7 the loan is a current liability—at 31/12/20X7 A does not have an unconditional right to defer settlement for at least 12 months.

Example 2—current liabilities 18


• Same as in Ex 2 except after the end of the reporting period (31/12/20X7) and before the financial statements were approved for issue, the bank formally agreed not to demand early repayment of the loan.

At 31/12/20X7 the loan is a current liability—at 31/12/20X7 A does not have an unconditional right to defer settlement for at least 12 months.

Example 3—current liabilities

98

19


• The IFRS for SMEs does not require:– operating segments information– earnings per share

• Retrospective restatement in full IFRSs requires presentation of three statements of financial position. The IFRS for SMEs requires only two.

• In limited circumstances the IFRS for SMEs permits presentation of a statement of income and retained earnings in place of the statement of comprehensive income and statement of changes in equity (see paragraph 3.18). This option does not exist in full IFRSs.

• The IFRS for SMEs has only three items of other comprehensive income (OCI).



• Preparing financial statements requires judgementand the use of estimates (eg materiality judgementsand going concern assessments—when it is doubtful whether the entity has no realistic alternative but to liquidate).

• IAS 1 requires disclosure of:• judgements that management has made in the

process of applying the entity’s accounting policies that have the most significant effect

• Information about major sources of estimation uncertainty.

Judgement and estimates

21


• Preparing financial statements requires judgementregarding the best way in which to present financial information

• Financial statements are, generally, prepared on the going concern basis—judgement may be required when determining whether this basis is appropriate.

Judgement and estimates continued



IAS 7Statement of Cash Flows

K


23


• IAS 7 requires disclosures about the historical changes in cash and cash equivalents of an entity (refer to the Illustrative Examples to IAS 7 in Part B for illustrative disclosure).

• That information helps users to: • assess the entity’s ability to generate future net

cash inflows. It indicates how the reporting entity obtains and spends cash.

• understand a reporting entity’s operations, evaluate its financing and investing activities, assess its liquidity or solvency and interpret other information about financial performance.

Introduction 24


• Cash flows are classified by activities: operating; investing; and financing.

• Investing activities are the acquisition and disposal of long-term assets and investments that are not cash equivalents (paragraph 16).

• Financing activities are changes in the equity capital and borrowings of the entity (paragraph 17).

• Operating activities are the revenue-producing activities of the entity, and all activities that are not investing or financing.

Classification of activities

99

25


• In 20X7 A acquires 50% of the equity of B for CU110 when B’s cash and cash equivalents = CU10. From 1/1/20X7 A controls B (ie B is a subsidiary of A)

• Scenarios (i) A settles the purchase price in cash(ii) A buys on credit (will settle next year)(iii) A settles by issuing its own equity to the

seller(iv) A borrows CU110 from the bank and uses

cash borrowed to settle

Example 1 26


• The group (A & B consolidated) would present a cash flow in the investing activities section for the purchase of a subsidiary of: –scenario (i) CU100 outflow (ie CU110 less

CU10)–scenario (ii) CU10 inflow–scenario (iii) CU10 inflow–scenario (iv) CU100 outflow (in investing

activities) & CU110 inflow in financing activities

Example 1 continued

27


• There is a choice of ways of presenting cash flows from operating activities (paragraph18):

– the direct method—gross cash receipts and gross cash payments are shown (paragraph 19). This method is encouraged.

– the indirect method—profit or loss is adjusted to determine operating cash flow (paragraph 20).

Direct method or indirect method 28


• Reporting on a net basis– paragraph 22 illustrates cash flows that may be

reported on a net basis

• Foreign currency cash flows (paragraphs 25–28)– recorded in an entity’s functional currency.– translation may give rise to exchange differences.

• Interest and dividends– disclosed separately and presentation must be

consistent from period to period (ie which activity)

Other considerations

29


• Income taxes– Separate disclosure as an operating activity unless

specifically identified as another

• Investments in group entities– Equity method: limited to cash flows between itself

and the investee

• Changes in ownership interest in subsidiaries– Gross cash flows from gaining or losing control is

an investing activity– Specific disclosure requirements (paragraph 40 and

Note A in the Illustrative Example to IAS 7 in Part B)

Other considerations continued 30


• IFRS for SMEs does not explicitly:– encourage entities to report cash flows from

operating activities using the direct method (see paragraph 19 of IAS 7 Statement of Cash Flows,).

– require the reporting of particular cash flows on a net basis (see paragraph 22 IAS 7 Statement of Cash Flows).


100

31


• The appropriate classification of cash flows into each one of the activities reflects management’s judgement.

• The information conveyed by a statement of cash flows depends on the items treated as ‘cash and cash equivalents’. Cash equivalents have a short maturity (three months at most) and exclude equity investments.

Judgements and estimatesInternational Financial Reporting Standards


IAS 8Accounting Policies, Changes in

Accounting Estimates and Errors

K


33


• IAS 8 sets out the criteria for selecting and changing accounting policies and specifies the accounting when an accounting policy is changed.

• focus is on providing relevant and comparable information in a cost-beneficial manner.

• It also specifies disclosures about changes in accounting policies, changes in accounting estimates and corrections of prior period errors.

Introduction 34


• Disclose relating to accounting policies (Do cut and paste from IFRS. Set out how the entity gives effect to the IFRS requirements):– measurement bases used – other relevant accounting policies used

information about judgements made in applying accounting policies that have the most significant effect on the FS

– information about key sources of estimation uncertainty that have a significant risk of causing a material adjustment within 1 year (including their nature and carrying amount)

Accounting Policies

35


• Examples:– Whether outflow is more likely than not re

a present obligation = recognise a liability?

– Whether a lease transfers substantially all risks and rewards of ownership = finance or operating lease?

– When risks and rewards transfer for goods sold = when to recognise revenue?

– Whether arrangement = sales of goods or financing?

– Whether controls exists = whether to consolidate?

Judgements—applying accounting policies 36


• When no IFRS requirement specifically applies to a transaction or event, management uses judgement to develop and apply an accounting policy that results in relevant and reliable information (paragraph 10). In making that judgement management considers (paragraphs 11 and 12):

• first, IFRSs that deal with similar issues• then the definitions, recognition criteria and

measurement concepts in the Framework

• optional—current standards based on a similar conceptual framework.

Accounting policy when no specific requirement

101

37


• May only change policy if required to or resulting information would be more relevant and reliable.

• A new or amended standard or interpretation may require a change in an accounting policy and may include specific transitional provisions (paragraph 19(a)).

• In other cases, changes in accounting policies are applied retrospectively (ie prior period amounts are adjusted as if the new policy had always been applied) (paragraph 19(b)).

• Disclosure is made about the change and its effect on the financial statements—refer to paragraph 22.

Changes in an accounting policies 38


• In 20X7 A voluntarily changed an accounting policy. The cumulative effect of the change is a decrease of CU100,000 in retained earnings at 1/1/20X7 (ie CU25,000 less profit for each of the past four years). The entity presents two years of comparative information. Presented as a restatement of: – retained earnings at 1/1/20X5—reduce by

CU50,000 – profit 20X5 & 20X6—reduce by CU25,000

each

Example 1—voluntary change of accounting policy

39


• Facts same as Ex 1. Except, it is impracticable to determine the individual period effects of the change of policy.

Presented as a restatement of:

– retained earnings at 1/1/20X7—reduce by

CU100,000 (no adjustment to 20X5 and 20X6)

– additional disclosures

Example 2—voluntary change of accounting policy 40


• Many items in financial statements cannot be measured with precision and can only be estimated.

• Accounting estimates are based on the latest available information.

– estimates are revised as a result of new information or changed circumstances.

• Consequently, a change in estimate is recognised in the current period and future periods affected (paragraph 36).

– prior period amounts are not adjusted.

Accounting estimates

41


On 1/1/20X1 A buys yacht for CU1,000,000. Useful life = 30 years. Residual value = CU100,000. Straight-line method of depreciation.

At 31/12/20X9, as a result of research in 20X9, A reassessed the yacht as follows: useful life at 20 years from 1/1/20X1; residual value at nil; fair value at CU800,000; and straight-line depreciation as most appropriate method.

Example—change in accounting estimate 42


The reassessment of the yacht’s useful life and its residual value are changes in accounting estimates. The revised assessments are appropriately made on the basis of new information that arose from research performed in the current reporting period—20X9.

Example—change in accounting estimate continued

102

43


• Errors can arise from mistakes and oversights or misinterpretations of available information.

• Errors are corrected in the first set of financial statements issued after their discovery.

• Prior period amounts are restated as if the error had never occurred.

• The error and the effect of its correction on the financial statements are disclosed.

Errors 44


Same as Ex on slide 40, except, the research was publicly available in late 20X5. A believed the research to be valid but chose to ignore it until 20X9.A’s 20X5–20X8 financial statements include errors. The comparative figures in its 20X9 financial statements must be restated to correct the effects of the prior period errors [if material].

Example—prior period error or change in estimate, or both?

45


• IAS 8 and Section 10 Accounting Policies, Estimates and Errors of the IFRS for SMEs share the same principles.

– However, the hierarchy applied in the absence of an explicit requirement is different.



• Developing an accounting policy in the absence of a specific IFRS requirement requires judgement.

• As a result of the uncertainties inherent in business activities, many items in financial statements are estimated. Estimation involves judgements based on the latest available, reliable information.

• Disclosing known or reasonably estimable effects of the application of a new, but not yet effective, IFRS will have on the entity.


47


• An entity may voluntarily change an accounting policy only if the change will leads to ‘reliable’ and more relevant information—determining whether this is the case involves judgement

• When correcting prior-period errors judgement must be applied. For example in determining

• whether the prior period error is material • whether is it practicable to determine the

period-specific effects of an error on comparative information



IAS 10Events after the Reporting Period

K


103

49


• Specifies accounting and reporting for events (favourable and unfavourable) that occur between the end of the reporting period and the date when the financial statements are authorised for issue.

• Those events could affect a user’s resource allocation decision even if they are indicative of conditions that arose after the end of the reporting period.

• How to report the event depends on whether the event is indicative of a condition that existed at the end of the reporting period.

Introduction 50


• Adjust financial statements for those events after the reporting period that provide evidence of conditions that existed at the end of the reporting period.

• For example—settling a court case after the end of the reporting period confirms the existence of the present obligation at the end of the reporting period and removes uncertainties about the amount of the obligation.

• Further examples are contained in paragraph 9.

Principle for adjusting events

51


• Do not adjust recognised amounts for conditions that are indicative of conditions that arose after the end of the reporting period

• Dividends declared after the reporting period are not a liability at the end of the reporting period because, at that time, there is no obligation.

• However, disclose the nature and estimated financial effect of non-adjusting events

• For example, changes in the market value of investments or effects of changes in currency exchange rates after the reporting period.

Principle for non-adjusting events 52


At 31/12/20X7 when performing its year-end physical ‘stock count’ management observed the entity’s inventory in its newly constructed warehouse was undamaged.In early January 20X8 much of the entity’s inventory in its warehouse was damaged by rain water that poured through a gaping crack in the warehouse wall. The crack first became visible in January 20X8.

Discussion question—are the events described above adjusting or non-adjusting events after the end of the reporting period?

Example—events after the end of the reporting period

53


IAS 10 and Section 32 Events after the End of the Reporting Period of the IFRS for SMEsshare the same principles.



• Judging the materiality threshold for the disclosure of non-adjusting events—such as a major business combination or disposal, a plan to discontinue an operation, fire affecting a major production plant, changes in tax rates or tax laws enacted or announced after the reporting period.

• Events after the reporting period may require an assessment of the applicability of the going concern assumption at reporting date.


104



IFRS 5Non-current Assets Held for Sale

and Discontinued Operations

K


56


• Information about an entity’s non-current assets held for sale and its discontinuing operations assists users assess the amount, timing and uncertainty of (the prospects for) future net cash inflows to the entity which is useful to them in making decisions about providing resources to the entity.

• Non-current assets held for sale are to be recovered through proceeds from sale (not use)

• no future cash flows from discontinued operations

Introduction

57


• The standard comprises classification and presentation requirements and measurement provisions (note measurement scope exclusions in paragraph 5).

