© 2012: South-Asian Management Technologies Foundation International Financial Reporting Standards Self Study QAS CPE Program

© 2012: South-Asian Management Technologies Foundation

International Financial Reporting Standards

Self Study QAS CPE ProgramSelf Study QAS CPE Program


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IFRS Framework


Scope

• The framework deals with the:– objectives of financial statements– qualitative characteristics – elements of financial statements– recognition and measurement of

• Assets and Liabilities• Income and Expenses

– concepts of capital and capital maintenance.


Objective

• To provide information about – the financial position (balance sheet), – performance (income statement), and – changes in financial position (cash flow

statement) of an entity.

• Fair presentation

• Transparency


Qualitative Characteristics

– Nature– Materiality– Faithful

representation– Substance

over form– Neutrality– Prudence– Completeness

Relevance

Understandability

Reliability

Comparability

True and

fair view / fair

presentation

Constraints•Timeliness•Balance between

•benefit and cost•qualitative characteristics

Assumptions: Accrual Basis, Going Concern


Elements of Financial Statements – Measurement of Financial Position

Asset Liability

Equity

• Resource under control• Result of past events• Future economic benefits are

expected to flow

• A present obligation• Arising from past events, • Settlement expected to result

in an outflow of resources embodying economic benefits

• Residual interest in the assets


Elements of Financial Statements – Measurement of Performance

Income Expenses

• Increases economic benefits during the accounting period– Direct inflows – Enhancement of asset– Decreases in liabilities– Income embraces

revenue and gains

• Decreases economic benefits during accounting period– Direct outflows – Depletions of assets– Incurrence of liabilities


Recognition of Elements

• Initial– It is probable that any future economic benefit will flow

to or from the entity; and– The item has a cost or value that can be measured

with reliability .

• Subsequent to reflect fair value– Historical cost.– Current cost.– Realisable (settlement) value.– Present value (fair market value).


Capital Maintenance Concept

• Financial Capital– Net assets– Profit results in increase in nominal monetary

capability

• Physical Capital– Operating Capability– Profit results from increase in production

capability over a period


First-time Adoption of International Financial

Reporting Standards (IFRS 1)


Scope

• The Standard specifically covers:– comparable (prior period) information – identification of basis of reporting,– retrospective application of IFRS information,– formal identification of reporting and transition

date.


First-time Adopter

• For the first time, makes an explicit and unreserved statement that its financial statements comply with IFRS

• It excludes, – Preparation of IFRS financial statements for

internal management use only– Compliance with select IFRS. – Inclusion of a reconciliation of selected figures

from previous AS to IFRS


First-time Adoption Timeline

01-04-2010 31-03-2011 31-03-2012

2010-2011 2011-2012

Commencement of transition to

IFRS Indian AS Reporting

Reporting Date

First IFRS reporting with IFRS

comparatives of previous year


Previous AS to IFRS on First-time Adoption

• Step 1:Select IFRS accounting policies– Latest version of standards only

• Step 2: Recognise / derecognise where necessary, for example

– Liabilities (e.g. future losses, rectification obligations, leases)

– Special Purpose Entities– Proposed dividend


Previous AS to IFRS on First-time Adoption

• Step 3Re-measure, for example

– Where basis same, but measured differently (e.g. IFRS cost ≠ previous AS cost)

– Where basis has changed (e.g. from cost to fair value)– Where discounting is required / prohibited (e.g.

deferred tax, provisions, impairments)

• Step 4Reclassify, for example

– Between captions (e.g. debt / equity)


Mandatory Exceptions

• De-recognition of financial instruments– A first-time adopter is not permitted to recognise

financial assets or financial liabilities that had been derecognised under its previous AS

• Hedge accounting– If designated as a hedge before the date of

transition but does not meet the conditions for hedge accounting• Apply IAS 39 to discontinue hedge accounting


Mandatory Exceptions

• IAS 27 - Non-controlling Interests – apply prospectively from the date of transition to IFRSs:

• (a) the requirement that total comprehensive income is attributed to the owners of the parent and to the non-controlling interests

• (b) the requirements for accounting for changes in the parent’s ownership interest in a subsidiary that do not result in a loss of control; and

• (c) the requirements for accounting for a loss of control over a subsidiary.

– However, if a first-time adopter elects to apply IFRS 3 retrospectively to past business combinations, it shall also apply IAS 27


Optional Exceptions

• Business combinations that occurred before opening balance sheet date:

– An entity may keep the previous AS based accounting, that is, not restate: • previous mergers or goodwill written-off from

reserves; • the carrying amounts of assets and liabilities

recognised at the date of acquisition or merger; • how goodwill was initially determined


Optional Exceptions

• Business combinations and resulting goodwill:

– goodwill for contingent purchase consideration resolved before transition date to be adjusted

– any non-IFRS acquired intangible assets (not qualifying as goodwill) should be reclassified

– impairment test to include goodwill– Credit existing negative goodwill to equity.


Optional Exceptions

• Property, plant, and equipment, intangible assets, and investment property carried under the cost model – Deemed Cost

• Fair value at the opening IFRS balance sheet date. • Deemed cost a surrogate for cost or depreciated

cost at a given date.• Revalued assets –

– either fair value or price-index-adjusted cost.– If one-time revaluation of assets or liabilities to fair value

because of a privatisation or initial public offering the revalued amount


Optional Exceptions

• IAS 19 - Employee benefits: actuarial gains and losses

– Recognise all cumulative actuarial gains and losses for all defined benefit plans

• IAS 21 - Accumulated translation reserves – Recognise all translation adjustments arising

on the translation of the financial statements of foreign entities in accumulated profits or losses.


Group, Subsidiaries, Associates and Joint Ventures

• A parent may become a first-time adopter earlier than or later than its subsidiary, associate, or joint venture investee

– Subsidiary adopted before parent• subsidiary's date of first-time adoption will be it’s

entity-only adoption date

– If group adopts IFRS before the subsidiary, then the subsidiary has an option either • elect the group date as is its IFRS transition date• first-time adoption in its entity-only financial

statements.


Group, Subsidiaries, Associates and Joint Ventures

If the local legislation requires a separate parent account to be prepared, then subject to the applicable legislation, parent company may prepare a separate financial statement that may not be IFRS compliant while the group account is IFRS compliant.


Presentation and Disclosures

• A statement of first-time adoption of IFRS

• Prior information not converted to IFRS:– Information should be prominently labelled as

not being prepared under IFRS.– Where the adjustment to the opening balance of

retained earnings cannot be reasonably determined, that fact is stated.

• Where IFRS 1 permits a choice of transitional accounting policies, the policy selected should be stated.



• One year of full comparative financial statements to be provided

• Effect of transition on – the reported financial position, – financial performance, and – cash flows

• Equity reconciliation

• Profit reconciliation



• In interim reporting – Equity reconciliation – Profit reconciliation

• Explanation of material adjustments made • Errors in previous-AS financial statements

separately disclosed. • Impairment losses

– Recognised or reversed on transition to IFRS– IAS 36 disclosures as if recognised or reversed in

period beginning on transition date



• Use of fair values as deemed costs is as follows:

– Disclosed aggregate amounts for each line item– Disclosed adjustment from previous AS for

each line item


Presentation of Financial Statements (IAS 1)


Scope

• What constitutes a complete set of financial statements

• Overall requirements for the presentation of financial statements

• The distinction between current and non-current elements, and

• Minimum requirements for financial statement content.


Components of Financial Statements

• End of period statement of financial position• Comprehensive income statement for the period • Statement of changes in equity for the period • Statement of cash flows for the period, and • Notes, comprising a summary of accounting

policies and other explanatory notes. • A statement of financial position as at the beginning

of the earliest comparative period – entity applies an accounting policy retrospectively or – makes a retrospective re-statement of items – reclassifies items in its financial statements.


Fundamental Accounting Assumptions

Accrual basis of accounting

Going concern

Materiality andaggregation

Offsetting

Consistency of presentation

Comparative information

Compliance with IFRS

Fair presentation

Financial Statements


Current and Non-Current

Assets current if:• Involved in normal

operating cycle• Held primarily for trading

purposes • Expected to be realised

within 12 months• Cash or a cash equivalent

Liabilities current if:• Involved in normal operating

cycle• Held primarily for trading• To be settled within 12 months• No unconditional right to defer

settlement for at least 12 months

An entity must normally present a classified balance sheet, separating current and non-current assets and liabilities

Else Non-current


Identification of Financial Statements

• Clearly identify:– the financial statements – the reporting enterprise – whether the statements are for the enterprise or

for a group – the date or period covered – the presentation currency – the level of precision (thousands, millions, etc.)


Statement of Financial Position

• Balance Sheet classifications of assets and liabilities – Current and Non-current– Liquidity based presentation


Balance Sheet Content

• Property, plant and equipment• Investment property• Intangible assets• Assets/disposal groups held

for sale• Biological assets• Inventories • Investments accounted for

using the equity method • Trade and other receivables• Cash and cash equivalents

• Other financial assets• Provisions• Trade and other payables• Other financial liabilities• Deferred tax liabilities and assets• Current tax liabilities and assets• Liabilities of disposal groups• Minority interest (within equity)• Issued capital and reserves


Capital Disclosures

• The entity’s objectives, policies, and processes for managing capital

• Quantitative data about what the entity regards as capital

• Whether the entity complies with any capital (adequacy) requirements

• Consequences of non-compliance with capital requirements where applicable

• A description of the nature of each reserve within the equity.


Share Capital

• For each class of share capital:– Number of shares authorised– Number of shares issued and fully paid– Number of shares issued and not fully paid– Par value per share, or that it has no par value– Reconciliation of shares at beginning and end of year– Rights, preferences, and restrictions attached to that

class– Shares in the entity held by entity, subsidiaries, or

associates– Reserved for issue under options and sales contracts


Puttable Shares and Obligations Arising Only on Liquidation

• summary quantitative data (equity)

• the entity's objectives, policies and processes for repurchase or redeem the instruments

• the expected cash outflow on redemption or repurchase

• information about how the expected cash outflow was determined.


Disclosure About Dividend

• Disclosure on face of income statement or statement of changes in equity or in notes:– the amount of dividends recognised as distributions to

equity holders during the period, and – the related amount per share.

• Disclosure in the notes:– the amount of dividends proposed or declared before the

financial statements were authorised for issue– the amount of any cumulative preference dividends not

recognised.