• A non-current assets is classified as ‘held for sale’ if its carrying amount will be recovered principally through a sale transaction, rather than through continuing use (paragraph 6).

• Non-current assets held for sale are measured at the lower of fair value less costs to sell and carrying amount—they are not depreciated (paragraph 15).

• Non-current assets held for sale or disposal groups are presented separately as current assets on the statement of financial position. Associated liabilities presented separately from other liabilities (paragraph 38). Refer to IFRS 5 IG: Example 12 in Part B.

Non-current assets held for sale 58


• A ‘discontinued operation’ is a component of an entity that either has been disposed of or is classified as held for sale (paragraph 32).

• The component must be a major line of business, a geographical area of operations, or a subsidiary that was acquired exclusively for resale.

• Discontinued operations are presented separately within profit or loss in the statement of comprehensive income and the statement of cash flows (paragraph 33).

• Refer to IFRS 5 IG: Example 11 in Part B.

Discontinued operations

59


• Section 17 Property, Plant and Equipment (paragraph 26) and Section 27 Impairment of Assets (paragraph 9(f)) deal with items of property, plant and equipment held for sale

• A plan to dispose of such items is an indicator of impairment which triggers an impairment test.

• Unlike ‘full’ IFRS, the IFRS for SMEs no other specific classification, presentation or measurement requirements.



• The classification of an asset as ‘held for sale’ is based on actions taken by management before the end of the reporting period and management’s expectation that a sale will be achieved.

• The asset must be available for immediate sale in its present condition (subject only to terms that are usual and customary for sales of such assets).

• The sale must be highly probable (appropriate management commitment, actively seeking a buyer, reasonable price, 12 month limit).


105

61


• Measuring the fair value less costs to sell of assets held for sale (absent an active market).

Judgements and estimates continuedInternational Financial Reporting Standards


IFRS 8Operating Segments

K


63


• Many entities are diversified or multinational operations or both. Their products and services, or the geographical areas in which they operate, may differ in profitability, future prospects and risks.

• Consequently, segment information might be more relevant than consolidated or aggregated data for users in assessing risks and returns of an entity.

• Standard applies to entities or groups with publically traded debt or equity or whose financial statements are filed with a securities commission or regulatory organisation (paragraph 2).

Introduction 64


• IFRS 8 requires disclosure of information about an entity’s operating segments, its products and services, the geographical areas in which it operates, and its major customers.

• This information assists users to evaluate the entity’s business activities and the environment in which it operates. That assists users to better assess the prospects for future net cash inflows to the entity which is useful in making decisions about providing resources to the entity.

Introduction continued

65


• Operating segments are components of an entity about which discrete financial information is available and which the chief operating decision maker regularly evaluates in deciding how to allocate resources and in assessing performance (paragraph 5).

• The financial information reported is the same as the chief operating decision maker (a function, not a title) uses.

• the measure of each operating segment must be the one used by the chief operating decision maker (paragraph 25).

• Providing information ‘through the eyes of management’ enhances a user's ability to predict actions or reactions of management that can significantly affect the entity’s prospects for future cash flows.

Identifying operating segments 66


• Information must be reported for all operating segments identified.

• If operating segments exhibit similar long-term financial performance and have similar economic characteristics such segments may be aggregated for reporting purposes (paragraph 12).

• Certain operating segments may not form part of aggregated information and must be presented separately. Determination of such segments is based on quantitative thresholds (paragraph 13).

• Refer to IFRS 8 IG 7 in Part B for a diagram illustrating the main provisions for identifying reportable operating segments.

Reportable operating segments

106

67


IFRS 8.20–24

• An entity must give descriptive information about: – the way the operating segments were determined– the products and services provided by the

segments– differences between the measurements used in

reporting segment information and those used in the entity’s financial statements

– changes in the measurement of segment amounts from period to period.

Disclosure 68


• An entity must report a measure of operating segment profit or loss and of segment assets. It must also report a measure of segment liabilities and particular income and expense items.

• An entity must report information about the revenues derived from its products or services, about the countries in which it earns revenues and holds assets, and about major customers.

Disclosure continued

69


• There are no specific requirements relating to operating segments in the IFRS for SMEs.

• Presentation of operating segment information is not required.



• Identifying the entity’s chief operating decision maker (as a function, not a specific title).

• matrix form of organisations require management judgement to segmentation that satisfy IFRS 8’s objective.

• Identifying which operating segments can be aggregated

• Identifying reportable segments that do not meet the quantitative threasholds for reportable segments.




IAS 24Related Party Disclosures

K


72


• The standard is applied to determine related party relationships, identify outstanding balances between such parties and the identification of when and what disclosure is necessary.

• Related party disclosures highlight the possibility that the entity’s financial position and profit or loss might have been affected by the existence of related parties and by transactions and outstanding balances with such parties.

• Related party disclosures could affect a user’s resource allocation decision based on the entity’s financial statements.

Introduction

107

73


IAS 24.9

• A person or a close member of that person’s family is related to the reporting entity if that person:

– has control, joint control or significant influence over the reporting entity

– is a member of the key management personnel of the reporting entity (or its parent)

Related party 74


• An entity is related to a reporting entity when:– they are both members of the same group

(which means that each parent, subsidiary and fellow subsidiary is related to the others)

– one entity is an associate or joint venture of the other entity

– both entities are joint ventures of the same third party

– one entity is a joint venture of a third party and the other is an associate of the third party

– …

Related party continued

75


Entity X

Entity A Entity B

From Entity A’s perspective is Entity B a related party (and vice versa)?

Example 1—identifying related parties 76


X’s influence over B

ControlJoint

controlSignificant influence

X’s influence over A

Control Yes, related party

Yes, related party

Yes, related party

Joint control

Yes, related party

Yes, related party

Yes, related party

Significant influence

Yes, related party

Yes, related party

Not necessarily

related

Example 1—identifying related parties continued

77


Family X

Entity A Entity B

From Entity A’s perspective is Entity B a related party (and vice versa)?

Example 2—identifying related parties 78


Family X’s influence over Entity B

Control JC KMP SI

Family X’s influence over Entity A

ControlYes,

related party

Yes, related party

Yes, related party

Yes, related party

JCYes,

related party

Yes, related party

Yes, related party

Yes, related party

KMPYes,

related party

Yes, related party

Not necessarily related


SIYes,

related party

Yes, related party



Example 2—identifying related parties continued

108

79


• the name of the reporting entity’s parent and, if different, its ultimate controlling entity, irrespective of whether there have been transactions between them.

• details of key management personnel compensation in total and by category of benefit (ie short-term employee benefits, share-based payment).

• the nature of the related party relationship

Disclosures 80


• details by category of related party of the transactions and outstanding balances, including commitments, to enable users to understand the potential effect of the relationship on the financial statements.

Disclosures continued

81


• This Standard provides a partial exemption from the disclosure requirements for government related entities in relation to related party transactions with:• a government that has control, joint control or

significant influence over the reporting entity; and• another entity that is a related party because the

same government has control, joint control or significant influence over both the reporting entity and the other entity.

• Refer to Illustrative Example 1 of the Illustrative Examples to IAS 24 in Part B.

Government related entities 82


• Differences between Section 33 Related Party Disclosures and IAS 24 include:

– the definition of a related party is slightly different (paragraph 33.2(vii)–(x) differs from IAS 24.9 (vii))

– the concept of ‘significant voting power’ is specific to Section 33

– disclosure has been simplified in Section 33– key management personnel compensation must

only be provided in total– fewer disclosures are required when the

government-related entities exemption is used


83


• Identifying related parties—focus on substance of a relationship rather than merely its legal form.

• Identifying the degree of influence exerted by one party on the other (ie control or significant influence).

• identifying key management personnel depends on the level of authority and responsibility and may include seconded staff and people engaged under outsourcing contracts.

• identifying close members of the family of a key management personnel involves judging whether that person is expected to influence (or be influenced by) by that person in their dealing with the entity.



IAS 21The Effects of Changes inForeign Exchange Rates

K


109

85


• An entity must determine its functional currency—the currency of the primary economic environment in which the entity operates (IAS 21.9–14)

• all other currencies are foreign currencies• An entity can choose to present its financial

statements in any currency—its presentation currency

• However, the entity must first measure all items in its functional currency before translation to the presentation currency

• A group does not have a functional currency

Functional currency versus presentation currency 86


• In some cases judgement is required to determine the functional currency of an entity.

• A foreign operation (regardless of its legal form) may be carried out as an extension of the reporting entity and the assessment of its functional currency depends on factors such as

• degree of autonomy • significance of transactions with reporting

entity• the level of financial dependence.


87


If the presentation currency is different from the functional currency…• …translate assets and liabilities using the closing rate

and income and expenses using the transaction date rates.

• an appropriately weighted average rate for a period can be used if it is a reasonable approximation of the transaction rates.

• All resulting exchange differences are recognised in other comprehensive income (OCI).

• The cumulative amount recognised in OCI is reclassified to profit or loss when the foreign subsidiary is disposed of (ie recycling).

• note: the IFRS for SMEs prohibits such recycling

Presentation currency 88


• A group chooses a currency in which to present its consolidated financial statements.

• A group does not have a functional currency.• The functional currency of individual entities in

a multinational diversified group may differ. In such cases, the financial statements of individual entities will be translated into a common presentation currency for the purpose of presenting the group’s consolidated financial statements.

Presentation currency of a group

89


Ex 1:

On 1/1/20X1 A paid CU60,000 to acquire 75% of B for FCU7,500 when B’s only assets were cash FCU1,000 & machine FCU9,000.CU = functional currency of A & presentation currency of group.FCU = functional currency of B.

Presentation currency of a group 90


Trial balances 31/12/20X1 A B

CU FCU

Share capital (100) (1,000)

Opening retained earnings (80,000) (9,000)

Profit for the year (10,000) (5,000)

Investment in B 60,000

Machine 6,000

Cash 30,100 9,000

Ex 1 continued:


110

91


FCU Exch rate CU

Share capital (1,000) × 8 actual (8,000)

Retained earnings (9,000) × 8 actual (72,000)

Profit for the year (5,000) × 7.5 actual (37,500)

Machine 6,000 × 7 closing 42,000

Cash 9,000 × 7 closing 63,000

Translation difference

Balancing 12,500

Ex 1 continued: Translate B’s trial balance



A B Adjust Consol

Profit 10,000 37,500 47,500

OCI (12,500) (12,500)

C income 35,000

Allocation Owners’ of parent NCI

Profit 38,125 (ie 10,000A + 75% × 37,500B)

9,375 (ie 25% ×37,500B)

OCI (9,375)

(ie 75% × -12,500)

(3,125)

(ie 25% × -12,500)

Ex 1 continued: Consolidated SOCI (working)


93


A B Adjst Consol

Share capital

100 8,000 (8,000) 100

R earning 90,000 97,000 (78,250) 108,750

NCI 26,250 26,250

Invest in B 60,000 (60,000)

Machine 42,000 42,000

Cash 30,100 63,000 93,100

Ex 1 continued: Consolidated SOFP (working)



• Differences between IAS 21 and Section 30 Foreign Currency Translation include:

– less application guidance is provided in the IFRS for SMEs.

– on disposal (or partial disposal) of a foreign subsidiary full IFRSs requires recycling of the FCTR in profit or loss. The IFRS for SMEs prohibits such recycling.


95


Thank You

111




Day 3

113



Presenting Financial Instruments

(IAS 32)Joint ECCB and IFRS Foundation workshopwith the support of a World Bank financed project

Darrel Scott, IASB member


22



Scope and Objective

• Principles for the classification of financial instruments• Liability vs. equity classification• Instruments with both a liability and an equity component

• Guidance on presentation• Deals with all types of financial instruments

• Contract to buy or sell a non-financial item that can be settled net

3


Scope Exceptions

Does not deal with:• Interests in subsidiaries, associates and joint ventures• Employee benefits• Share based payments• Insurance contracts

4


Financial asset

• Cash,• Equity in another entity• Right to receive cash or another financial asset, • Right to exchange instruments under potentially favourable

terms or

• A contract that may be settled in entity’s own equity• Non derivative where entity will or may receive variable

number of its own equity instruments, or• A derivative that may be settled other than by exchanging a a

fixed amount of cash or a fixed number of the entity’s own equity instruments

5


Financial liability

• Obligation to deliver cash or another financial asset,• Obligation to exchange instruments under potentially

unfavourable terms or • a contract that will or may be settled in entity’s own equities

• Non derivatives • That the entity is or may be obliged to deliver a variable

number of its own equity instruments, or• Derivatives

• That will or may be settled other than by exchanging a fixed amount of cash for a fixed number of the entity’s own equity instruments

6


115

Equity Instrument

• Residual interest in the assets of an entity after deducting its liabilities

• Excludes any instrument with an obligation to: • pay cash or another financial asset or• exchange financial assets and financial liabilities under potentially

unfavourable conditions.

• If settled in the issuer’s own equity, then the contract must be fixed for fixed

• An obligation to issue a fixed number of equity shares is not a liability because it cannot result in a loss to the entity

7


ExampleEquity Instrument

Are the following equity instruments?• An ordinary share• A non-redeemable, non-cumulative preference share• A non-cumulative preference share redeemable at the option

of the issuer• A non-cumulative preference share redeemable at the option

of the holder

8


Equity Instrument continued

A puttable instrument is equity if:• It entitles the holder to a pro rata share of net assets

(liquidation) • The instrument is the most subordinate.• No other obligation to deliver cash or another financial asset.• The expected cash flows are based substantially on profit or

loss, the change in net assets, or the change in fair value of the entity.

9



Convertible debt• Has both the characteristics of debt and equity• IAS 32 requires that the instrument be split and recorded as

two separate components• Liability component: Measured by reference to the fair value

of the liability• Equity component: Difference between the issue value and

the fair value of the liability

• Determination made on day 1• No gain or loss recognised on day 1

10



Treasury Shares• Equity instruments that an entity or group hold(s) in itself • Treasury shares are deducted from equity• Gain or loss on purchase/sale of treasury shares recognised

directly in equity

11


ExampleTreasury shares

• Entity B is a 100% owned subsidiary of Entity A• On 1 March 20x1, entity B purchased 100 shares in Entity A

at a price of CU200 each• On 30 June 20x1, Entity B still held the shares. The share

price on that day was CU225

12


116

ExampleTreasury shares continued

Journal Entries – Entity B’s separate financial statements

Purchase of the shares (1 March 20x1)Investment in shares 20 000

Cash 20 000

Recorded price increase (30 June 20x1)Investment in shares 2 500

Profit on shares 2 500Net effect of reduction in cash CU20 000, Increase in investments CU22 500 and profit CU2 500

13



Group Journal entries

Purchase of the shares (1 March 20x1)Consolidated equity 20 000

Cash 20 000

Recorded price increase (30 June 20x1)No journal necessary

Net effect, reduction in Group cash of CU20 000, reduction in group equity of CU20 000

14



Consolidation Journal Entries – Group

Purchase of the shares (1 March 20x1)Consolidated equity 20 000

Investment in shares 20 000

Recorded price increase (30 June 20x1)Dr Profit on shares 2 500

Cr Investment in shares 2 500Net effect, reduction in Group cash of CU20 000, reduction in group equity of CU20 000

15


Comprehensive Income

• Interest, dividends, losses, and gains on a financial liability are expense or income.

• Distributions on equity instruments are debited directly to equity

16


Offsetting

• Offsetting, or netting, is when an entity presents rights and obligations as a net amount in its statement of financial position

• Financial instruments should generally be presented gross• IAS 32 requires an entity to offset a financial asset and

financial liability only when the entity– currently has a legally enforceable right to set off the

recognised amounts; and– intends either to settle on a net basis, or to realise the asset

and settle the liability simultaneously.

• Reviewed jointly with the FASB

17


Offsetting continued

Why a joint offsetting project?• Significant difference in balance sheets prepared in

accordance with IFRSs and US GAAP• Different offsetting requirements result in reduced

comparability • Investors do not have sufficient information to make

decisions or to make comparisons• The boards decided to maintain their respective offsetting

models but agreed on and issued common offsetting disclosure requirements

18


117

19

Gross amountsbefore

offsetting

(A)

Gross amountsset off

(B)

Net amountspresentedin balance

sheet (C)

Other amountsin scope butnot set off in

balance sheet (D)

Net amounts

(E)

[same forall preparers]

[depends onoffsetting model]



[same forall preparers]


• Example disclosure:



• Inconsistencies in the application of the offsetting requirements in IAS 32 were highlighted during the project outreach

• The Board added application guidance to improve consistency of application of IAS 32 offsetting requirements

• Right of set-off must be enforceable in:• The normal course of business;• The event of default; and • The event of insolvency or bankruptcy of all of the

counterparties.• Some gross settlement systems are considered equivalent to net

settlement if they eliminate or result in insignificant credit and liquidity risk and process receivables and payables in a single settlement process or cycle.

20



• The distinction between financial liabilities and equities requires judgment

• Offsetting also requires the application of judgment, especially in considering the intention of the parties.

21


22Thank You


118



Accounting for Financial Instruments

(IAS 39 and IFRS 9)Joint ECCB and IFRS Foundation workshopwith the support of a World Bank financed project



22



3


IAS 39 and IFRS 91 January 2013

IAS 39 IFRS 9

Classification and Measurement• Mandatory date: 2015• Early adoption allowed

Hedge Accounting

Impairment

4


IAS

39 IFR

S 9

Classification & MeasurementIFRS 9 (2010) + ED of limited

amendments

ImpairmentForthcoming ED

General Hedge accounting*Review draft

* Macro hedge accounting is separated from this project

IAS 39 and IFRS 91 January 2013 continued

Classification and measurementFinancial assets

Fair Value (No impairment)

Amortised cost(one impairment method)

Contractual cash flow characteristics

Business model testFVO for

accounting mismatch (option)

All other Instruments:• Equities• Derivatives• Some hybrid contracts

Equities: OCI presentation

available(alternative)

Reclassification required when business model changes

5


IFRS 9Main changes from IAS 39

• Reduces complexity– single impairment model (only FIs at amortised cost)– embedded derivatives no longer separated from financial asset

host contracts

• Aligns measurement of financial assets with entity’s ‘business model’ and contractual cash flow characteristics

• ‘Own credit risk’ issue addressed • Elimination of ‘tainting rules’

– that caused assets to be measured at fair value even if the business model was to hold

6


119

Business model:

• objective of holding instruments is to collect contractual cash flows rather than to sell prior to contractual maturity to realise fair value changes

• not an instrument by instrument approach to classification• assess contractual terms of instruments within such a business

model

Financial AssetsAt amortised cost 7


Contractual cash flow characteristics• Payments represent solely principal and interest• Interest is consideration for time value of money and credit

risk• Prepayment/extension options may qualify

No ‘tainting’ rules for assets at amortised cost

• gains or losses from derecognising such items to be presented separately with additional disclosures

Financial AssetsAt amortised cost continued 8


Alternative presentation of fair value changes in other comprehensive income (OCI)Scope

• investments in equity instruments not held for tradingFeatures

• alternative available instrument by instrument• dividends recognised in P&L

• no recycling, impairment or change in presentation

Financial AssetsEquity investments: OCI alternative 9


10

Hybrid contracts

Financial host Non-financial host

IAS 39 guidance retained

No separation –part of classification

Financial AssetsEmbedded derivatives


11

Fair value option available, if…

Accounting mismatch

Managed on fair value basis

Embedded derivative(s)

Not managed to collect contractual cash flows = FV

Hybrid contracts financial host

classified entirety

*Circumstances when FVO available is unchanged for financial liabilities

Financial AssetsFair Value Option (FVO)


Unquoted equities and their derivatives• Fair value measurement required• Cost may be an appropriate estimate of fair value

– if more recent information not available or a wide range of outcomes

• Does not apply to equities held by financial institutions and investment funds

Contractually linked and non-recourse instruments• Detailed application guidance• ‘Look through’ approach

12

Financial AssetsApplication guidance


12

120

13

IAS 39 IFRS 9

Classification Rules-based categories each with different measurement methods

Principles-based, classifications based on a clear rationale

Measurement Irrevocable option at initial recognition to present fair value changes of some equity investments in OCI

Impairment Different impairment rules depending on category and instrument type

Only debt instruments at amortised cost (or FVOCI, as proposed) are tested for impairment

Financial AssetsSummary of Key Changes from IAS 39


14

Financial AssetsSummary of Key Changes continued

IAS 39 IFRS 9

Tainting Tainting rules for held to maturity investments

No tainting rules

Reclass-ification

Some reclassifications permitted/required

Reclassifications required if and only if business model changes

Embedded derivatives

Bifurcation of embedded derivatives required in some cases

No separation, same classification approach (for hybrid financial assets with financial hosts)

FVO Available if specific criteria are met

Available if eliminating or significantly reducing an accounting mismatch


15

Held for tradingFair value - with changes

recognised in profit or loss

Not held for trading

Fair value – irrevocable choice of recognising

changes in profit or loss or OCI


Example 1Equity Investment 16

Held to collect contractual cash flows

Amortised cost(FVO available if criteria

are met)

Not held to collect contractual cash flows

Fair value through profit or loss*


*could be FVOCI according to Limited Amendments ED

Example 1Debt Investment

17

Hybrid contract (as a whole) has P&I cash flows

and is held to collect contractual CFs*

Whole instrument at amortised cost

All other hybrid contracts with financial hosts

Whole instrument at fair value through profit or loss*


*Limited Amendments ED proposes clarifications to the P&I test which may result in more instruments at amortised cost

Example 1Debt Investment (embedded derivative)

Classification and measurementFinancial liabilities

All financial liabilities

Amortised cost

FVO for mismatch,

managed on FV basis and

hybridsExcept:

Held for tradingFair value through

P&L

Own credit in OCI

• Hybrid financial liabilities are bifurcated• No reclassification permitted

18


121

19

Financial LiabilitiesFVO and own credit

• What is ‘own credit’?– fair value changes in liability arising from changes in the liability’s

credit quality• How is it measured?

– often measured as change in margin over a benchmark interest rate

• What is the concern?– gain when credit quality deteriorates, loss when credit quality

improves– reporting such gains and losses is not useful

– Board’s Request for Information on measurement of liabilities– ED on classification and measurement

© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 20

To address ‘own credit risk’• Retain IAS 39 measurement requirements for financial

liabilities:– held for trading fair value through P&L– hybrid liabilities bifurcation requirements in IAS 39– ‘vanilla’ liabilities amortised cost– maintain FVO (with current eligibility conditions)

BUT

• Separate out ‘own credit risk’ for FVO• ‘Own credit risk’ portion would be separated in a manner

similar to that previously used in IFRS 7 for disclosure (IFRS 7 B4)

Financial LiabilitiesFVO and own credit continued


20

21

Financial LiabilitiesFVO and own credit continued

Change in FV

attributable to all factors except ‘own credit risk’

Change in FV

attributable to ‘own credit’ (not

recycled)

Profit or Loss

Profit XXX

Financial liability at FVOon statement of financial position at (full) fair value

Statement of Comprehensive Income

Other Comprehensive Income

XXX


Mandatory for all liabilities at FVO unless this would create or enlarge an accounting mismatch

21 Impairment

IAS 39 requirements:

• Incurred loss approach for financial assets • Impairment loss only recognised when:

– trigger (loss) event occurs– impact can be reliably estimated

• Losses expected as a result of future events, no matter how likely are not recognised

• More than one model depending on classification

22

22© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

2323

ImpairmentCollateral values

• Key determinant in calculating loss given default (LGD) - only limited effect on probability of default (PD)

• Therefore primary focus is for calculating expected future cash flows once a loss event has been determined

• Future cash flows should be calculated taking account of all relevant information available at measurement date, therefore collateral is a current value

• Collateral values are disclosed under IFRS 7 for all credit exposures, both defaulted and not

23


2424

ImpairmentRestructured loans

• Banks and other lenders regularly renegotiate terms of loans to assist troubled borrowers

• A renegotiated loan should be evaluated to determine if loan terms:

– Have been modified, or– Substantially changed

• In the former circumstance, the loan should be evaluated for impairment based on original expected cash flows and interest rates

• In the latter circumstance, the asset should be derecognised, and a new asset recognised at fair value. The difference in values is recognised as a loss

24


122

2525Impairment continued

Criticisms of the incurred loss approach:

• Expected losses not recognised before trigger events– overstates/front-loads interest revenue – results in ‘too little, too late’ recognition of loan losses– triggers inconsistently applied

• Does not reflect the underlying economics of the transaction• Need to improve usefulness of financial statements and timing

of recognition of losses• IASB is developing a new impairment model to address

criticisms

25


Hedging

• ‘Hedging’ and ‘hedge accounting’ are two different things• What is hedging?