Statement of Comprehensive Income

• The entity may present all items of income and expense recognised in a period– in a single statement of comprehensive

Income or– in two statements; a statement displaying

components of profit and loss and a second statement beginning with profit and loss and displaying in addition the other comprehensive income.


Income Statement Content

• As a minimum the income statement must include:– revenue– finance costs– share of the post tax profit/loss of associates and JVs accounted

for using the equity method– tax expense– a single amount comprising the total of:

• the post-tax profit or loss of discontinued operations; and • the post-tax gain or loss recognised on the measurement to fair

value less costs to sell or on the disposal of the assets (disposal groups) constituting the discontinued operation; and


Income Statement Content

• profit or loss– profit or loss attributable to minority interest; – profit or loss attributable to equity holders of

the parent.

• No items may be presented on the face of the income statement or in the notes as "extraordinary items".


Income Statement–Other Information

• May be either stated in Comprehensive Income Statement or in Notes

– Analysis of expenses based on nature or their function

– Disclosure of the following:• Depreciation charges for tangible assets• Amortisation charges for intangible assets• Employee benefits expense• Dividends recognised and related amount per share

– Income tax related to each component of other comprehensive Income


Income Statement–Other Information

• write-downs of inventories to net realisable value • write-downs of PPE to recoverable amount, and • reversals of such write-downs• restructurings of the activities of an entity • reversals of provisions for costs of restructuring • disposals of items of PPE• disposals of investments; • discontinuing operations; • litigation settlements; and • other reversals of provisions


Other Comprehensive Income

• Changes in revaluation surpluses• Actuarial gains and Losses on defined benefit

Plans • Gains and Losses arising from translating the

financial statements of a foreign operation• Gains and Losses on re-measuring available-

for-sale financial assets• The effective portion of gains and losses of

hedging instruments in cash flow hedge.


Statement of Changes in Equity

• Profit or loss for the period

• Each item of income or expense recognised directly in equity

• Total of above two items showing separately amounts attributable to minority shareholders and parent shareholders

• Effects of changes in accounting policy

• Effects of correction of errors


Statement of Changes in Equity – Other Information

• transactions with equity holders acting in their capacity as equity holders

• Movement of balance of accumulated profit or loss

• a reconciliation of changes in: – each class of equity– share premium– each reserve.



• A statement showing all changes in equity (SOCIE) Examples of items in SOCIE– Issue of share capital– Payment of dividend– Transaction cost associated with issue of equity– Equity Share options issued



• A statement of changes in equity that excludes transactions with owners acting in their capacity as equity owners and that does not provide a reconciliation of opening and closing equity (statement of recognised income and expense, SoRIE)

• Examples of items in SORIE – Valuation gain or loss taken to equity (AFS)– Cash flow hedge adjustments– Translation gain or loss (CTA)– Associated companies equity movement– Tax on items taken directly to equity– Revaluation of PPE


SOCIE


SORIE


Disclosure of Accounting Policies

• Measurement bases used in preparing financial statements

• Each accounting policy used even if it is not covered by the IFRS

• Judgments made in applying accounting policies that have the most significant effect on the amounts recognised in the financial statements


Estimation Uncertainty

• Key assumptions about the future and major sources of estimation uncertainty – significant risk of causing material adjustment

to the carrying amount of assets and liabilities– In relation to those assets and liabilities the

noted shall include:• Their nature• Their carrying amount at the end of reporting period.


Other Disclosures

• Domicile of the entity

• Legal form of the entity

• Country of incorporation

• Registered office or business address,

• Nature of operations or principal activities,

• Name of the parent and ultimate parent


Statement of Cash Flows (IAS 7)


Scope

All entities must present a cash flow statement

For each period financial statements are presented

Operating Activities

Investing Activities

Financing Activities


Scope

Cash Flows

Operating Activities

Investing Activities

Financing Activities

Principal revenue generating and other activities that are not investing or financing

Acquisition and disposal of long-term

assets and other investments not included in cash

equivalents

Activities that result in changes in the size

and composition of the equity capital and

borrowings of the entity


Operating Activities – Direct and Indirect Methods

• The direct method (recommended)– Major classes of gross

cash receipts and gross cash payments are disclosed

• The indirect method (most common)– Profit or loss is adjusted for:

• effects of transactions of a non-cash nature,

• deferrals/accruals of past or future operating cash receipts or payments, and

• items of income/expense associated with investing and financing cash flows

Choose between


Foreign Cash Flows

• Exchange rate at the date of cash flows:– Cash flows in foreign currencies– Cash flows of foreign subsidiaries

• Unrealised gains and losses in foreign currencies are not cash flows

• Exchange rate changes on cash and cash equivalents in foreign currencies to reconcile cash and cash equivalent at the beginning and end of period


Accounting Treatment

• Cash flows from investing activities – Major classes of gross cash receipts and gross

cash payments– The aggregate cash flows from acquisitions or

disposals of subsidiaries and other business units are classified as investing.

• Cash flows from financing activities are reported by separately listing major classes of

– gross cash receipts and – gross cash payments.



• The following cash flows can be reported on a net basis:

– Cash flows on behalf of customers• Items for which the turnover is quick, • the amounts large, and maturities short.

• Cash flows from joint ventures are proportionately included in the cash flow statement


Separate Disclosure

• Disclose separately in the cash flow statement:– Interest and dividends received and paid

• Classify consistently as operating, investing or financing activities

– Taxes on income• Classify as operating activities unless specifically

identified with financing and investing activities• Disclose total amount of taxes paid if allocated over

more than one class


Separate Disclosure

• Disclose, in aggregate, in respect of both acquisitions and disposals during the period:

– Total purchase or disposal consideration– Purchase or disposal consideration paid in cash

and equivalents– Amount of cash and equivalents in the entity

acquired or disposed– Amount of assets and liabilities other than cash

and equivalents in the entity acquired or disposed.


Accounting Policies, Changing in Accounting

Estimates and Errors (IAS 8)


Scope

• This Standard covers situations where the entity:

– is selecting and applying accounting policies,– is accounting for changes in accounting

policies,– has changes in accounting estimates, and– has corrections of prior-period errors.


Definitions

• Accounting policies– specific principles, bases, conventions, rules, and

practices applied by an entity – in preparing and presenting financial statements.

• Changes in accounting estimates – are adjustments of an asset’s or liability’s carrying

amount – the amount of the periodic consumption of an asset

• from the assessment of the present status of, • expected future benefits and obligations • may result from new information or new developments


Definitions

• Prior-period errors – are omissions from and misstatements – arising from a failure to use, or a misuse of, reliable

information – available when financial statements were authorised for

issue,

• Such errors include the effects of– mathematical mistakes,– mistakes in applying accounting policies,– oversights or misinterpretations of facts, or– fraud.


Definitions

• Impracticable changes – are requirements that an entity cannot apply

after making every reasonable effort to do so.• effects are not determinable;• assumptions about management intent in prior

period are required; and• it is impossible to distinguish information about

circumstances


Changes in Accounting Policy

• Consistency is important

• Change an accounting policy only if the change:– is required by a standard or an interpretation; or– results in the financial statements providing

reliable and more relevant information


Changes in Accounting Policy

Changes in accounting policies

Application of a standard

or interpretation

Voluntary change in

accounting policy

Specific transitional provisions

Apply specific

transitional provisions

Apply change

retrospectivelyYes

No


• On voluntary changes– Nature of change– Reason or reasons why new policy provides reliable

and more relevant information– Adjustment in current and each prior period presented– Adjustment to basic and diluted earnings per share– Adjustment to periods prior to those presented

Disclosure - Changes in Accounting Policy


• Impracticable to determine the amount:– The title of the Standard or Interpretation– change in accounting policy is made in

accordance with its transitional provisions (when applicable)

– The nature of the change in accounting policy– A description of the transitional provisions – The transitional provisions that might have an

effect on future periods

Disclosure - Changes in Accounting Policy


Prior-period Errors

• Correct retrospectively – restate the comparative amounts for the prior

period or periods presented in which the error occurred, or

– restate the opening balances of assets, liabilities, and equity for the earliest prior period presented.


• Change in accounting estimates:– Nature of the change in estimate– Amount of the change and its effect on the current and future

periods– If estimating the future effect is impracticable that fact should be

disclosed.

• Prior period errors:– Nature of the error– Amount of correction in each prior period presented and the line

items affected– Correction to basic and diluted earnings per share– Amount of correction at beginning of earliest period presented– Correction relating to periods prior to those presented

Disclosures


Share-based Payments (IFRS 2)


• Defining share-based payment

• The distinction and accounting for share-based payment transaction –equity settled

–cash settled

• Reflections in profit or loss and financial position

Scope


Share-based Payments

• Share-based payment transactions includes:– Grants to employees (and others providing

similar services), e.g., non-executive directors– Grants to non-employees, e.g., suppliers– Employee share purchase plans– Payments within a group– Payments directly by shareholders


Timeline of a Share Option Award

Year 1 Year 2 Year 3

Grantdate

Vestingdate

Exercisedate

Time

Vesting period

Grant date - the date at which the entity andanother party have ashared understanding ofthe terms and conditions of the arrangement

Vesting period - the period during which all the specifiedvesting conditions are to be satisfied

Vesting date – the date when the conditions for entitlement are satisfied; grant become unconditional

Exercise date is the datewhen awards (e.g. options) are exercised.



• Recognise goods / services received when goods are obtained or services are received – Assets

– Expenses

• Equity-settled transactions → increase equity

• Cash-settled transactions → recognise liability



• Equity-settled share-based payment– The fair value of the equity instruments – at grant date for transactions with employees

and others providing similar services; and– at the date on which the entity receives the

goods or the counterparty renders the services in all other cases.

• The fair value of the equity instruments issued or to be issued should be based on market prices, taking into account market vesting conditions



• Listed shares should be measured at market price.

• Options should be measured – on the basis of the market price of any equivalent

traded options; or– using an option pricing model in the absence of

such market prices; or– at intrinsic value when above method not possible


Cancellation

• Cancellation or settlement is accounted for as accelerated vesting

• Any payment made on cancellation or settlement is accounted for as a repurchase of equity instruments, except that any excess over the fair value of equity instruments at repurchase date is an expense


Key Points

• Recognition in profit or loss and financial position of share-based payment transactions

• Classification between equity or cash-settled share-based payment transactions– Equity-settled transactions → increase equity– Cash-settled transactions → recognise liability

• Measure employee services indirectly by measuring equity instrument at grant date

• Recognise fair value of employee awards over vesting period


Key Points

• Modified grant date approach: market, non-market and service conditions

• Re-measure cash-settled share-based payment transactions each balance sheet date and at settlement date

• Measure non-employee goods / services directly at date the goods / services are obtained

• Account for modifications that increase the fair value of the equity instrument


Disclosures

• An entity should provide a description of– each type of share-based payment

arrangement that existed at any time during the period; and

– the general terms and conditions of each arrangement, such as vesting requirements, the maximum term of options granted, and the method of settlement (for example, whether in cash or equity).


Disclosures

• An entity should provide the number and weighted average exercise prices of share options for each of the following groups of options:– Outstanding at the beginning of the period– Granted during the period– Forfeited during the period– Exercised during the period– Expired during the period– Outstanding at the end of the period– Exercisable at the end of the period


Disclosures• For share options granted

– the weighted average fair value at the measurement date

– information on how that fair value was measured :

• The option pricing model used and the inputs to that model, including– the weighted average share price– exercise price– expected volatility– option life– expected dividend– the risk-free interest rate


Disclosures

• How expected volatility was determined• Any other features for measurement of fair value• For share options exercised during the period an

entity should disclose the weighted average share price at the date of exercise.

• For share options outstanding at the end of the period, an entity should disclose the range of exercise prices and weighted average remaining contractual life.


Insurance Contracts (IFRS 4)


Scope

• This IFRS does not address– accounting aspects related to other assets

and liabilities of an insurer,– product warranties,– residual value guarantee embedded in a

finance lease, and– financial guarantees.


Key Concepts

• Insurance Contracts

• Insurance Liability

• Insurance Risk

• Insured Event

• Policy holder and a Cedant



• An insurer should assess at each reporting date adequacy of insurance liabilities recognised

• Liability Adequacy Test– Current estimate of all contractual and related cash flows,

else

• determine the carrying amount of the relevant insurance liabilities less carrying amount of related deferred acquisition costs, and intangible assets.

• determine whether the amount is less than the carrying amount if within the scope of IAS 37 – account for the difference in profit or loss.



• If a cedant’s reinsurance asset is impaired,– the cedant should reduce its carrying amount – recognise impairment loss in profit or loss.

• A reinsurance asset is impaired if– evidence that the cedant might not receive all

amounts due to it under the contract,– an event has a measurable impact on the

amounts that the cedant will receive from the re-insurer.


Change in Accounting Policy

• Current market interest rates – For re-measuring designated insurance liabilities to

reflect current market interest rates

• Not allowed: but continuance– Measuring insurance liabilities on an undiscounted basis– Measuring contractual rights to future investment

management fees at an amount that exceeds their market comparable fair value

– Using non-uniform accounting policies for the insurance contracts of subsidiaries


Change in Accounting Policy

• The insurer might switch to a comprehensive investor-oriented basis of accounting that involves– current estimates and assumptions,– a reasonable adjustment to reflect risk and uncertainty,– measurements that reflect both the intrinsic value and

time value of embedded options and guarantees, or– a current market discount rate.


Disclosures

• Its accounting policies for insurance contracts and the assets, liabilities, income, and expenses related thereto

• Recognised assets, liabilities, income, and expenses

• Cash flows on the direct method - optional


Disclosures

• If the insurer is a cedant, it should disclose– gains and losses recognised in profit or loss on buying

reinsurance,– amortisation of deferred gains and losses for the period,– unamortised amounts at beginning and end of the period,– the process used to determine assumptions underlying

measurement of recognised profits and losses,– the effect of changes in assumptions, and– Reconciliations of changes in insurance liabilities,

reinsurance assets, and related deferred acquisition costs.


Disclosures

• Additional Disclosures– The amount, timing, and uncertainty of future cash

flows from insurance contracts– Risk management policies and objectives– Terms and conditions affecting the amount, timing,

and uncertainty of the insurer’s future cash flows– Interest rate risk and credit risk detail – Exposures to interest rate risk or market risk under

embedded derivatives that are contained in a host insurance contract


Disclosures

• Additional Disclosures– Insurance risk, including

• the sensitivity of profit or loss and equity to changes in applicable variables,

• concentrations of insurance risk, and• actual claims compared with previous estimates up to

a maximum period of 10 years (“claims development”)


Inventories (IAS 2)


• This Standard deals with all inventories of assets– Held for sale in the ordinary course of business.– In the process of production for sale.– In the form of materials or supplies to be consumed in

the production process.– In the rendering of services.

• In the case of a service provider, inventories include the costs of the service for which the related revenue has not yet been recognised

Scope


Scope

Scope excludes:•Construction contracts •Financial instruments•Biological assets related to agricultural activity and agricultural produce at the point of harvest

Does not apply to the measurement of inventories held by:

•Producers of agricultural and forest products, agricultural produce after harvest, and minerals and mineral products•Commodity broker-traders



• Inventories should be measured at the lower of cost and net realisable value.– Specific Cost– Weighted Average Cost– FIFO– Standard Cost– Retail Method


Cost

• Include:– Purchase costs, such as the purchase price and import charges– Costs of conversion– Direct labour– Production overheads, including variable overheads and fixed

overheads allocated at normal production capacity– Other costs, such as design and borrowing costs

• Exclude:– Abnormal amounts of wasted materials, labour, and overheads– Storage costs, unless they are necessary prior to a further

production process– Administrative overheads– Selling costs


Disclosures

• Accounting policies for measuring inventories – Including cost formulas used

• Carrying amounts– Inventories, including classifications and inventories

carried at fair value less costs to sell– Amount of inventories recognised as an expense

• Write-down and reversals– Recognised as expense and as reduction of expense

respectively– Circumstances or events that led to a reversal

• Carrying amount of inventories pledged


Construction Contracts (IAS 11)


• When the outcome of a construction contract can be estimated reliably, the excess of revenue over costs (profit) should be recognised based on the stage of completion (percentage of completion method).

• Fixed price contracts • Cost plus contracts• Accounting for construction contracts

– that cannot be measured reliably.– Where contract costs can be reliably measured

Scope


• Contract revenues comprise– the initial agreed contract amount, and– variations, claims, and incentive payments to extent

• that they will probably realise • capable of being reliably measured.

– When the outcome of a contract cannot be reliably estimated,

• revenue recognised to the extent it is probable to recover contract costs.

• Contract costs should be recognised as an expense of the period

– An expected loss should be recognised as an expense immediately



• Contract costs comprise– direct contract costs (for example, materials),– general contract costs (for example,

insurance), and– costs specifically chargeable to the customer

in terms of the contract (for example, administrative costs).

• Any expected excess of total contract costs over total contract revenue (loss) is recognised as an expense immediately.



Accounting Treatment – Measured Reliably

• Fixed price contract:– Total contract revenue

measurable reliably– Probable that economic

benefits will flow to the entity

– Contract costs and stage of completion measurable reliably

– Contract costs clearly identifiable/measurable: actual vs. estimates

• Cost plus contract:– Probable that economic

benefits will flow to the entity

– Contract costs (whether or not specifically reimbursable) clearly identifiable/measurable


Stages of Completion

• The stage of completion is determined by reference to– portion of costs incurred in relation to

estimated total costs,– surveys of work performed, and– physical stage of completion.


Single / Separate Contract

• A group of contracts should be treated as a single construction contract if it was negotiated as a single package.

• The following contracts should be treated as separate construction contracts:– A contract for a number of assets if separate

proposals have been submitted for each asset– An additional asset constructed at the option

of the customer that was not part of the original contract


Disclosures

• Balance sheet and notes include– amount of advances received,– amount of retention monies,– contracts in progress being costs-to-date-

plus-profits or costs-to-date-less-losses,– gross amount due from customers (assets),– gross amount due to customers (liabilities), – contingent assets and contingent liabilities (for

example, claims).


Disclosures

• The Income statement includes– amount of contract revenue recognised.

• Accounting policies include– methods used for revenue recognition, and– methods used for stage of completion.


Income Taxes (IAS 12)


Scope

• This Standard deals with all income taxes – domestic, – foreign, and – withholding taxes, – dividend taxes

• Defines accounting and taxable profit/loss.• Recognising and measuring deferred tax

assets/liabilities.


Accounting Treatment• Current tax should be recognised as a liability

and expense in the period to which it relates:– A liability (asset) for unpaid (overpaid) current taxes.– The benefit of a tax loss that can be carried back to

recover current tax of a previous year should be recognised as an asset.

• A deferred tax asset is recognised for – all deductible temporary differences – probable that they are recoverable from future taxable

profits.



• A deferred tax liability is recognised for all taxable temporary differences, except when those differences arise from– Initial recognition of goodwill for which

amortisation is not deductible for tax purposes – Initial recognition of an asset/liability in a

transaction which:• Is not a business combination and• Does not affect accounting nor taxable profit at that

time


Disclosure

• Taxation balances should be presented as follows:– Tax balances are shown separately in the

balance sheet.– Deferred tax balances

• are distinguished from current tax balances.• are non-current.

– Taxation expense (income) should be shown for ordinary activities on the face of the income statement.


Disclosure - Offset

• Current tax assets/liabilities– Legally enforceable right; and– Intention to settle on a net basis or simultaneously

• Deferred tax assets/liabilities– Legally enforceable right to off-set current tax assets and

liabilities; and– Income taxes relating to same taxation authority and from:

• The same taxable entity• Different taxable entities intending to settle/realise net or

simultaneously


Disclosure

• Accounting policy: The method used for deferred tax should be disclosed.

• The income statement and notes should contain:– Major components of tax expense (income)—shown

separately—including the:• Current tax expense (income)• Deferred tax expense (income)

• Deferred tax arising from the write-down of a deferred tax asset

• Tax amount relating to changes in accounting policies and fundamental errors treated.


Disclosure

• Reconciliation between tax amount and accounting profit or loss in monetary terms, or a numerical reconciliation of the rate.

• Explanation of changes in applicable tax rate (rates) compared to previous period (periods).

• For each type of temporary difference, and in respect of each type of unused tax losses and credits, – amounts of the deferred tax recognised in the income

statement.