– managing risks by using one financial instrument (‘hedging instrument’) purposely to offset the variability in FV or cash flows of a recognised asset or liability, firm commitment, or future cash flows (‘hedged item’)


26

27

Example:Hedging

• On 1/12/X1 a jeweler purchased 1,000 ounces of gold for $1,500 per ounce to manufacture jewelry whose selling price fluctuates with changes in the gold price

• Jeweler is concerned the gold price will decline.– buys a forward contract (settled net in cash) to sell 1,000

ounces of gold at $1,500 anytime in the next two months. The forward contract is measured at FVTPL.

– at 31/12/X1 gold price is $1,400– Without hedge accounting, the $100,000 gain on the forward

contract is recognised in profit or loss in 20X1– but the ‘loss’ attributable to the reduced selling price will affect profit or loss in the future (ie when the sale is recognised).

• Accounting ‘mismatch’© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

27 What is hedge accounting?• Matching the change in FV of the hedging instrument and the

hedged risk in profit or loss for the same period• Hedge accounting is only an issue when normal accounting

would put the two fair value changes in different periods—sometimes referred to as an ‘accounting mismatch’

• Strict conditions must be met before hedge accounting is possible:

– there must be formal designation and documentation of a hedge, including the risk management strategy for the hedge.

– the hedging instrument must be expected to be highly effective in achieving offsetting changes in fair value or cash flows of the hedged item that are attributable to the hedged risk.


28

Hedge accountingIAS 39 requirements• Hedge accounting:

– Is an election– Can only be applied prospectively– Effectiveness testing must be performed on each testing

date and offset of fair value changes on hedging instrument and hedged risk must be within 80–125% of each other

• Hedging instrument must be a derivative (except for hedges of FX risk)

• Hedged item – Entire item, group of items, or a hedged risk that is

reliably measurable


29

• Hedge exposure to fair value changes of recognised asset or liability or unrecognised firm commitment (or portion of these attributable to a particular risk)

• Recognition of gains and losses on hedged item and hedging instrument in profit and loss and adjust the carrying amount of the hedged item even if the hedged item is not at FVPL (eg if AFS or at cost)

• Examples– Fixed-rate debt– Inventory– Firm commitment to buy a commodity at a fixed price

30

Types of hedge accountingFair value hedge accounting


123

31

Example:Fair value hedge accounting

• Entity borrows 1,000, 3 years, 5% fixed rate, payable at the end, measured at amortised cost

• Hedged with a derivative whose value is linked to an interest rate index, eg a receive-variable, pay-fixed interest rate swap

• End of year 1, market rate = 6%• PV of debt discounted at 6% = 982

• PV of 50 payable in 1 year, 50 payable in 2 years, and 1050 payable in 3 years

• Value of the derivative declines to -20 • 1000*(5%-6%)

• Note: there is ineffectiveness of 2 • Change in fair value of the debt (982-1000) vs. change in fair value of the

interest rate swap (20)

• Passes effectiveness testing - 18/20 = 90%


31

32

Financial position when loan made:Cash 1,000

Loan payable 1,000Adjust loan end of year 1 to reflect rate change:

Loan payable (hedge acct) 18P&L (18 gain – 20 loss) 2

Derivative (Liability) 20Financial position end of year 1:

Cash 1,000Derivative (Liability) 20Loan payable 982

Equity (P&L reserve) 2

Example:Fair value hedge accounting continued


32

33

• Hedge of the exposure to variability in cash flows attributable to a particular risk associated with

• a recognised asset or liability or • a highly probable forecast transaction

• Hedge of the foreign currency risk of a firm commitment• Portion of hedge deemed to be effective:

• gains and losses recognised in OCI• Portion of hedge deemed to be ineffective:

• gains and losses recognised in profit or loss• Treatment of cumulative gains or losses differs based on what ‘type’ of

asset or liability is subsequently recognised• Examples

– Floating-rate debt– Forecast purchases and sales at prevailing commodity prices – Forecast debt issuance

Types of hedge accountingCash flow hedge accounting


33

34

• Entity issues 1,000 floating-rate debt • Variability on cash flows from interest rate risk managed with

a derivative (pay-variable, received-fixed interest rate swap)• End of year 1 interest rates increase – PV of cumulative

change in cash flows increases by 100• But FV of swap decreases by 105• Note: Some hedge ineffectiveness which passes

effectiveness test - 100/105 = 95%

Example:Cash flow hedge accounting


34

35

Opening financial position:Loan receivable 1,000

Cash 1,000Ineffective portion of hedge:

P&L 5 (ineffective portion of hedge)OCI (Equity) 100

Derivative (Liability) 105Closing financial position:

Loan receivable 1,000Equity (OCI) 100 (effective portion of hedge)

Derivative (Liability) 105Equity 995

example continued next slide...

Example:Cash flow hedge accounting continued


35

• Hedge of a net investment in a foreign operation– As defined in IAS 21– Accounted for similarly to cash flow hedges

36

Types of hedge accountingNet investment in foreign operation


124

37

• Entity A has a wholly-owned subsidiary, Entity B. Entity A has a CU functional currency and Entity B has a FCU functional currency. Entity A paid FCU100,000 for the investment in net assets at fair value of FCU80,000. Goodwill of FCU20,000 was recognised.

• At acquisition, Entity A loaned Entity B CU15,000 (exchange rate was FCU2:CU1). Settlement is not planned or expected in the near future.

Example:Net Investment in foreign operation


37

38

• At acquisition, Entity A designates the net investment in Entity B as a hedged item in its consolidated financial statements.

• The maximum amount that can be designated is FCU130,000• Net assets at FV: FCU80,000• Goodwill: FCU20,000• Loan: FCU30,000

• If the loan was expected to be settled in the foreseeable future, it would not form part of the net investment.

Example:Net Investment in foreign operation continued


38

39

• Financial asset, or portion of an asset is derecognised if:– Entity no longer exposed to substantial risk and rewards of

ownership, and – Entity no longer controls the asset

• Profit or loss is recognised on derecognition (difference between proceeds and carrying value)

• Financial liability derecognised when extinguished

Derecognition


39 40


Thank You

125




QuizFinancial InstrumentsJoint ECCB and IFRS Foundation

with the support of a World Bank financed project



22



Question 1

Which of the following are equity instruments? a. A non-redeemable, cumulative preference shareb. A preference share convertible into a fixed amount of

ordinary sharesc. A preference share convertible into a variable amount of

ordinary sharesd. An ordinary share puttable to the majority shareholdere. A warrant in terms of which the company is obliged to issue

ordinary shares at a fixed price at a future date


3 Question 2a

Entity A, a listed company, has formed a share trust for its employee share option scheme. Entity A controls the share trust. The trust buys and holds Entity A shares to eventually deliver to employees when the options vest.

How would Entity A record the shares purchased in its consolidated accountsa. Employee benefitsb. Investmentsc. Trading assetsd. Equitye. Other


4

Question 2b

Entity B is a listed insurance company with a broad portfolio of investments held to fund future insurance claims. In order to match the performance of the domestic stock exchange, the portfolio includes its own shares.

How would Entity B record the shares purchased in its own accountsa. Employee benefitsb. Investmentsc. Trading assetsd. Equitye. Other


5 Question 2c

Entity C is an investment bank subsidiary of a listed group, with an equities trading desk. Its traders have a broad market making mandate, which includes trading in their own holding company shares.

How would Entity C record the shares purchased in the consolidated accounts of its parent?a. Employee benefitsb. Investmentsc. Trading assetsd. Equitye. Other


6

126

Question 3

Entity A is an investment bank subsidiary of a listed group, with an equities trading desk. Its traders have a broad market making mandate, which includes trading in their holding company shares.

How would Entity A record the profits and losses on holding company shares purchased in its own accounts?a. Trading profitsb. Investment profitsc. Don’t record anythingd. Other


7 Question 4

Entity A has issued $1 million non redeemable, non cumulative preference shares paying a 5% dividend, and $1 million redeemable cumulative preference shares paying a 4% dividend.

What expense will be recorded in its comprehensive income for the year?a. $900 000b. $500 000c. $400 000d. $0


8

Question 5

Entity A and Entity B are both derivative trading houses in a relatively small trading market. The two entities trade extensively with each other, and have entered into a legally binding agreement that, in the event of a default by either party, all outstanding obligations of each entity will be offset and settled net.

Can the entities offset the assets and liabilities held with each other?a. Yesb. No


9 Question 6

1/1/X1 Entity A buys 100 share options for 2,000 cash. The options permit Entity A to buy shares in a listed entity XYZ for 50 per share at any time during the next 2 years. Bank charges a fee of 20. On 1/1/X1 XYZ's share price is 44.

At what amount should Entity A initially measure the options?a. 1,900b. 1,980c. 2,000d. 2,020e. 4,040


Question 7

Same facts as Question 6. At 31/12/X1 Entity A has not yet exercised the option; XYZ share price is 47; fair value of option is 2,500.

At what amount should Entity A measure the options at 31/12/X1?a. 1,980b. 2,000c. 2,020d. 2,500e. 4,700


11 12Question 8

Entity borrows 10,000 from a bank 5 years, fixed interest payable annually 6% in arrears (this is a market rate.) Bank charges entity 50 loan application fee. Entity should measure the loan on initial recognition at...

a. 7,473 (= PV 10,000 at 6% for 5 years)b. 7,423 c. 9,950d. 10,000e. 10,050


127

13Question 9

Entity A sells 100 of receivables to bank for 85. Entity A continues to collect and remit amounts collected to bank, for which bank pays a fee to Entity A. Entity A has no obligation for credit losses or for slow payment by debtors. How is this transaction accounted for?a. Entity A removes receivables from its balance sheet and

shows no liability for 85 proceedsb. Entity A keeps 100 receivables on its balance sheet and

shows a liability for 85c. Entity A keeps 100 receivables on its balance sheet and

shows no liability for 85d. Entity A removes receivables from its balance sheet and

shows a liability for 85© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Question 10

A financial instrument that is designated as a hedging instrument is always measured at Fair Value Through Profit or Loss?a. Trueb. False


14

Question 11

Entity A has inventory it plans to sell in 3 months. Entity A is worried about price decline during the 3 months and so enters into forward contract to hedge price risk of its inventory. Relationship meets conditions for hedge accounting and Entity A documents the hedge.

What is the accounting?


15 Question 11 continued

a. Recognise forward contract as an asset or liability at FV and change in FV in P&L. Recognise the change in FV of the inventory in P&L and as an adjustment to the carrying amount of the inventory.

b. Recognise forward contract as an asset or liability at FV and change in FV in OCI. Recognise the change in FV of the inventory in OCI and as an adjustment to the carrying amount of the inventory.

c. Recognise forward contract as an asset or liability at FV and the change in the FV of the forward contract in OCI. Do not recognise the change in the FV of the inventory as inventory is measured at cost.


16

Questions 12 and 13Scenario

Entity A purchased a bond at face value CU10,000 (equal to the fair value at that date) that pays a coupon based on the market interest rate of 5 per cent per annum. At purchase date, there are 20 years until the bond’s maturity date. Interest of CU500 is received every year in cash. The bond has a maturity value of CU10,000.

17


Question 12

• Assume that the bond is measured at amortised cost and that two years after the bond was purchased, the market interest rate changed to 6 per cent per annum.

• What journal entries should be processed by the entity relating to the bond from inception until maturity of the bond?

18


128

Question 13

• Assume that instead of being purchased at face value, the bond was purchased at a discount of 20 per cent. The bond is correctly measured at amortised cost.

• What journal entries should be processed by the entity relating to the bond at purchase date and for the first year thereafter?

19


Questions 14, 15 and 16Scenario

• An entity enters into a forward exchange contract on 30 April 20X1 to receive USD100,000 and deliver CU399,688 on 28 February 20X2. The forward exchange contract is designated as a hedging instrument for the purchase of inventory on 31 December 20X1—the resulting payable is to be settled on 28 February 20X2

• All hedge accounting conditions are met• The entity’s reporting period ends on 31 October

20


• The following spot and fair values of the forward exchange rate contract are applicable:

21

SPOT FAIR VALUE OF CONTRACT

30 April 20X1 3.7300 031 October 20X1 3.4714 (39,253)31 December 20X1 3.3100 (62,658)28 February 20X2 3.1507 (84,623)


Questions 14, 15 and 16Scenario continued Question 14

What journal entry(ies) must be processed at 31 October 20X1 assuming that the entity designates the forward exchange contract as a cash flow hedge of a forecast transaction and the option in IAS39.98(b) is selected?

22


Question 15

What journal entry(ies) must be processed at 31 October 20X1 assuming that the entity designates the forward exchange contract as a cash flow hedge of a forecast transaction and the option in IAS39.98(a) is selected?

23


Question 16

What journal entry(ies) must be processed at 31 October 20X1 assuming that the entity designates the forward exchange contract as a fair value hedge of an unrecognised firm commitment?

24


129

25


Thank You

130



Disclosure of Financial Instruments

(IFRS 7)Joint ECCB and IFRS Foundation

‘train the trainers’ workshop

22



• IFRS 7 sets out disclosures for financial instruments• The classification, presentation, recognition and

measurement of financial instruments are the subjects of • IAS 32 Financial Instruments: Presentation

• IAS 39 Financial Instruments: Recognition and Measurement

• IFRS 9 Financial Instruments (being developed in phases), which will ultimately replace IAS 39.

3Introduction


• Applies to all entities • Applies to all financial instruments

4Scope and Objective


Information that enables users to evaluate the significance of financial instruments for the entity’s financial position and

financial performance.• Information (qualitative and quantitative) that enables users

to evaluate• the nature and extent of risks arising from financial

instruments to which the entity is exposed at the end of the reporting period.

• how the entity manages its exposure to those financial risks.

5Disclosure principles


• Qualitative information about exposure to risks arising from financial instruments.

• The disclosures describe management’s objectives, policies and processes for managing those risks

6Disclosure requirements


131

• Quantitative information about exposure to risks arising from financial instruments, including specified minimum disclosures about

• credit risk, • liquidity risk and • market risk.

• These disclosures provide information about the extent to which the entity is exposed to risk, based on information provided internally to the entity’s key management personnel.

7Disclosure requirements continued


8Disclosure requirements continued


IFRS 7

Risk Financial Instruments

QualitativeQuantitative Statement of position

Comprehen-sive Income Other

Risks• Credit• Liquidity• Market

• Some income line items by measurement category

• Accounting policies

• Hedging• Fair value

• Carrying amounts by measurement category

• Allowance for credit losses

• Collateral• Derecognition• Offsetting

• Financial instruments split by balance sheet classification, including

• Required fair value (eg held for trading) and• Designated fair value

• Details of reclassifications between categories• Financial assets pledged as collateral and assets held as

collateral • Credit loss provisions split by asset class • Details of compound financial instruments• Details of loan defaults by asset class

9Financial Position


• Income, expenses, gains and losses split by balance sheet classification, including

• Required fair value (eg held for trading) and• Designated fair value

• Interest income and expense by measurement category• Impairment losses by class of financial assets• Interest income on impaired financial assets

10Comprehensive Income


• Accounting policies• Measurement bases adopted for financial instruments• Detailed hedge accounting disclosures• Fair value of financial instruments not already carried at fair

value• Fair value

• Methods and assumptions used in determining fair value• Fair value hierarchy

11Other


• Analyses of financial instruments by risk type• Credit risk• Market risk• Liquidity risk

• Split of instruments by Balance sheet classification• Qualitative information including:

• risk exposures for each type of financial instrument• management's objectives, policies, and processes for

managing those risks• changes from the prior period

12Risk disclosures


132

Not derecognised

Includes:• Nature of transferred assets• Nature of risk and rewards• Relationship between transferred assets and associated

liabilities

13Transferred financial assets


Derecognised assets

Includes:• Carrying amount and fair value of assets and liabilities that

represent continuing involvement• Income and expense recognised due to continuing

involvement• Maximum exposure to loss• Gains or losses on derecognition• Extra disclosures if not even throughout the reporting period

(eg only at year-end)

14Transferred financial assets continued


• Qualitative and quantitative information to evaluate the nature and extent of the entity’s exposure to and management of risks arising from financial instruments, including:

• amounts that best represent maximum exposure to credit risk.

• sensitivity analysis for each type of market risk showing how profit or loss and equity would have been affected by changes in relevant variables that are reasonably possible.

15Judgements and estimates


• Fair value information is required to be provided for all financial assets and liabilities (with limited exceptions) irrespective of whether they are carried at FV.

16Judgements and estimates continued


17


Thank You

133




For quiz see page 126

134




Day 4

135



Project to replace IAS 39



22



3

IAS

39 IFR

S 9

Classification & MeasurementIFRS 9 (2010) + ED of limited

amendments

ImpairmentForthcoming ED

General Hedge accounting*Review draft

* Macro hedge accounting is separated from this project

IAS 39 and IFRS 91 January 2013 continued


Effective date and transition

• IFRS 9 effective 1 January 2015– early application permitted (phases)– Required application date will be calibrated for all

completed phases• Restatement of comparative financial statements not

required– modified disclosures on transition

4


All Classification & Measurement

General Hedge Accounting

All Classification & Measurement:

5

Current Proposed

Classification & Measurement:

Financial AssetsOwn Credit requirements

All Classification & Measurement

Impairment

General Hedge Accounting

OR

OR

Transition – early application choices

OR




Phase IClassification and Measurement


137

7Reopening Phase I

• Limited modifications• IFRS 9 is sound and operational• Address specific application issues• Consider interaction of IFRS 9 and insurance project • Seek to reduce key differences with the FASB’s

classification and measurement model– Both are mixed measurement models– Both consider characteristics of the instrument and business

model– Joint deliberations but separate exposure drafts


Scope of possible changes

• Clarify the contractual cash flow characteristics and business model tests

• Reconsider the need for bifurcation of financial assets• To address interaction with the insurance project and align

with the FASB’s model, consider:– Introducing a third business model – Whether some debt instruments should be remeasured

through OCI

• Knock on effects, eg interrelated issues for financial liabilities, transition and disclosure

8


Classification and measurementFinancial assets










9


Classification and measurementFinancial assets: possible changes










10


FVOCI(one impairment

method)

Cash flow characteristics assessment

• Affirms the principle in IFRS 9– If cash flows are not solely principal and interest (P&I),

measure at FVPL– If cash flows are solely P&I, measurement depends on the

business model

• Does not change the assessment for most instruments• Clarifies the application of the principle when:

– Interest rate is leveraged or– There is an ‘interest rate mismatch’

• Requires cash flows on actual instrument to be compared with a benchmark instrument

11


12

Amortised cost Contractual cash flow characteristics

Contractual terms that give rise to solely payments of


Interest =Consideration for•time value of money •credit risk

Principal Interest

‘Modified’ P&I satisfies test IF • Compared with a benchmark

instrument• Difference not more than insignificant


138

Amortised costBusiness model

• Financial assets qualify for amortised cost if:– Objective of business model is to collect contractual

cash flows

• Clarify the term ‘hold to collect’ by providing additional application guidance on:

– Type of business activities– Frequency and nature of ‘acceptable’ sales

13


Bifurcation

• 3 primary options considered:– Current asymmetrical model in IFRS 9– Bifurcation of both assets and liabilities– No bifurcation

• Several bifurcation methods considered• Decision to retain the current model

14


Business model/strategy

• IFRS 9 business models – Held to collect contractual cash flows (amortised cost)– Other (FVTPL)

• Introduced FVOCI :– Interest revenue: effective interest method– Impairment: same as amortised cost – Other gain/loss in OCI: recycle to P/L on derecognition– P/L same as for amortised cost

15


Business model/strategy continued 16


Contractual cash flow

characteristics

FVPL

Business model

Hold to collect

Both hold to collect and sell

Amortised cost

FVOCI

Reclassification applies to all business models

Do not satisfy

1717Financial liabilities

• Accounting as for IAS 39 except for financial liabilities under Fair Value Option

• These financial liabilities recorded on statement of financial position at full fair value

• Changes in fair value attributable to ‘own credit’ recorded in OCI (not recycled)

• All other changes recorded in Profit or loss• Mandatory for all liabilities under the FVO unless this would

create or enlarge an accounting mismatch


Convergence

• Both boards have mixed measurement models• Similarities in classification criteria

– Characteristics of instruments– Business model/strategy

• Sought to reduce key differences– FASB had FVOCI for some debt instruments– FASB retained bifurcation for financial assets– FASB prohibited reclassification

• Joint redeliberation of key differences. Two proposed models now largely aligned

• Separate exposure drafts

18


139



Phase IIFinancial Instruments: Impairment

Three Bucket Approach


20Introduction

• Expected loss (EL) model• Responsive to changes in information that impact credit

expectations• Deterioration in credit quality leads to recognition of lifetime

losses• Robust disclosures to support principle and support

comparability

Guiding principle: Reflect general pattern of deterioration and improvement of credit quality of financial assets


21

Credit quality deterioration since initial recognition

Impairment recognition

Interest revenue

12 month expected loss Lifetime expected loss Lifetime expected loss

Gross basis Gross basis Net basis

Stage 1 Stage 2 Stage 3

Deterioration model


22

• Smaller change in PD for good quality assets and bigger change in PD for poorer quality assets

• An example would be if an existing financial asset would be priced differently because of the increase in credit risk since initial recognition

• To address complexity and cost:– do not recognise lifetime expected losses on assets with a

low probability of default

• Symmetrical model

Recognise lifetime expected losses if probability of default has increased significantly since initial recognition

Lifetime expected loss


23

• Use best information available without undue cost and effort

• Information to consider includes:– Borrower specific– Macro-economic– Internal default rates and probabilities of default– External pricing– Credit ratings– Delinquencies

• Rebuttable presumption that assets 30 days past due have deteriorated

Assessing deterioration


24

• Calculate interest on net basis when satisfies IAS 39 criteria for impairment

• Consistent with population considered impaired under IAS 39 today (excluding IBNR)

– therefore accounting stays the same for these assets

When to calculate interest


140

• Scope– Both originated and purchased credit-impaired– same population as IAS 39 impaired

• Always outside general deterioration model• Use credit-adjusted effective interest rate

– No day 1 allowance balance– No day 1 impairment loss recognised

• Allowance balance represents changes in lifetime loss expectations

25Credit impaired on initial recognition


26

Without a significant financing component (eg short term):• Measure receivable at invoice amount• Allowance is always lifetime expected losses• Provision matrix can be used

With a significant financing component (eg long term) and lease receivables:• Policy election:

• general deterioration model or • always recognise lifetime expected losses

Trade and lease receivables


27

Apply general deterioration model• Instruments that create a present legal obligation to

extend credit• Maximum contractual period exposed to credit risk• Estimate usage behaviour over the lifetime• Expected losses presented as liability

Loan commitments and financial guarantee contracts


• Inputs, assumptions and techniques used in:– estimating expected credit losses; and– assessing whether the recognition of lifetime expected losses have

been met.