Disclosure

• The balance sheet and notes should include:– Aggregate amount of current and deferred tax charged or

credited to equity.– Amount for which no deferred tax asset is recognised

• deductible temporary differences,

• unused tax losses, and

• unused tax credits.

– Amount for which no deferred tax liability is recognised • investments in subsidiaries,

• branches,

• associates, and joint ventures

– For each type of temporary difference, and in respect of each type of unused tax losses and credits, the amount of the deferred tax assets and liabilities is recognised in the balance sheet.


Disclosure

• The balance sheet and notes should include:– Amount of a deferred tax asset and nature of the

evidence supporting its recognition, when • the utilisation of the deferred tax asset is dependent on future

taxable profits; or

• the enterprise has suffered a loss in either the current or preceding period.

– Amount of income tax consequences of dividends to shareholders that are not recognised in the financial statements.

– The nature of the potential income tax consequences that would result from the payment of dividends to the enterprises’ shareholders.


Property, Plants and Equipments (IAS 16)


Scope

• Deals with all property, plant, and equipment, including – that which is held as a lessee under a finance lease

– property that is being constructed or developed for future use as investment property.

• This Standard does not apply to:– property, plant, and equipment that is classified as held for

sale,

– biological assets related to agricultural activity,

– mineral rights and mineral reserves, such as oil or natural gas, or

– similar non-regenerative resources.


Definition

• Property, plant, and equipment – tangible items that are

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

• expected to be used during more than one period.


Recognition

• Costs of PPE recognised as asset when:– Probable future economic benefits, and – Cost can be measured reliably

• Criteria apply to all costs when incurred, including:– Initial acquisition or construction costs– Subsequent costs (covered later)

• Initially, PPE measured at cost


Recognition

• Capitalise replacement or renewal components and major inspection costs

• Write off replaced or renewed components related to a previous inspection (irrespective of whether identified on acquisition or construction)

• Expense day-to-day servicing costs


Cost of PPE

• The cost of an item of includes:– Its purchase price and duties paid– Any costs directly attributable to bringing the asset to the

location and condition – The initial estimate of the costs of dismantling and

removing the asset and restoring the site– Materials, labour, and other inputs for self-constructed

assets– Government grants deducted from cost or set up as

deferred income


Cost of PPE

• Cost of PPE item should exclude:– General and administrative expenses– Start-up costs

• Subsequent to initial recognition, an entity should choose either the – cost model

• Cost less accumulated depreciation and impairment losses.

– revaluation model • Fair value less subsequent accumulated depreciation

and impairment losses


Teasers

• What do we do when – Payment for a PPE is deferred beyond normal

credit terms• Clue: Borrowing cost

– Assets are exchanged• Clue: Fair value

– Paid by way of equity instrument• Clue: Fair value of PPE and Equity


Component Accounting

• The amount initially recognised for a PPE is to be allocated to its– Significant parts and – Depreciated separately for each part– Group by same depreciation rate


Basis for Revaluation

• Fair value of plant & equipment and land & building is market value

• If there is no evidence of market value viz. specialised instrument or no market, valued at depreciated replacement cost


Revaluation

• Increase in carrying amount– Recognise in OCI and accumulate in Equity as

revaluation Surplus– Recognise as income to the extent it reverses

earlier impairment loss recognised as expense

• Decrease in carrying amount– Recognise in OCI as decrease in revaluation

surplus – If decrease exceeds revaluation surplus, excess

to be recognised in profit and loss as expense


Revaluation

• Surplus included in equity is transferred to retained earnings derecognition of asset

• Transfer to retained earning not made through profit and loss

• Impact on taxation is to be computed


Revaluation Accounting

• Revaluation: Write off accumulated depreciation against gross value of asset– Asset restated at revalued amount– Accumulated depreciation set to zero

• Cost: Proportionately change acc. depreciation with change in gross carrying amount so that carrying amount equals revalued amount– Gross carrying amount to depreciation ratio remains

same– Net carrying amount = revalued amount


Disclosures

• For each class of property, plant, and equipment the following must be presented:– The measurement basis used for determining the

gross carrying amount– The depreciation methods used– The useful lives or the depreciation rates used– The gross carrying amount and the accumulated

depreciation (together with accumulated impairment losses) at the beginning and end of the period


Disclosures• A reconciliation of the carrying amount at the

beginning and end of the period showing– additions, disposals, or depreciation;– acquisitions through business combinations;– increases or decreases resulting from revaluations and

impairment losses recognised or reversed directly in equity;

– impairment losses recognised in profit or loss;– impairment losses reversed in profit or loss;– net exchange differences arising on the translation of the

financial statements; or– other changes.


Disclosures

• The financial statements should also disclose– restrictions on title and pledges as security for

liabilities,– expenditures recognised in the carrying amount

in the course of construction,– contractual commitments for the acquisition of

property, plant, and equipment, and – compensation for impairments included in profit

or loss.


Disclosures

• Disclosure of the methods adopted and the estimated useful lives or depreciation rates – methods adopted and the estimated useful

lives or depreciation rates,– depreciation, whether recognised in profit or

loss or as a part of cost of other assets, during a period, and

– accumulated depreciation at the end of the period.


Disclosures

• Disclose the nature and effect of a change in an accounting estimate with respect to– residual values,– the estimated costs of dismantling, removing,

or restoring items,– useful lives, and– depreciation methods.


Disclosures

• Revalued assets– Effective date of revaluation– Independent valuator involvement– Methods and significant assumptions applied– Reference to observable prices in an active

market or recent arm’s length transactions– Carrying amount that would have been

recognised had the assets been carried under the cost model

– Revaluation surplus


Disclosures

• Other Disclosures– Carrying amount of temporarily idle property,

plant, and equipment– Gross carrying amount of fully depreciated

items still in use– The carrying amount of items retired from

active use and held for disposal– Fair value of property, plant, and equipment

when this is materially different from the carrying amount per the cost model in use


Leases (IAS 17)


Scope

• This Standard should be applied in accounting for all leases other than

– leases to explore for or use minerals, oil, natural gas, and similar non-regenerative resources, and

– licensing agreements for such items as motion picture films, video recordings, plays, manuscripts, patents, and copyrights.

• However, this Standard should not be applied as the basis of measurement for

– investment property held by lessees,

– investment property provided by lessors under operating leases,

– biological assets held by lessees under finance leases, or provided by lessors under operating leases.


Accounting Treatment- Classification

The overriding principle

Substance over form

The key question

Have substantially all risks and rewards of ownership of the leased asset been

transferred to the lessee ?

Timing of classification

At the inception of the lease


Accounting Treatment- Finance Lease

Lessee LessorBalance sheet

Leased asset (include indirect costs)

Liability (PV of minimum lease payments)

Receivable (less indirect costs)(PV of net investment)

Income statement

Depreciation

Finance expense

Profit on sale?

Finance income


• Lessee:– records leased asset & corresponding liability at lower of:

• PV of minimum lease payments, and• fair value

– depreciates asset over the shorter of:• lease term, or• useful life

– unless reasonable certainty that lessee will obtain ownership by the end of the lease term

• Lessee / Lessor:– Finance income or expense is calculated using effective

interest rate method (using rate implicit in lease)

Accounting Treatment- Finance Lease


Accounting Treatment- Operating Lease

Lessee Lessor

Balance sheet Lease rental

payable

Leased asset

Lease rental receivable

Income statement Lease rental

expense

Depreciation Lease rental income


• Uneven lease payment profile– Spread on straight line basis over lease term – Balance sheet will reflect deferral or prepayment

• Lease incentives– Spread on straight line basis over lease term

• Annuity depreciation– Is not allowed

Accounting Treatment- Operating Lease


Sale and Leaseback Transactions

• Finance lease– any excess of sales proceeds over the

carrying amount in the books of the lessee (vendor) should be deferred and amortised over the lease term.


Sale and Leaseback Transactions

Recognise profit or loss

immediately

Recognise profit or lossimmediately

Sale price = FV

Sale price < FVand, in case of a loss,

not compensated by future below-market

lease payments

Defer andamortise excess over fair value

Defer and amortise loss

Sale price < FVand resulting loss is

compensated by future below-market

lease payments

Sale price > FV

•Operating lease


Disclosures - Lessee• Finance leases:

– Asset: Carrying amount of each class of asset

– Liability: Total of minimum lease payments reconciled to the present values of lease liabilities in three periodic bands,

• not later than 1 year,

• not later than 5 years, or

• later than 5 years

– IAS 16 requirements for leased property, plant, and equipment

– General description of significant leasing arrangements

– Distinction between current and non-current lease liabilities

– Future minimum sublease payments expected to be received under non-cancellable subleases at balance sheet date

– Contingent rents recognised in income for the period


Disclosures - Lessee

• Operating Leases:– General description of significant leasing arrangements

(same information as for finance leases above)– Lease and sublease payments recognised in income of

the current period, separating minimum lease payments, contingent rents, and sublease payments

– Future minimum non-cancellable lease payments in the three periodic bands

– Future minimum sublease payments expected to be received under non-cancellable subleases at balance sheet date


Disclosures - Lessor

• Finance leases:– The total gross investment reconciled to the present

value of minimum lease payments receivable in the three periodic bands

– Unearned finance income– Accumulated allowance for uncollectible receivables– Contingent rents recognised in income– General description of significant leasing arrangements– Un-guaranteed residual values


Disclosures - Lessor

• Operating leases:– All related disclosure under IAS 16, IAS 36,

IAS 38, and IAS 40– General description of significant leasing

arrangements– Total future minimum lease payments under

non-cancellable operating leases in the three periodic bands

– Total contingent rents recognised in income


Revenue (IAS 18)


Scope

• Revenue and Income.

• Recognition criteria for revenue is identified.

• Practical guidance is provided on– moment of recognition,

– amount to be recognised, and

– disclosure requirements.


Key Concepts

Income

Sale of goodsRendering of ServicesUse of assets; yielding• Interest• Royalties• Dividends

IAS 18 - Revenue

Other income and gains

Insurance contracts - IFRS 4Leases – IAS 17Financial instruments – IAS 39Biological assets – IAS 41 Dividends (associates) – IAS 26

ConstructionContracts IAS 11.3• Specifically negotiated• Construction of

customised assets

IAS 11 - Construction Contracts

2


Revenue Recognition

Sale of goods

a) Transfer of risks and rewards

b) Retain neither managerial involvement nor control

c) Revenue can be measured reliably

d) Probable economic benefit flow to entity

e) Cost incurred measured reliably

Use of assets by others

a) Probable economic benefits flow to entity

b) Revenue measured reliably

Rendering of service

Revenue only recognised to extent expenses recognised & recoverable

Inventory under IAS 2.8 and 2.19

Not necessarily in accordance with the timing of receipt of payment, or in relation to timing of costs incurred by the seller unless this reflects timing of performance

Outcome estimablereliably:a) Revenue measured

reliablyb) Probable economic

benefit flow to entityc) Stage of completion

measured reliablyd) Cost incurred / to

complete measured reliably

Outcome notreliablyestimable

Other

services

Stage of completionInterest

Effective interest rate method

Royalties

Accrual basis

Dividends

Right to receive payment established

IAS 11

Requirements of IAS 11 generally applicable for recognition of revenue and associated costs

2


Disclosures• Disclose accounting policies as follows:

– Revenue measurement bases used– Revenue recognition methods used– Stage of completion method for services

• The income statement and notes should include– Amounts of significant revenue categories:

• Sale of goods• Rendering of services• Interest• Royalties• Dividend


Disclosures

– Amount of revenue recognised from the exchange of goods or services

– The methods adopted to determine the stage of completion of transactions involving the rendering of services

– The amount of each significant category of revenue recognised during the period including revenue arising from

• The sale of goods• The rendering of services


Employee Benefits (IAS 19)


Scope

• Accounting recognition and measurement principles, for all employee benefits

• 5 types of employee benefits are identified:– 1. Short-term employee benefits (for e.g. bonus).– 2. Post-employment benefits (for e.g., pensions).– 3. Other long-term employee benefits (for e.g.,

long-service leave, profit sharing, bonuses).– 4. Termination benefits.– 5. Equity compensation benefits


Defined Contribution Plan

• Short-term employment benefits – Recognised as an expense

• Defined contribution plans– Cost of benefits = contribution paid or

payable to the plan– Accrue cost as service rendered– Short fall / excess of contribution payable over

amount paid is recognised as liability / asset– Disclose amount recognised as expense


Defined Benefit Plan

• Defined benefit plans:– Cost of benefit = present value of entitlement

earned

– Many variable factors such as final or average pay levels

– Involves complex calculations

– Plan assets measured at fair value

• Defined benefit obligation determined using actuarial techniques and discounting

• Determine actuarial gains/losses to be recognised


Termination Benefits

• The event that results in an obligation is termination rather than employee service.

• Only recognise when demonstrably committed to– Terminate specific individual (s)/group of

individuals; or– Provide termination benefits to encourage

voluntary redundancy

• Discount if due in more than 12 months


Disclosures

• Balance sheet and notes:– Details about the recognised defined benefit

assets and liabilities– Reconciliation of the movements of

aforementioned– Amounts included in the fair value of plan

assets for financial instruments, or property occupied or assets used by the entity

– The actual return on plan assets– Liability raised for equity compensation plans


Disclosures

– Financial instruments issued to and held by equity compensation plans as well as the fair values thereof

– Share options held by and exercised under equity compensation plans

• Income statement and notes:– Expense recognised for contribution plans– Expense recognised for benefit plans and the line

items in which they are included– Expense recognised for equity compensation plans


Disclosures

• Accounting policies:– Methods applied for the recognition of the

various types of employee benefits– Description of post-employment benefit plans– Description of equity compensation plans– Actuarial valuation methods used– Principal actuarial assumptions


Accounting and Reporting by Retirement Benefit Plans

(IAS 26)


Scope

• Applied in the financial statements of retirement benefit plans that are directed to all participants, irrespective of whether a plan is– not a separate fund,– either a defined contribution or a defined benefit

plan,– managed by an insurance company,– sponsored by other parties than employees, or– either a formal or informal agreement.



• Defined contributions plans– In financial statements

• a statement of net assets available for benefits and a description of the funding policy.

– For valuation of assets owned by the plan• Investments should be carried at fair value.• If carried at other than fair value, the investments’

fair value should be disclosed.



• Defined benefit plans– In financial statement

• the net assets available for benefits, • the actuarial present value of retirement benefits

(distinguishing between vested and non-vested benefits), and • the resulting excess or deficit, or

– OR• a statement of net assets available for benefits• including either a note disclosing the actuarial present value

of retirement benefits (distinguishing between vested and non-vested benefits) or

• a reference to this information in an accompanying report.



• Actuarial valuations are normally obtained every 3 years

• Retirement benefit plan investments should be carried at fair value.

• The financial statements should explain – the relationship between the actuarial present value of

the promised retirement benefits and – the net assets available for benefits, as well as – the policy for the funding of the promised benefits.


Disclosures

• A description of the plan

• Policies include:– A statement of changes in net assets

available for benefits– Significant accounting policies– Description of the investment policies– Description of the funding policy


Disclosures

• Statement of net assets available – Assets at year-end, suitably classified– Basis of valuation of assets– Note stating that an estimate of the fair value of plan

investments is not possible, if applicable– Details of any single investment exceeding

• either 5 percent of net assets available for benefits or • 5 percent of any class or type of security

– Details of any investment in the employer– Liabilities other than the actuarial present value of

promised retirement benefits


Disclosures

• The statement of changes in net assets available for benefits – Investment income– Employer contributions– Employee contributions– Other income– Benefits paid or payable (analysed per category of benefit)– Administrative expenses– Other expenses– Taxes on income– Profits and losses on disposal of investments and changes in value

of investments– Transfers from and to other plans


Disclosures

• Actuarial information (for benefit plans only)– The actuarial present value of promised retirement

benefits, based on the benefits promised under the terms of the plan, on service rendered to date, and on using either current salary levels or projected salary levels

– Description of main actuarial assumptions– Method used to calculate the actuarial present value

of promised retirement benefits– Date of most recent actuarial valuation


Accounting for Government Grants and Disclosure of

Government Assistance (IAS 20)


Scope

• Definition of government grants and government assistance.

• The recognition criteria for grants.

• Disclosure of the extent of the benefit recognised or received and other forms of government assistance in each accounting period.

• IAS 41 deals with government grants related to biological assets.


Key concepts

Government support

Assistance

•Economic benefit to an entity

•Qualifying criteria

Other Benefits

•Indirectly provided benefits

Grants

•Transfer of resources

•compliance with certain conditions

•Related to operating activities

Assets Income

Accounting and disclosure Disclosure Not required in financial statements

related to


Recognition

• Government grants should be – recognised as income on a systematic basis – over the periods necessary to match them – with related costs that they should

compensate. – compensation for expenses or losses already

incurred with no future related costs is recognised as income


Repayment

• Accounted for as a revision of an accounting estimate– Repayment related to income is first applied

against an unamortised deferred grant credit.– Repayment in excess of a deferred grant

credit is recognised as an expense.– Repayment related to an asset is recorded by

increasing the carrying amount of the asset or reducing a deferred income balance.


Disclosure

• Asset-related grants – – Present in the balance sheet, either by

• setting up the grant as deferred income, or• deducting it from the carrying amount of the asset.

• Income-related grants – – Present in the income statement, either as

• separate credit line item, or• deduction from the related expense.


Disclosure

• Accounting policies:– Method of presentation– Method of recognition

• Income statement and notes:– Government grants: Nature, Extent, Amount– Government assistance: Nature, Extent,

Duration, Unfulfilled conditions, Contingencies attached to assistance


The Effects of Changes in Foreign Exchange Rates

(IAS 21)


Scope

• Definition and distinction between – functional and other currencies which give

rise to exchange differences on transactions.– presentation and functional currency of a

foreign operation results in exchange differences on translation.

• Monetary and non-monetary gains and losses.


Key Concepts

• The functional currency of a foreign operation is– Different from reporting entity’s functional currency

when foreign operation’s• activities are carried with significant degree of autonomy,• transactions with reporting entity are low,• cash flows do not directly affect cash flows of reporting entity,• cash flows not readily available for remittance to reporting

entity, and• cash flows are sufficient to service existing and normal debt

obligations.


Functional Currency

• Recognise transaction at the spot exchange rate at the transaction date

• At each balance sheet date, subsequent measurement takes place as follows:– Closing rate for monetary items which remain

unsettled.– Non-monetary items carried at:

• Historical costs are reported using the exchange rate at date of the transaction.

• Approximate or average rates may be more appropriate for inventories.

• Fair values are reported using the exchange rate at the date when the fair value was determined.


Functional Currency

• Resulting exchange differences are included in profit or loss

• The following exchange differences are included in other comprehensive income until disposal of the related asset or liability, when they are transferred to profit or loss:– Those relating to mark-to-market (MTM) gains or losses on

available for sale financial assets.– Gains or losses on non-monetary items recognised directly in

Other comprehensive income;• Intra-group monetary items that form part of an entity’s net

investment in a foreign entity

• A foreign liability that is accounted for as a hedge of an entity’s net investment in a foreign entity.


Functional Currency

Monetaryassets

RealisedExchange

differences

Unrealisedexchange differences

Recognised in P/L(both gains and losses)

Non-monetary assets

Gain or lossrecognised

in OCI

Exchange componentrecognised in OCI


Presentation Currency

Assets and liabilities

Income and expenses

All resulting exchange differences classified as equity

Closing rate at dateof each BS presented

Rate at date of transaction (or average rate)

To P/L on disposal

Equity (except retained earnings)

Rate at date of original transaction


Disclosure

• Income statement – – The amount of exchange differences recognised

• Balance sheet – – Net exchange differences recognised in other

comprehensive income and classified in a separate component of equity, and

– a reconciliation of the amount of such exchange differences at the beginning and end of the period

• Difference between the presentation and functional currency.

• Change in the functional currency with reason


Borrowing Costs – (IAS 23)


Scope

• Borrowing cost – As interest and other costs incurred by an

entity in connection with the borrowing of funds.

• Qualifying asset:– Asset that necessarily takes a substantial period of

time to get ready for intended use or sale

• Alternative accounting treatments – Capitalisation


Capitalisation

• Capitalised when– it is probable that they will result in future economic

benefits to the entity, and– the costs can be measured reliably

• Capitalisation commences when– expenditures on a qualifying asset are being incurred,– borrowing costs are being incurred, and– activities necessary to prepare the asset for its

intended sale or use are in progress.