• Roll-forward of the carrying amount and allowance balance• Disaggregation of carrying amount by credit quality • Credit-impaired assets at initial recognition• Collateral • Assets evaluated on individual basis

28Disclosures


• Qualitative information related to the discount rate • Modifications of assets with lifetime losses• Interest revenue: Amount and measurement• Less disclosure for assets under simplified approach

29Disclosures continued


• On transition, use initial credit quality unless requires undue cost or effort

– If initial credit quality not used, evaluate based on second criteria for lifetime losses

• Permit but not require restatement of comparatives• Line-item disclosures comparing IAS 39 and IFRS 9:

– should be permitted but not required for prior periods– should not be required for the current period

• Require reconciliation of impairment allowances under IAS 39 and IFRS 9, showing effect of reclassifications from initially applying IFRS 9

30Transition


141



Phase IIIHedge Accounting: General


32Objective

Risk managementobjective:

Seeks to link risk management and

financial reporting(top down)

Accounting objective:

Seeks to manage timing of recognition

of gains or losses(bottom up)


33Hedged items

Qualifying hedged item

Entire item Component

Risk component(separately identifiable and reliably

measurable)

Nominal component or selected contractual CFs


Hedged items: risk components

Benchmark (eg interest

rate orcommodity

price)


rate orcommodity

price)

Variable element

Fixed element


rate orcommodity

price)


rate orcommodity

price)

Variable element

Fixed element

IAS 39 New model


34

35Hedging instruments

Qualifying hedging instruments

Entire item Partial designation

FX risk component Nominal component (proportion)

• Intrinsic value• Spot element


36Costs of hedging

Time valueof options

Transaction related

hedged item

Time period related hedged

item

Costs of hedging

Forward element of forward contract


142

Forward pointsFeedback on ED: accounting requirement for time value of options and forward points should be consistently applied

37

Time value of options

Forward points (IAS 39)

Forward points (decision in redeliberations)

Transaction related hedged item

Defer Can ‘in substance’ defer**

N/A (currentrequirements already provide solution)

Time period related hedged item

Amortise Profit or loss Amortise

Profit or loss

volatility

** Can be deferred by the “forward rate method” (other than for FX financial assets/liabilities)


37 38Hedge effectiveness

Hedge effectiveness

Hedge effectiveness test:1. Economic relationship2. Effect of credit risk3. Hedge ratio

Measuring and recognisinghedge ineffectiveness

Rebalancing Discontinuation


39

Total entity risk exposure(no specific disclosure requirements)

Disclosures: scope

Hedged exposure(Exposure to risks being

hedged)

IFRS 7 Disclosure requirements

Significance of financial instruments for financial position and performance

Nature and extent of risks arising from financial instruments

Entity’s exposure attributable to the hedged risk


39 40Disclosures

Hedge accountingdisclosures

Risk management

strategy

Amount, timingand uncertainty

of future cash flows

Effects of hedge accounting on

the primaryfinancial

statements

Specific disclosures for

dynamic strategies and

credit risk hedging


41Alternatives to hedge accounting

Alternatives

‘Own use’ scope exception in IAS 39

Credit derivatives

Elective FVTPL• At initial recognition or subsequently• At discontinuation: amortisation

Eligible for FVO in IFRS 9


• Prospective transition with limited exceptions• Retrospective application

• Required for time value of options • Permitted for accounting for forward elements

• Practical expedients• Allowed to consider the transition as a continuous process• For rebalancing, starting point is the hedge ratio used

under IAS 39 (gains or losses recognised in profit or loss)

• Hedging relationships that qualified under IAS 39 and qualify under the new model will be treated as continuing

Transition


42

143

43Thank You


144




For quiz see page 126

145



Accounting for Insurance contracts



22



Introduction

• IFRS 4 applies to insurance contracts issued by any entity, including entities that are not regulated as insurers

• Includes both insurance and reinsurance contracts issued• Also includes reinsurance contracts held• It does not address other aspects of accounting by insurers,

such as accounting for financial assets

3


DefinitionInsurance contract

• Under an insurance contract, one party (the insurer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder

• Some contracts having the legal form of insurance may not meet that definition

• Insurance contracts transfer insurance risks (rather than only financial risks)

4


DefinitionInsurance contract continued

• Significant insurance risk• significant additional benefits in any scenario (that has

commercial substance)• not a percentage test• contract by contract

• Unbundling a deposit component• Embedded derivatives

5


Unbundling deposit component

Can measure deposit component separately?

All rights and obligations recognised?

MUST NOT unbundle

MAY unbundle

MUST unbundle

NO

NO

YESYES

6


147

Embedded derivatives

• IFRS 9 requires fair value measurement for many embedded derivatives

• IFRS 4 exempts embedded derivatives that:• are themselves an insurance contract (specific disclosure

required); or• are an option to surrender insurance contract for fixed

amount

7


• IFRS 4 permits insurers to retain most aspects of their previous accounting for insurance contracts

• This avoids disruption while the IASB works on a comprehensive review of accounting for insurance contracts

• The nature and extent of judgements and estimates will, therefore, depend largely on that previous accounting

• Typically this will involve estimates of uncertain cash flows

8Continuing previous accounting


To ease transition to Phase 1

• Temporary exemption from the hierarchy in IAS 8• Limiting the exemption from the hierarchy to 5 areas• Permitting some existing practices to continue but prohibiting

their introduction


9 Temporary exemption from hierarchy

IAS 8 Hierarchy• Criteria to use in developing accounting policy in absence of

specific IFRS guidance• Exempt under IFRS 4 for insurance contracts issued, and

reinsurance contracts held• But

• may not change policy unless result is more relevant and reliable

• may continue existing practice, but not introduce them

10


Limiting the hierarchy exemption

However, IFRS 4: • Prohibits provisions for possible claims under contracts

that are not in existence• Requires insurer keep insurance liabilities on its

balance sheet until they discharged, cancelled, or expired

• requires insurance liabilities to be presented without offsetting them against related reinsurance assets

• requires an impairment test for reinsurance assets• requires a liability adequacy test for the insurance

liabilities


11 Limiting the hierarchy exemption

Liability adequacy test

• Use existing test if minimum requirements met:• consider current estimates of all contractual cash flows,

including embedded options and guarantees• recognise any loss immediately in profit or loss

• Otherwise test using provisions standard (IAS 37)

12


148

Permitting some existing practices

Continue, but may not introduce

• Non-discounting of insurance liabilities• Off-market measurement of contractual rights to investment

management fees • Non-uniform accounting policies for insurance liabilities of

subsidiaries• Excessive prudence• Future investment spreads (rebuttable presumption)

13


Discretionary Participation Feature

Contractual right to additional benefits:• likely to be significant portion of total benefits• amount or timing contractually at the discretion of the issuer,

and• contractually based on:

• performance of specified contracts• returns on specified assets, or• profit or loss

14


Insurance contracts with DPF

• Guaranteed element• policyholder has unconditional right• must classify as liability

• Discretionary participation feature• may classify as liability, equity or split• do not show as mezzanine

15


Investment contracts with DPF

• May classify whole contract as liability• if so, apply liability adequacy test

• May classify part or all of DPF in equity• reported liability not less than IAS 39 measurement of

guaranteed element

16


• Determining whether contracts with the legal form of an insurance contract are insurance contracts as defined in IFRS 4

17Judgements and estimates


Insurance ‘models’

• Current current• Current current with discretionary reserving• Cost cost with OCI• Cost cost

18


149

19


Thank You

150




Project to replace IFRS 4

(IFRS X)Joint ECCB and IFRS Foundation


22



The need for change 3

Insurance entity orientation

A huge variety of accounting models for different types of contract

Estimates for traditional long duration contracts locked in at inception

Little information about economic value of embedded options and guarantees

Discount rate typically based on estimates of investment returns determined at inception

Lack of discounting for non-life liabilities

Complex to understand




The Board’s proposals


Scope

• What does the standard apply to?• Scope and scope exceptions• Definition of insurance contract and insurance risk

Identify

• What are we measuring?• Unbundle non-insurance components• Identify recognition point • Identify cash flows within the contract boundary

Measure

• How do we measure the contract?• Consider eligibility for special applications (eg premium allocation approach, mirroring

approach) • If applying building block approach: cash flows, discount rate, risk adjustment, residual

margin

Present

• How do we communicate?• Presentation in statement of comprehensive income and statement of financial position• Disclosures

5Overview of topics


Scope

• No significant changes to scope and definition

6

Confirm standard applies to:

Insurance contracts the insurer issues

Reinsurance contracts the insurer (cedant) holds

Financial instruments with discretionary participation

features issued by insurers

Some changes to scope exceptions:

Exclude financial guarantee contracts

unless previously regarded as insurance contracts (status quo)

Fixed fee service contracts – additional

guidance provided

© FRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

151

Unbundle non-insurance components 7

Insurance component

Non-distinct investment

component

Distinct investment

components

Distinct goods andservices

Embedded derivatives that are not closely related

Measure using insurance contracts standard, but exclude from volumeinformationMeasure using financialinstruments standards

Measure using revenuerecognition standard

Measure using insurance contracts standard


Quantifies the unearned profit the insurer expects to earn as it fulfils the contractQuantifies the difference between the certain and uncertain liability An adjustment that reflects the time value of money

The amounts the insurer expects to collect from premiums and pay out as it acquires, services and settles the contract, estimated using up-to-date information

Measurement of insurance liability

Cash flows

Time value of money

Risk adjustment

Residual margin

Total liability

8


MeasurementCash flows

Confirm use of expected value of cash flows incurred in fulfilling the contract, considering all relevant information

+ Add guidance: + not all possible scenarios need to be identified and

quantified+ do not adjust measurement to reflect subsequent outcome

of an insured event that was impending at the end of reporting period

An explicit, unbiased and probability-weighted estimate of the future cash outflows (less the future cash inflows) that will arise as the insurer fulfils the insurance contract

9


Cash flows

Time value of money

Risk adjustment

Residual margin

Defining the cash flows

Acquisitioncosts

Premiumreceived

Expenses

Premiumreceived

Claimpayment

Recognition point:Contract starts when coverage period begins (may be after insurer is on risk)

Contract boundary: Ends when:• Not required to

provide coverage• Can reprice to

reflect risks of policyholder

• In some cases, when insurer can reprice to reflect risk of portfolio

• On substantial modification

Included in cash flows:All direct costs of originating and all directly attributable costs incurred in fulfilling a portfolio of insurance contracts

10


MeasurementTime value of money

Confirm discount rate:– Reflects only the characteristics of the insurance contract

liability, current and updated each reporting period– Reflects extent of dependency of liability cash flows on

assets returns

+ Guidance on determining the discount rate– Do not prescribe method – ‘top-down’ and ‘bottom-up’ both

acceptable– Remove any factors that influence observable rates not

relevant to the liability

A discount rate that adjusts cash flows for the time value of money

11


Cash flows

Time value of money

Risk adjustment

Residual margin

MeasurementRisk adjustment

IASB confirm measurement of liability should include explicit risk adjustment

• No restriction on permitted techniques Disclose confidence level equivalent

12


An explicit estimate of the effects of uncertainty about the amount and timing of future cash flows

Cash flows

Time value of money

Risk adjustment

Residual margin

152

• Reflects the uncertain nature of an insurance contract liability

• This uncertainty and the related risks put an economic burden on insurers, ie reflects the ‘cost’ associated with uncertainty

13

Scenario A Scenario B

Probability of Pay-off • 0.5 for CU1 000• 0.5 for CU0

Probability of Pay-off• 1 for CU500

Probability weighted average = CU500 (50% x 1000 + 50% x 0)

Probability weighted average = CU500 (1 x 500)

Why adjust for risk?