Capitalisation• Capitalisation should cease when

– the asset is materially ready for its intended use or sale,– active development is suspended for extended time– construction is completed in part that can be used

independently.

• Capitalisation should not cease– when all of the components need to be completed before

any part of the asset can be sold or used,– for brief interruptions in activities,– if substantial technical and administrative work is done– for delays that are inherent in the asset acquisition

process (e.g. wines).


Capitalisation

• Specific borrowings: – Net of investment income on any temporary

investment of funds pending expenditure on asset

• General borrowings: weighted average interest cost


Disclosure

• Accounting policy adopted for borrowing costs

• Capitalisation rate used to calculate capitalised borrowing costs

• Total borrowing costs incurred with a distinction between

• the amount recognised as an expense, the amount capitalised.


Impairment of Assets (IAS 36)


Scope

• The circumstances in which an entity should calculate the recoverable amount of its assets, including internal and external indicators or impairment;

• The measurement of recoverable amount for individual assets and cash-generating units; and

• The recognition and reversal of impairment losses.



• The recoverable amount of an asset should also be estimated annually for– intangible assets with an indefinite useful life,– intangible assets not yet ready for use, and– goodwill.

• Indicators of Impairment– External sources

• Significant decline in market value

• Technological, market, economic, legal environment

• Lower market capitalisation than equity book value

– Internal sources• Evidence of obsolescence or physical damage

• Discontinuance, disposal, restructuring plans



• Determine recoverable amount for– The individual asset, or if not possible– The asset’s CGU

• Apply CGU concept when the asset does not generate cash inflows which are independent from other assets

• CGU – – The smallest identifiable group of assets that

generates cash inflows that are largely independent from other assets of groups of assets



• Impairment loss should be recognised in the profit or loss

• Reversal of impairment loss of prior periods if change in the estimates

• Goodwill to be allocated to CGUs

• An impairment loss for goodwill should not be reversed.


Disclosure

• for each class of assets and for each reportable segment, – amount recognised in the income statement

for:• Impairment losses• Reversals of impairment losses

– Amount recognised directly in other comprehensive income for:

• Impairment losses• Reversals of impairment losses


Disclosure

• For material impairment losses– Events and circumstances that led to the loss being

recognised or reversed– Amount recognised or reversed– Nature of the asset or the CGU unit and the

reportable segments – Whether recoverable amount is the net selling price or

value in use– The basis used to determine the net selling price or

the discount rate used to determine value in use


Provisions, Contingent Liabilities, and Contingent

Assets - (IAS 37)


Scope

• Accounting treatment and disclosure requirements for all provisions, contingent liabilities, and contingent assets

• It guides when, in respect of a specific obligation,– provide for it (recognise),– disclose information only, or– disclose nothing.



• A provision should be recognised only when– present obligation as a result of a past event,– Legal or constructive nature– probable outflow of resources embodying economic

benefits – reliable estimation.

• The amount recognised as a provision should be the best estimate of the expenditure required to settle the present obligation.



• Legal– Contract– Law / legislation

• Constructive– Established pattern

of past practice– Published policies– Creation of a valid expectation (communication)



• An entity should not recognise a contingent liability. – An entity should disclose a contingent liability

unless the possibility of an outflow of resources embodying economic benefits is remote.

• An entity should not recognise a contingent asset. – A contingent asset should be disclosed where

an inflow of economic benefits is probable.


Recognition and Measurement

• Future operating losses – No provision

• Onerous contracts – Present obligation provided

• Restructurings –Provision recognised when constructive obligation


Disclosure

• Provisions– Itemised reconciliation of the carrying amount at the

beginning and end of the accounting period; – Description of the nature of the obligation and the

expected timing of any outflows of economic benefits– Uncertainties about the amount or timing of those

outflows– Amount of any expected reimbursement, stating the

amount of any asset that has been recognised for that expected reimbursement.


Disclosure

• Contingent liabilities: – Brief description of the nature– Estimate of the financial effect– Indication of uncertainties relating to the

amount or timing of any outflow– The possibility of any reimbursement

• Contingent assets:– Brief description of the nature– Estimate of the financial effect


Disclosure

• Impracticability

• seriously prejudice the position of the entity


Intangible Assets (IAS 38)


Scope

• the definition of an intangible asset,

• recognition as an asset,

• determination of the carrying amount,

• determination and the treatment of impairment losses, and

• disclosure requirements.



• An intangible asset is recognised if– It is probable that the future economic

benefits attributable to the asset will flow to the entity, and

– the cost of the asset can be measured reliably.

• All other expenses related to the following categories are expensed.



• Initial Measurement – At Cost

• Subsequent Measurement– Cost Model

• Cost less amortisation and • impairment losses (if any)

– Revaluation Model• Revalued amount less amortisation and • impairment losses (if any)

– Research expenditure is treated as an expense.



• Development expenditure recognised if – The technical feasibility of completing the intangible

asset so that it will be available for use or sale– The availability of adequate technical, financial, and

other resources to complete and to use or sell the intangible asset

– The intention to complete the intangible asset and use or sell it

– The ability to use or sell the intangible asset– How the intangible asset will generate probable future

economic benefits– The ability to measure the expenditure


Disclosure

• Accounting policies should specify– measurement bases,– amortisation methods, and– useful lives or amortisation rates.

• Income statement and notes should disclose– the amortisation charge for each class of asset

indicating the line item in which it is included– the total amount of research and development costs

recognised as an expense.


Disclosure

• Balance sheet and notes:– Gross carrying amount less accumulated depreciation

for each class of asset – Detailed itemised reconciliation of movements in the

carrying amount during the period– If an intangible asset is amortised over more than 20

years, the evidence that rebuts the presumption that the useful life will not exceed 20 years

– Carrying amount of intangibles • pledged as security• whose title is restricted


Disclosure

• Balance sheet and notes:– Capital commitments for the acquisition of intangibles– A description, the carrying amount, and remaining

amortisation period of any intangible that is material to the financial statements of the entity as a whole

– For intangible assets acquired by way of a government grant and initially recognised at fair value

– the fair value initially recognised for these assets,– their carrying amount, and– whether they are measured at the benchmark or

allowed alternative treatment


Disclosure

• Additional Disclosures– Effective date of the revaluation– Carrying amount of each class of intangibles

had it been carried in the financial statements on the historical cost basis

– Amount as well as a detailed reconciliation of the balance of the revaluation surplus

– Any restrictions on the distribution of the revaluation surplus


Financial Instruments – Recognition and Measurement

(IAS 39)


Scope• Financial Instruments are contracts that give rise to

– Financial Assets for one– Financial Liabilities or equity instrument for

another• A derivative is a financial instrument or contract

– the value changes in response to changes in an underlying interest rate, exchange rate, commodity price, security price, credit rating, etc.

– settlement takes place at a future date.


Key Concepts

• Four classes of financial assets– assets held for trading at fair value through P/L adjustment– assets available for sale, – assets held to maturity, and – loans and receivables.

• Two classes of financial liabilities– those at fair value – fair exchange price– liabilities shown at amortised cost.

• Three types of hedging– fair value – cash flow – net investment in a foreign subsidiary.


Exclusions

• Subsidiaries, associates, and joint ventures.• Rights and obligations under leases.• Employee benefit plan assets and liabilities.• Rights and obligations under insurance contracts.• Equity instruments issued by the reporting entity.• Financial guarantee contracts related to failure by a

debtor to make payments when due• Contracts for contingent consideration in a business

combination.• Contracts based on physical variables.


Initial Recognition

All financial assets and financial liabilities, including derivatives,

should be recognised on the balance sheet when the entity

becomes party to the contractual provisions of the instrument

Financial assets

@

“fair value of consideration

given”

Financial liabilities

@

“fair value of consideration

received”

Transaction costs are incremental cost that are directly attributable to the acquisition, issue or disposal of a

financial asset or financial liability


Subsequent RecognitionInstrument Measurement Value changes

P&L

Not relevant(unless impaired)

P&L

P&L

Held-to-maturity investmentsAmortised cost

(effective interest rate)Not relevant

(unless impaired)

Amortised cost(effective interest rate)Loans and receivables

Available-for-sale Fair value

Financial assets (HFT) at fair value through profit or loss Fair value

Derivatives Fair value

Financial liabilities at fair value through profit or loss Fair value

Other liabilities Not relevantAmortised cost

OCI(unless impaired)



• Gains or losses are included in net profit or loss for the period.

• Two exceptions to this rule:– Unrealised gains or losses on an available-for-sale

(non-trading) financial asset must be recognised in equity until it is sold or impaired, at which time the cumulative amount is transferred to net profit or loss for the period.

– When financial assets and financial liabilities (carried at amortised cost) are being hedged by a hedging instrument, special hedging rules apply.


Impairment

• All impairment losses are included in net profit or loss for the period

• Subsequent reversal of impairment loss in future periods shall not result in the carrying amount of the financial asset exceeding what the amortisation cost would have been on date of reversal had the impairments not been recognised.


Derecognition

• A financial asset, is derecognised when – entity loses control of the contractual rights to the cash

flows that compose the financial asset.

• Difference between the proceeds and the carrying amount is included in the profit or loss for the period.

• A financial liability is derecognised when it is extinguished, that is, when the obligation is discharged, or cancelled, or expires.


Hedging

• Hedge Instrument is a financial instrument used as an offset to the change in fair value or cash flows of a hedged item.

• Hedge Item is an asset, liability, firm commitment, highly probable forecasted transaction or net investments in foreign operations that

– Exposes the entity to risk of changes in fair value or cash flow

– Is designated as being hedges


Hedging

Cash flow hedges• Hedge of exposure to variability in cash flows that is:

1. attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction; and

2. could affect profit or loss.

Hedges of a net investment in foreign operation• Hedge of a monetary item that is accounted for as part of the net investment as defined in

IAS 21.

Fair value hedges: Hedge of exposure to changes in fair value of:– a recognised asset or liability; an unrecognised firm commitment; or an identified

portion of any of the above two, – that is attributable to a particular risk– And could affect Profit & Loss



• A hedging relationship qualifies for hedge accounting if:– At the inception of the hedge there is formal

documentation setting out the hedge details.– The hedge is expected to be highly effective in

achieving offsetting changes in fair value or cash flows attributable to hedge risk.