MeasurementResidual margin

Confirm no gain at inception Confirm accretion of interest at locked in rate• Portfolio unit of account• Adjust for changes in estimates of cash flows of future

coverage/ future services• Adjustments made prospectively

A residual margin that quantifies the unearned profit the insurer expects to earn as it fulfils the contract

14


Cash flows

Time value of money

Risk adjustment

Residual margin

Change (7) smaller than residual margin Change (33) larger than residual margin

Change of 7 in cash flows offset by change of -7 in residual margin

20 offset by change of -20 in residual margin13 recognised in profit or loss

Remaining margin of 13 allocated to P&L over remaining contract term

No margin remains to allocate to P&L over remaining contract term

• At T0, risk-adjusted cash flows are 80 and residual margin is 20.• At T1, estimate of risk-adjusted cash flows change

Example 15


PresentationED Proposals 16

Statement of comprehensive income

Risk adjustment

Residual margin

Profit or loss

Net interest and investment

Investment income

Interest on insurance liability

Underwriting result

Experience adjustments andchanges in estimates

20XX

X

X

X

X

X

X

X

X


• All premiums treated as deposits, all payments as return of deposits

• All changes in estimate presented in profit and loss

Therefore

• Profit and loss included only margins (summarised margin approach)

• No OCI

PresentationPremiums and claims/benefits


17

Why is it important?

• To provide information that can be used to assess growth or shrinkage

• To give information about the amount of new business written in the year

• To give basic information about volume• To provide an approximation to cash collected• To help assess profitability (by permitting comparison of

amount of activity required to generate net profit)

PresentationPremium and revenue


18

Today, insurers measure revenue from insurance contracts in different ways….

• May include deposit-like receipts• May not reflect timing of service provided by insurer

• May be included on a ‘cash-receivable’ basis• May be included when contract is written• May not reflect the compensation for risk borne in each period

• Single premiums and recurring premiums given same weight

Premiums may be an amalgam of amounts calculated on different bases

153

PresentationConsequences


19

• Premiums should be allocated in the statement of comprehensive income on an earned basis

• Part of premium that relates to investment components should be excluded from the premium presented in the statement of comprehensive income

Premium revenue would represent the price the insurer charged for insurance coverage in that period

Comprehensive incomeA current view of performance

Profit or lossPerformance based on a locked in discount rate

OCIEffect of changes in

discount rate


20

PresentationPerformance

PresentationTentative decisions


21

• Profit and loss presents:– Revenue, price charged for coverage for the period– Claims on incurred basis– Interest on insurance liability based on locked in rate

• Changes in liability from changes in discount rate presented in other comprehensive income unless the cash flows in the insurance contract are affected by asset returns

• When liability contractually linked to assets changes in the liability presented on consistent basis with changes in underlying items

PresentationTentative decisions continued 22

Statement of comprehensive income

Premiums

Changes insurance liability

Profit or loss

Net interest and investment

Investment incomeInterest on insurance liability, at locked in rate

Underwriting result

Claims and expenses

20XX

X

X

X

X

X

X

X

X

Total comprehensive income

Effect of discount rate changes on insurance liability

X

X

X


• Information about premiums, claims and expenses on face

• Underwriting result same as under ED proposals (summarised margin)

• Interest expense at locked in rate

• Present changes in the liability from changes in the discount rate in OCI

Insurance Contract Assets

Reinsurance Contract Assets

Insurance Contract Liabilities

Reinsurance Contract Liabilities

Do not net overall asset with overall liability positions

Do not net reinsurance contracts with

underlying direct contracts

23


• Present all rights and obligations for insurance contracts on a net basis

PresentationBalance Sheet Premium Allocation Approach

• One versus two insurance models• IASB decided one model – Building Block Approach• Practical expedient – Premium Allocation Approach• Therefore:

– Subject to entry criteria– Discretionary

• Key criteria: PAA should ‘mimic’ BBA

24


154

Premium Allocation ApproachEligibility 25

Cash flows

Time value of money

Risk adjustment

Residual margin

Permitted if reasonable approximation to the building block approach, ie if: • coverage period is 12 months or less, or• both following apply:

– no significant changes in estimate are likely to occur before the claims incur

– no significant judgement needed to allocate the premium


Premium allocation approachMeasurement 26

Cash flows

Time value of money

Risk adjustment

Residual margin

• On initial recognition– Record a liability at the PV of premiums

received/receivable, less acquisition costs– Record an asset as the PV of premiums

receivable• Reduce the liability for passage of time• Reduce asset for receipt of premiums• Recognise a liability for incurred claims (using

building block approach)


Premium allocation approachMeasurement continued 27

Cash flows

Time value of money

Risk adjustment

Residual margin

Time value of money

• Remaining coverage– Discounting required only if significant financing

component– Practical expedient 12 months

• Liability for incurred claims– Practical expedient 12 months



Cash flows

Time value of money

Risk adjustment

Residual margin

Liability for remaining coverage (pre-claims)

• Simple accounting with limited re-measurement• Reflect time value of money if financing significant• Practical expedient - 12 months• Onerous contract test when facts indicate



Cash flows

Time value of money

Risk adjustment

Residual margin

Onerous contract test

• Applied at inception of contract, and/or• Any point during the coverage period• Only when facts and circumstances indicate• Balance of liability insufficient• Includes a risk adjustment



Cash flows

Time value of money

Risk adjustment

Residual margin

Liability for incurred claims

• Measured consistently with the building block approach (with no residual margin)

• Discounted if material. Practical expedient 12 months

• Includes a risk adjustment


155


Cash flows

Time value of money

Risk adjustment

Residual margin

Post Contract reward features

• Current boundary definition– Boundary of contract defined by coverage– Claims can extend beyond coverage period

• Reward considerations– Similar features to post coverage claim– Envisaged at and during coverage period– Actuarially calculated, risk adjusted


Special applicationsReinsurance assets 32


Cash flows

Time value of money

Risk adjustment

Residual margin

Measured as:

• Present value of fulfilment cash flows measured using consistent assumptions as those used in measuring the underlying direct insurance liability

plus• Residual margin, recognised in a way that reflects

reinsurance coverage is a service to the insurer, ie:– Gains recognised over coverage period– Losses recognised immediately if for past

events, otherwise over coverage period

ED proposals Tentative decisions

None for contracts in force at date of transition

Current measurement at date of transition

Transition

33

Total liability

33


Include margin for in force contracts at date of transition:• Determine retrospectively if

practicable• If not practicable because of lack

of objective data, estimate maximising use of objective data

Cash flows

Time value of money

Risk adjustment

Residual margin

• Additional guidance provided for determining locked-in discount rate to adjust accumulated OCI at date of inception and subsequent interest expense in P&L if cannot determine retrospectively

• Relief provided on transition:• Redesignation of financial assets because of accounting

mismatches created by application of new standard• Assume all changes in estimates of cash flows known at initial

recognition• Assume that the risk adjustment at inception equals the risk

adjustment on transition• Reduced disclosures for transition to new standard

34


Transition relief provided

35


Transition relief provided continued

TransitionOrigination

Point in time cash flow expectations

Plus: actual historical cash flows

Equals: opening cash flow expectations

Point in time risk margin

Transition point in time risk margin

Discount rate (from market, some relief)

Calculate residual margin

What will really change for life?

Updated, rather than locked-in, assumptions

Current value measurement of guarantees and

options previously not

recognised

More information

about the effects of risk, time

value of money and other estimates

Discount rate reflects

insurance contract liability, not reduced by

expected investment

spreads

No need for complex and

hard-to-understand

mechanisms for dealing with

deferred acquisition costs

A single accounting model for all life insurance contracts, rather than different accounting models based on product type. That model gives:

36


156

No loss of KPIs: Life

KPI Available from new standard?

Our proposals

Investment returns Investment results highlighted separately from underwriting results on the face of the profit or loss

Expense ratio

Actual to expected experience measures for mortality, morbidity

Disaggregation of information about the effect of experience adjustments and changes in estimates required in the notes

Value of new business Information about the residual margin and how it changes each period required in the notes

Value of existing book

37


What will really change for non-life?

For some jurisdictions,

introduction of discounting and

risk adjustment in measuring the

liability for incurred claims

More informationin the audited

financial statements about claims liabilities, changes in risk and effects of discounting

38


No loss of KPIs: Non-life

KPI Available from new standard?

Our proposals

Premiums written/premiums earned

Premium income, underwriting margin, including disaggregation of claims, expenses and premiums on the face of the profit or loss (for short duration contracts)

Combined ratio Cost ratio Claims ratio

Loss development tables Disclosed in the notes, not in MD&A

39




What’s next?


When? 41

Q1 2013

Finish redeliberations

H1 2013

Publish targeted

exposure draft

Q4 2013

Begin redeliberations

H2 2014

Publish IFRS

Not before Jan 2018

Proposed effective date


42

Presentation proposals

Volume information

Effect of changes in discount rates

in OCI

Measurement proposals

Unearned profit in contract/Unlocking

the margin

Participating contracts

Approach to transition

Practicable, then retrospective application

Impracticable, then estimate

residual margin


Focus of targeted re-exposure

157

43


Thank You

158




Joint ECCB and IFRS Foundation ‘train the trainers’ workshop

QuizInsurance Contracts

22



Question 1

An insurer A enters a contract with B in terms of which the insurer undertakes to pay CU1,000 to B in the event of the credit default by C. The client has no relationship with the third party. Does the contract fall within the scope of IFRS 4?

3


Question 2

Same facts as in Question 1, but B periodically advances money to C. The payment of the CU1,000 is not however dependent on any amount being owed to the B at the time of default. Does the contract fall within the scope of IFRS 4?

4


Question 3

Same facts as in Question 1, but the contract stipulates that an amount will only be paid if, and to the extent that B suffers an actual loss. Does the contract fall within the scope of IFRS 4?

5


Question 4

An insurer A enters into a life insurance contract with an insured B. In terms of the contract, the insurer will pay out a sum of CU1, 000 on the death of B. In addition, the contract contains an investment element. In terms of this latter element, A is obliged to pay B an amount on surrender of the contract.At 31/12/X1, A calculates the probability weighted liability under the contract as a whole as CU300. The probability weighted value of the surrender benefit is CU180. The liability for the surrender value is CU200 if the policy were to be surrendered on 31/12/xX. What should the insurer record on its balance sheet?

6


159

Question 4 continued

a. Insurance liability CU300b. Insurance liability CU120

Deposit liability CU180c. Insurance liability CU120

Deposit liability CU200d. A choice

7


Question 5

Same facts as in Question 4, but instead of a surrender value, the insurance contract contains an explicit account balance the value of which will be paid out on the earlier of the death of the policyholder, or the surrender of the contract. a. Insurance liability CU300b. Insurance liability CU120

Deposit liability CU180c. Insurance liability CU120

Deposit liability CU200d. A choice

8


Question 6

An insurer has insurance liabilities with a probability weighted value of CU20,000. It has entered into re-insurance contracts which exactly mirror the terms and conditions of 20% of the insurance contracts. What should it record on its statement of financial position:a.Insurance liabilities of CU16,000 (80% of CU20,000)b.Insurance liabilities of CU20,000 and re-insurance assets of

CU4,000c.Insurance liabilities of CU20,000 and re-insurance assets of

another amount (insufficient information)

9


Question 7

An insurer reporting under IFRS has insurance liabilities in a closed portfolio at 31/12/X1 at a discounted value of CU10,000 (undiscounted CU12,000). At 31/12/X2, the value of these liabilities has changed as follows:• increased by CU250 due to the unwinding of present value

discount,• increased by CU500 due to a decrease in the long term

discount rate• decreased by CU600 due to expected claims

10


Question 7continued

What is the correct liability on the balance sheet for the two years:

x1 x2

a. 12 000 11 400 (12 000 – 600)b. 10 000 9 650 (10 000 + 250 – 600)c. 10 000 10 150 (10 000 + 250 + 500 – 600)

11


12


Thank You

160




Day 5

161




Regulatory FilingsJoint ECCB and IFRS Foundation


22



Introduction

• IFRS is a useful starting point for regulatory governanceBUT• Only if the differences are clearly understood, and adjusted for• Regulators have a number of tools to adjust IFRS results:

• Recognition/derecognition of assets/liabilities• Adjustments to capital balances• Risk weightings• Ring fencing of capital balances

3


Objective

• Objective of financial reporting is to provide information for effective resource allocation. Focus therefore on:

• Effects of market events • Volatility of results• Transparency• Efficient capital utilisation

• Regulatory view is about stability of sector. Focus therefore:• Stability of earnings and balance sheet• Controlled release of information• Reserving in good times• Conservative capital policies

4


Differences in approach

IFRS• Point in time reflection of

current economics• Neutral• Asset/liability focus• Transaction focused across all

industries and jurisdictions• Generally principle based• Wide variety of constituents

slows down turnaround

5


Regulatory• Forward looking focus

anticipating economics• Prudent• Equity (Capital focus)• Industry and jurisdiction

focused• Generally rules based• Rapid turnaround

Assets

• Similar starting points for both IFRS and regulatory views• Resource controlled as a result of past events and from which

future economic benefits are expected to flow• Mixed valuation model (Fair value vs Amortised cost)• Neutrality• Economic point in time• Primary distinctions

• Unexpected losses• Liquidity portfolios• Recognition

6


162

AssetsUnexpected losses

IFRS•Based on concept of neutrality•Amortised cost assets impaired for ‘incurred’ or ‘expected’losses•Impairments based on unbaised expected future cash flows•Usually requires a trigger event

7


Regulatory•Prudential requirements drive conservative outlook•Amortised costs assets impaired for both ‘expected’ and ‘unexpected’ losses•Impairments based on ‘downturn’ or stressed expected future cash flows•Unexpected impairments require no trigger event

AssetsUnexpected losses continued

IFRS• Fair value assets carried at

market value at year end date• Market values generally

incorporate a risk premium to reflect unexpected losses

• Reporters generally not permitted to adjsut market values

8


Regulatory• Prudential requirements drive

conservative outlook• Some regulators require

haircuts for certain fair value assets (eg unlisted shares)

• Alternatively, may increase risk weighting

AssetsLiquidity portfolios

IFRS•Business model test (IFRS 9)•Business model for liquidity portfolio is often ‘hold to collect’, therefore amortised cost•Prudential turnover requirements may corrupt business model

9


Regulatory• Prudential requirements

anticipate realisation of liquidity portfolios

• Fair value may be more appropriate indicator of future realisations

AssetsRecognition/derecognition

IFRS• Based on risk/reward and

control tests• Ignores legal form other then

as impact on the above• Cost or value that can be

measured reliably• Recognition/derecognition of

an asset results in recognition/derecognition of corresponding liability (repos)

10


Regulatory• Generally based on legal form

of transaction• May result in fewer assets

being recognised on a regulatory balance sheet

• May result in different profit/loss recognition timing

AssetsDeferred tax asset

IFRS• Deferred tax asset recognised

under certain circumstances• Dependent upon unbiased

expected future utilisation of asset

11


Regulatory•Prudential requirements generally don’t recognise deferred tax assets (prudent approach)•Impact either through capital haircut, capital risk weighting or derecognition

Liabilities

• Similar starting points for both IFRS and regulatory views• Present obligation arising from past events, the settlement of

which is expected to result in outflow of resources embodying economic benefits

• Mixed valuation model (Fair value vs Amortised cost)• Neutrality• Economic point in time• Primary distinctions

• Convertible debt• Recognition• Own credit

12


163

LiabilitiesConvertible debt

IFRS• Characterised into two

components (liability/equity) based on Day 1 economics

• Carrying value based on day 1 values, equity not updated over life of contract

• No changes in classification after initial classification

13


Regulatory•Characterised into to components based on contractual outcome•Carrying value based on day 1 value and contractual outcome•‘Haircut’ classification changes over time

LiabilitiesConvertible debt example

Bank A issues a $100 convertible bond at a coupon of 5% per year, repayable in full after 25 years. The bond is fully convertible into ordinary shares at the option of the issuer anytime during the 25 year period. The equivalent rate of debt issued without the convertible option is 4.75% •IFRS considerations: Issued as debt, most likely outcome is debt, probably reported as debt•Prudential considerations: Convertibility at option of issuer probably makes this ‘available capital’, likely to be viewed as capital, with some form of haircut as maturity approaches

14


LiabilitiesRecognition/derecognition

IFRS• Based on a probable

threshold• Frequently driven by asset

recognition criteria

15


Regulatory• Generally based on legal form

of transaction• Impact on liabilities will reflect

the impact on assets

LiabilitiesOwn Credit

Introduction• Fair value of financial instruments includes pricing for the credit

risk inherent in the instrument (credit premium)• Liabilities carried at fair value incorporate this credit margin

(own credit)• Changes in own credit behave counter-intuitively

• decline in entities credit standing results in a profit, • improvement in entities credit standing results in a loss)

16


LiabilitiesOwn Credit

IFRS• For fair value liabilities,

adjustments to own credit:• Reflect immediately in profit

and loss (under IAS 39)• Will be reflected in OCI in

certain circumstances under IFRS 9

• Is not reflected in carrying value of amortised cost liabilities

17


Regulatory• Practices differ considerably• Usually any gain is not

allowed to form part of capital

Assets and liabilities

• Similar starting points for both IFRS and regulatory views• Assets and liabilities required to be presented gross on the

balance sheet, unless certain specific criteria are met• Assets and liabilities presented on balance sheet if probably.

Possible (or contingent) assets and liabilities may still require disclosure, but not necessarily on balance sheet

• Primary distinctions• Offsetting• Probability criteria

18


164

Assets and liabilitiesOffsetting

IFRS• Required to offset under

certain circumstances • A currently enforceable legal

right of set-off, and • Intention either to settle net

basis or to realise the financial asset and settle the financial liability simultaneously

• Focus on expected cash flows and current enforceability

19


Regulatory• Allowed to offset under certain

circumstances• An enforceable legal right of

set-off, and • Ability to settle net basis or to

realise the financial asset and settle the financial liability simultaneously

• Focus on credit risk in default scenario

Assets and liabilitiesOff balance sheet

IFRS•Principle based

• Probable threshold• Risk/reward and control

tests•Disclosure of underlying ‘position’, but not on-balance sheet:

• Loan commitments• Guarantees• Acceptances• Repos

20


Regulatory• Rules based• Jurisdiction/industry specific• May treat some/many/most

differently to IFRS under specific approaches

Assets and liabilitiesConsolidation

IFRS•Principle based •Substance over form•Full consolidation (other then for joint operations)•Associates and joint ventures remain ‘off balance sheet’•No NCI haircut

21


Regulatory• Only relevant to consolidated

supervision• May be rules based (Legal

form)• Often requires proportionate

consolidation for some subsidiaries, associates and joint ventures

• NCI Haircut

Assets and liabilitiesHedging

IFRS• Hedge accounting permitted

under specific circumstances• Rules based under IAS 39,

and sometimes does not risk management practices

• IFRS 9 more risk based• Has the effect of changing

valuation basis (greater degree of fair value accounting)

22


Regulatory• Generally only considered as

part of risk management returns

• Not sure of the extent of understanding or analysis

Comprehensive income

• Similar starting points for both IFRS and regulatory views• Change in economic benefits during period from changes of

assets (liabilities) • Mixed valuation model (Fair value vs Amortised cost)• Dependence on asset/liability measurements

23


Comprehensive incomeInterest recognition

IFRS• Interest/discount unwind

recognised on impaired balances

• Based on expected amount rather then contractual amount

24


Regulatory•Interest my be recognised based on contractual terms•Subject to a separate ‘interest in suspense’ adjustment

165

Comprehensive incomeEquity/liability classifications

IFRS• Where balance sheet

classification is liability• Income/expense, gain/loss

shown in income statement• Where classification is equity,

shown directly in equity

25


Regulatory• Different classifications of debt

equity will result in different treatment in the income statement

Comprehensive incomeAsset/Liability measurement and recognition

Differences• Differences in asset liability measurement will affect

comprehensive income• Examples include:

• Recognition of impairments• Unexpected losses

• Differences in recognition/derecognition criteria will affect comprehensive income

• Examples include:• Securitised assets• Repurchase agreements

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Equity

• Similar starting points for both IFRS and regulatory views• Residual interest in the assets of an entity after deducting its

liabilities • Different focal points• IFRS point in time driven, regulatory tends to be event driven• Primary distinctions

• Convertible debt• Unrealised gains• Equityholder transactions

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EquityUnrealised Gains and losses

IFRS• Fair value assets and liabilities

(FVPL, FVOPL, FVOCI)• Unrealised gains and losses

treated symmetrically• Credited/debited (net of tax

effect) to equity

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Regulatory•Potentially broader (focus may be on all assets and liabilities•Frequently not symmetrical –losses accelerated relative to gains•‘Haircut’ often applied to FVOCI gains, although interestingly often not to FVPL and FVOPL

EquityEquityholder transactions

IFRS• Defined equityholder

transactions do not go through comprehensive income

• Future equityholdertransactions, even if contractual, are not recorded in the primary statement

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Regulatory• Different definitions of equity

may give rise to different Income treatment

• Future equityholdertransactions eg guaranteed capital injections or conversions may be treated as capital

EquityReserves

IFRS• Single definition of equity• Measurement of equity

dependent on measurement of assets and liabilities

• Restrictions on asset liability measurement (eg neutrality) impacts on equity measurement (unexpected losses)

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Regulatory•Capital may be sub-divided with many sub definitions (tier I, tier II, distributable, non distributable)•Different asset liability requirements may result in different ‘residual’ capital amounts eg unexpected loss provisions

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EquityNon controlling interest

IFRS•Capital contributed by shareholders in ‘defined’subsidiaries•Consolidation ‘entry’•Included in equity at proportionate share of underlying assets ‘owned’ by outside shareholders•Generally not haircut

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Regulatory•Dependent on extent of ‘consolidated’ capital supervision•Dependent upon consolidation rules•Generally split between capital of regulated and non regulated entities•Usually haircut to prevent cross-subsidisation

EquityIntangible assets

IFRS• Intangible assets recognised

under certain circumstances• This has an impact on equity

balances (residual)

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Regulatory•Generally prudential regulators don’t recognise value of intangible assets•Impact either through capital haircut, capital risk weighting or derecognition

EquityCumulative other comprehensive income

IFRS• Accumulated from a number

of different asset/liability sources

• Primary classes• Cash flow hedges• Own credit• Pension Liabilities

• Some recycled, some not• Balance is accumulated to

equity

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Regulatory• Different OCI balances viewed

with different merit by prudential regulators

• Distinguish between • realised/unrealised• Profit/loss

EquityResidual effect

Differences• Differences in asset liability measurement will affect equity• Examples include:

• Recognition of impairments• Unexpected losses

• Differences in equity/liability classification will effect equity• Examples include

• Convertible debt• Equity derivatives

• Difference ins income treatment will affect equity

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Other

• A number of other factors are relevant to understanding the relationship between IFRS and prudential regulation

• Primarily relate to disclosure issues, and distinctions in viewpoints

• Not necessarily relevant from reconciliation perspective, but relevant to the objectives

• Primary issues• Perspective• Narrative reporting• Risk Reporting

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OtherPerspective

• Financial reporting viewed from the perspective of shareholder/credit provider

• Outsider looking in with limited access to additional information• Information not confidential so commercial sensitivity relevant• Looked at from access point (eg listed holding company for

shareholder, or ultimate guarantor for credit provider)• Regulatory reporting viewed from perspective of regulated

entity• Regulator usually has ability to access additional information• Access point may not be group

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OtherRisk reporting

IFRS• Extensive narrative and

quantitative financial reporting required

• Includes sensitivity analysis, maturity analysis, risk management techniques, policies, breaches and governance

• Focussed at reporting entity level (group), and reconciles to those numbers

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Regulatory• Confidential reporting• May be tailored to entity• Focussed on regulated entity• Can create

confusion/duplication because of difference in entity/specifiecs

OtherPost balance sheet events

IFRS• Specific requirements for post-

balance sheet events• Where circumstances existed

at yearend, and entity became aware of them post yearend, adjustment to results required

• Where circumstances did not exist at yearend, disclosure only

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Regulatory• Regulators generally prefer

adjustment for all known events, even if circumstances only occurred post year end.

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Thank You

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