– In the case of a forecasted transaction, the transaction must be highly probable.

– The effectiveness of the hedge is reliably measured.– The hedge was effective throughout the period for

which the hedge was designated.


Fair Value Hedge Accounting

Fair value

Measurement of hedging instrument

Measurement of hedged item

Fair value with respect to risk

being hedged (*)

Profitor

loss

(*) This applies even if a hedged item is otherwise measured at cost

Changes in fair value


Cash Flow Hedge Accounting

Changesin fair value

EquityEffective

Profitor loss

(*)

(*) Based on timing of earnings impact of hedged item (e.g. cost of sales, depreciation, interest)

Ineffective

Measurement of hedging instrument

Fair value


Test of Effectiveness

• Prospective Test– Performed at inception and each BS date and

should be effective in the range of 80%-125%

• Retrospective Test– To be performed on each reporting date.

Easiest way of doing is to compute ratio of changes in fair value of hedging instrument to changes in fair value of hedged item


Hedge Accounting RulesRecognise in income

statementRecognise directly in

equityRecognise in initial

measurement of asset/liability

Fair value hedge

All adjustments on hedging instrument and hedged item

Cash flow Hedge

Gain/Loss on ineffective portion of hedging instrument Gain/Loss previously recognised in equity when hedge does not result in asset/liability

Gain/Loss on the effective portion of hedging instrument

Gain/Loss previously recognised in equity

Hedge of net investment in foreign equity

Gain/Loss on ineffective portion of hedging instrument

Gain/Loss on effective portion of hedging instrument

Hedge accounting recognises symmetrically the offsetting effects on net profit or loss of changes in the fair values of the hedging instrument and the related item being hedged


Illustration

• On17th November 2011 Troublesome Ltd, an Indian company, plans to purchase a machinery worth USD300 M from Bush Traders Inc in around February 2012 and pay them by March 2012.

• Apprehending a fall in INR this exposure was hedged by a forward contract dated 17th January with Aisywaisy Bank with a maturity dated of 31st March 2012 for buying USD300M @INR50

• The exposure on account of the forward contract is now (300 x 50) INR15000 M


USD Price and Gains/Losses

Particulars Nov 17

Dec 31

Jan 15Feb 07

Mar 31

Expected Cash Flow (USD)

300 300 300 300 300

Spot Rate 48.00 48.80 49.20 49.50 51.00

Forward Rate 50.00 50.30 50.70 50.80 51.00

Value at Forward Rate INR

15000

15090 15150 15240 15300

Forward Fair Value NIL 90 150 240 300

Forward Fair Value Change

NIL 90 60 90 60

Change in Cash Flow Fair Value

NIL (90) (60) (90) (60)

Retrospective Test 100% 100% 100% 100% 100%


Accounting Entries

Date Entry Debit Credit

Nov 17 No Entry Required

Dec 31Forward Contract Fair Value DrHedging Reserve

90

90

Jan 15Forward Contract Fair Value DrHedging Reserve

60

60

Feb 07Stock in Trade (Rs.49.50 x 300) DrBush Traders

14850

14850

Feb 07Forward Contract Fair Value DrHedging Reserve

90

90

Feb 07Hedging Reserve Dr (50.80-50) x 300Stock in Trade

240

240


Accounting Entries

Date Entry Debit Credit

Mar 31Foreign Exchange Loss (51-49.50) x 300Bush Traders Inc

450

450

Mar 31Forward Contract Fair Value DrGain on Forward Contract Fair Value

60

60

Mar 31Bush Traders Inc (51 x 300) DrBank

15300

15300

Mar 31Bank DrForward Contract Fair Value

300

300


Accounting Entries

Impact on Profit and Loss Account

Sales 15500

Less: Cost of Sales 14610

Gross Profit 890

Other Gains & Losses

Forex Loss -450

Gain on Forward Contract Fair Value 60 390

EBIT 500


Financial Instruments: Disclosure and Presentation

(IAS 32)


Scope• all types of financial instruments, recognised or not,

and should be applied to contracts to buy or sell a non-financial item that can be settled net– in cash,– by another financial instrument, or– by exchanging financial instruments, as if the contracts

were financial instruments.

• Presentation issues addressed by IAS 32 relate to– distinguishing liabilities from equity– classification of compound instruments– reporting of interest, dividends, losses and gains– offsetting of financial assets and liabilities


Key Concepts

A financial instrument is a contract that gives rise to:

- a financial asset of one entity and

- a financial liability or equity instrument of another entity

Financialasset

CashEquity instrument of another entityContractual right to receive cash or another financial asset or to exchange financial assets or liabilities under potentially favourable conditionsCertain contracts settled in the entity’s own equity

Financialliability

Equity instrument

Contract evidencing a residual interest in

the assets of an entity after deducting all of

its liabilities

Contractual obligation to deliver cash or another financial asset or to ex-change financial asset or liabilities under potentially unfavourable conditionsCertain contracts settled in the entity’s own equity


Disclosures

• classify the instrument, or its component parts, on initial recognition as a financial liability, a financial asset, or an equity instrument

• The issuer of a compound financial instrument that contains both a liability and equity element (for e.g, convertible bonds), should classify the instrument’s component parts separately, – total amount – liability portion = equity portion.

• Interest, dividends, losses, and gains relating to a financial liability should be reported in the income statement as expense or income


Disclosures

• Distributions to holders of an equity instrument should be debited directly to equity.

• A financial asset and a financial liability should be offset only when– a legal enforceable right to set off exists, and– there is an intention either to settle on a net

basis, or to realise the asset and settle the related liability simultaneously.


Financial Instrument Disclosures

(IFRS 7)


Scope

• Applies to all entities and for all risks arising from all financial instruments

• The IFRS requires disclosure of the:– financial instruments vis-à-vis position and performance – carrying values of financial assets and financial liabilities;– nature and extent of the risks exposures – qualitative and quantitative information about exposure to

risks (credit risk, liquidity risk and market risk);– management’s objectives, policies and processes for

managing those risks.


Key Concepts

• Four classes of financial assets– Assets carried at fair value through profit and loss; – held-to-maturity securities; – available for sale securities; and – loans and receivables.

• Two classes of financial liabilities– Liabilities carried at fair value through profit and loss, and – liabilities measured at amortised cost.

• Reconciliations – – Sufficient information must be provided to enable reconciliations

with items presented in the balance sheet.


Disclosures

• A. Determination of Significance for Financial Position and Performance– A1. Balance Sheet

– A2. Income Statement and other comprehensive income statement

– A3. Other Disclosures – accounting policies, hedge accounting and fair value

• B. Nature and Extent of Risks Arising from Financial Instruments– B1. Qualitative disclosures (nature and how arising)—not

necessarily by instrument

– B2. Quantitative disclosures


Balance Sheet Disclosures

Information to be disclosed Financial Instruments Disclosed

Carrying Value All financial assets and financial liabilities

Credit Risk Loans and receivables at fair value, Liabilities at fair value

Reclassification All financial Assets

De-recognition – Transfers of Assets not qualifying

All financial Assets

Collateral given or held Financial assets pledged and pledged assets received

Allowances for credit losses – impairments in a separate account

Financial assets impaired- per class

Structured liabilities with equity components – using interdependent multiple embedded derivatives

Financial liabilities with multiple embedded derivatives

Loans payable – defaults and breaches Loans payable – currently in default


Income Statement Disclosures

Information to be disclosed

Financial Instruments affected

Net gains and losses Trading financial assets and liabilities held at fair value through profit and loss

Designated financial assets and liabilities held at fair value through profit and loss

Net gains and losses All other financial assets not measured at fair value and financial liabilities measured at amortised cost (neither at fair value through profit and loss)

Net gains and losses- amounts recognised and amounts removed from equity to be separated.

Available for sale financial assets

Total Interest Income and total interest expense – using effective interest rate method

Financial assets not measured at fair value and financial liabilities measured at amortised cost (neither at fair value through profit and loss).


Risk Disclosures

Information to be disclosed Financial Instruments affected

Quantitative Disclosures (nature and how arising) – not necessarily by instrument

Each type of risk arising from financial assets and financial liabilities

Quantitative Disclosures Each type of risk arising from financial assets and financial liabilities

Credit risk Financial assets and financial liabilities – per class

Liquidity Risk All financial liabilities

Market Risk Each type of market risk arising from all financial assets and financial liabilities


Risk Related Disclosures

• Qualitative Disclosure– The exposure to risk and how risks arise– The objectives, policies and processes to

manage risk as well as any changes in risk management processes from the previous period.

– The methods used to measure risk as well as any changes in risk measurement processes from the previous period.


Risk Related Disclosures

• Quantitative disclosures - For each type of risk arising from all financial assets an financial liabilities, provide:– Summary quantitative data as supplied

internally to key management personnel– Detail of all risk concentrations– Further information if data provided is not

representative of the risk during period– Credit , liquidity and market risk information

(specified below), where material.


Credit Risk Disclosures

• Exposure for each class of financial asset / liability. • A description of any collateral held• Information regarding the credit quality of financial

assets which are neither past due nor impaired• The carrying value of assets renegotiated• An age analysis of past due items.• Fair value of any collateral held• Analysis of impaired items • A discussion of the nature and carrying value of

collateral acquired and recognised (able).


Risk Disclosures

• Liquidity risk—quantitative disclosures – An analysis of remaining contractual maturities– A description of the management of inherent liquidity risk.

• Market risk—quantitative disclosures - For each type of market risk – Sensitivity analysis, including the impact on income and equity.

Value-at-risk (VAR) may be used, as long as objectives and key parameters are disclosed.

– Methods and assumptions used for sensitivity analysis—as well as changes from the previous period.

– Further information if data provided is not representative of risk during the period.


Risk Disclosures

• Credit risk on the balance sheet – – The credit risk related to loans and receivables as well as

liabilities, both measured at fair value, must be disclosed.

• For loans and receivables designated at fair value through profit and loss, disclose:– Maximum exposure to credit risk– Mitigation by using credit derivatives– The change in fair value attributable to credit risk (not market

risk events) as well as the methods used to achieve this specific credit risk disclosure

– The change in the fair value of credit derivatives – for the current period and cumulatively since loan was designated at fair value.


Risk Disclosures• For liabilities at fair value, disclose:

– The change in fair value attributable to credit risk (not market risk events) as well as the methods used to achieve this specific credit risk disclosure

– The difference between the current carrying amount and the required contractual payment when the liability matures.

• Reclassification of balance sheet items - items are reclassified– between cost, amortised cost or fair value

– out of fair value and the reason therefore

– into fair value and the reason therefore.


Disclosures

• Financial Instruments affected– Qualitative disclosures (nature and how each

type of risk arising from all financial arising) – Quantitative disclosures - Each type of risk

arising from all financial assets and financial liabilities

• Credit Risk Financial assets and financial liabilities - per class

• Liquidity risk - All financial liabilities• Market Risk - Each type of market risk arising from all

financial assets and financial liabilities


Disclosures

• De-recognition of balance sheet items– All transfers of assets not qualifying must be identified

as follows:– The nature of assets transferred which do not qualify

for de-recognition (for example, certain special-purpose vehicles for asset-backed securities)

– The nature of the risks/rewards still exposed– The carrying amount of assets still recognised;

disclose the original total and associated liabilities


Disclosures

• Collateral related to items on the balance sheet– Collateral given or held for financial assets pledged and pledged

assets received– For financial assets pledged, the– carrying amount of assets pledged– terms and conditions of assets pledged– For financial assets received as a pledge and available to be

sold, the– fair value of collateral held if available to be sold or re-pledged

(even if owner does not default)– fair value of collateral sold or re-pledged and whether there is

any obligation to return the collateral at the contract maturity– terms and conditions for the use of collateral


Disclosures

• Allowance for credit losses on the balance sheet– Reconciliation of changes during period should be

provided for all financial assets impaired per class of asset.

• Embedded options in the balance sheet (Structured liabilities with equity components using interdependent multiple embedded derivatives). – Disclose the existence of features and

interdependencies for all financial liabilities with multiple embedded derivatives.


Disclosures

• Loans payable in default– The carrying amount of such liabilities– Details related to the principal, interest,

sinking fund or redemption terms– Any remedy of default or renegotiation of loan

terms which had taken place prior to the issue of the financial statements.


Disclosures

• Hedge accounting in the financial statements - The types of hedges and risks related to hedging activities

Information to be disclosed Financial Instrument Affected

Description of each type of hedge All hedge types

Description of financial instruments designated as hedging instruments Financial Instruments used as hedging instrumentsFair Value of financial instruments designated as hedging instruments

Periods when cash flows will occur – when impact on profit and loss is expected

Cash Flow hedgesDescription of forecast transactions where hedge accounting previously used – no longer expected to occur


DisclosuresInformation to be disclosed Financial Instrument

Affected

Amount recognised in other comprehensive income during the period

Cash Flow hedges

Amount removed from other comprehensive income into profit and loss – per income statement line item

Amount removed from other comprehensive income into initial cost/carrying amount of forecast hedged non-financial instrument

Ineffectiveness recognised in profit and loss

Gains and losses on hedging instrumentFair value hedges

Gains and losses on hedged item attributable to hedged risk

Ineffectiveness recognised in profit and loss Hedges of net instruments in foreign operations


Fair Value Disclosure

• Information that is reconcilable with corresponding amounts in the balance sheet

• Methods and valuation techniques used - market price reference

• Valuation techniques using assumptions not supported by observable/quoted market prices

• the change in fair value recognised in profit and loss, • Effects of reasonable/possible alternatives for assumptions

used in valuation techniques• Carrying amounts and descriptions where fair value not used, • Carrying amount and profit and loss on derecognition of

instruments whose fair value could not be measured reliably


Investment Property (IAS 40)


Scope

• Applies to all investment property – Fair Value– Cost Model

• Classification of a property as investment property.

• Recognition as an asset.• Determination of the carrying amount at• Initial measurement, or• Subsequent measurement.• Disclosure requirements.


Key Concepts

• Investments property includes land and buildings or part of a building or both. It excludes– Owner-occupied property– Property held for sale– Property being constructed or developed– Property held by a lessee under an operating lease– Biological assets– Mining rights and mineral resources



• An investment property is recognised as an asset if– it is probable that the future economic benefits

attributable to the asset will flow to the entity, – the cost of the asset can be reliably measured.

• Initial measurement– At cost - comprising the purchase price and directly

attributable transaction costs. – General administrative expenses as well as start-up

costs are excluded



• Subsequent Measurement– Cost model - Measures investment property at cost

less accumulated depreciation and impairment losses• As per IAS 16• Depreciate• Impairment losses

– Fair value model – Measures investment properties at fair value.

• Do not deduct disposal costs• Changes in income statement• Exemption if cannot reliably determine on ongoing basis


Fair Value

• Include– Current market

conditions– Current lease

arrangements and expected cash inflows and outflows

• Exclude– Estimates based on

atypical arrangements– Transaction cost of sale– Double-count of assets

and liabilities– Expected cash outflows

for improvement– Expected cash inflows

after improvement


Disclosures• Accounting policies

– Criteria to distinguish investment property from owner-occupied property

– Methods and significant assumptions applied in determining fair value

– Extent to which fair value has been determined by an external independent valuer

– Measurement bases, depreciation methods, and rates for investment property valued according to the cost model

– The existence and amounts of restrictions on the investment property

– Material contractual obligations to purchase, construct, or develop investment property or for repairs or enhancement to the property


Disclosures

• Income statement and notes should include the following:– Rental income– Direct operating expenses arising from an

investment property that generated rental income

– Direct operating expenses from an investment property that did not generate rental income


Disclosures

• Balance sheet and notes should include the following:– When an entity applies the fair value model:

• Reconciliation of movements in the carrying amount• When an investment property cannot be measured at fair

value the reconciliation above should be separately disclosed from other investment property shown at fair value.

– When an entity applies the cost model:• All the disclosure requirements of IAS 16 should be

furnished.• The fair value of investment property is disclosed by way of a

note.


Agriculture (IAS 41)


Scope

• IAS 41 applies for the following, when they relate to agricultural activity– Biological assets – Agricultural produce at the point of harvest– Government grants relating to biological assets that

are measured at fair value

• But does not apply to– Land relating to agricultural activity– Intangible assets relating to agricultural activity– Agricultural produce after harvest


Key Concepts

• Biological asset and/or agricultural produce only recognised if: – The enterprise controls the asset as a result

of past events; – It is probable that future economic benefits

associated with the asset will flow to the enterprise; and

– The fair value or cost of the asset can be measured reliably


Measurement

Biological assets

• Initial recognition and at each balance sheet date at: – Fair value less estimated

point-of-sale costs …• Unless estimates of fair value

are determined to be clearly unreliable, in that case

– At cost less depreciation and impairment

Agricultural produce•Fair value less estimated point-of-sale costs•This is cost for inventory valuation purposes

Gains and Losses post Initial recognition are included in Profit and Loss Statement for the period


Government Grants

• Unconditional grant– Grants relating to

biological assets recognised as income when, and only when, it becomes receivable

• Conditional grant– Grants relating to

biological assets only recognised in income when the conditions are met

• If government grant relates to a biological asset measured at its cost less any accumulated depreciation impairment losses, apply IAS 20


Disclosure

• Carrying amount of its biological assets on the face of its balance sheet.

• Aggregate gain or loss • Description - each group of biological assets.

– The nature of its activities involving each group of biological assets

– Non-financial measures or estimates of the physical quantities of each group of biological assets at the end of the period, and

– Output of agricultural produce during the period


Disclosure

• Methods and significant assumptions for fair value • Fair value less estimated point-of sale costs of

agricultural produce harvested during the period• The existence and carrying amounts of biological

assets whose title is restricted, • Carrying amounts of biological assets pledged as

security for liabilities• The amount of commitments for the development

or acquisition of biological assets


Disclosure

• Financial risk management strategies related to its agricultural activity

• Government grants recognised in the financial statements

• Unfulfilled conditions and other contingencies attaching to government grants

• Significant decreases expected in the level of government grants


Disclosure

• Reconciliation of carrying amount from beginning to end of period– decreases due to sales,– decreases due to harvest,– increases resulting from business combinations,– net exchange differences arising on the

translation of financial statements of a foreign entity, and

– other changes.


Business Combinations (IFRS 3)


Scope• IFRS 3 specifies the financial reporting of an

entity when it undertakes a business combination • Except for

– Business combinations involving entities or businesses under common control

– Accounting by a joint venture for its formation– Business combinations of two or more mutual entities– Business combinations by contract alone

Business Combination

Bringing together separate entities into one economic entity as a result of one entity obtaining control over the net assets and operations of other entity.


Scope

• Accounting treatment at date of acquisition.

• Acquisition method of accounting.

• Initial measurement at fair value.

• Recognition of liabilities for terminating or reducing activities.

• Accounting for goodwill.


Combination

• Combination arises out of– Purchase of equity– Purchase of entire net assets– Assumption of liabilities– Purchase of some of the net assets that

constitute a business in itself

• Combination is effected by– Issue of equity– Transfer of cash, cash equivalent, or assets – Combination of these


Application of Acquisition Method

All business combinations within the scope of IFRS 3 are accounted for using the acquisition method

Step 1

Step 2

identifying an acquirer

Step 3 allocating the cost to the assets acquired and liabilities

and contingent liabilities assumed

measuring the cost of the business combination


Cost of Acquisition

• Fair value at the date of exchange of– Assets given,– Liabilities incurred, and– Equity instruments issued– Any cost directly attributable to the business

combination

Date of exchange is the date that an investment is recognised in the financial statements of the acquirer


Goodwill

• Initial recognition – Cost of acquisition - Fair value of identifiable

assets, liabilities, and contingent liabilities

• Goodwill is recorded as an asset

• Measurement in subsequent periods – Cost less any accumulated impairment losses


Disclosures

• All business combinations for the period– Names and description of combining entities of

businesses

– Date of acquisition

– Details of operations of acquirer that has been decided to be disposed of as a result of combination

– Percentage of voting equity instruments acquired

– Information about the cost of acquisition

– Information when equity instruments are issued


Disclosures

• All business combinations for the period– Fair values of each class of acquiree’s

assets and (contingent) liabilities and book values (IFRS) immediately before acquisition

– Amount of any excess recognised in profit or loss

– Description of factors that resulted in goodwill


Disclosures

– The fact that initial accounting for business combination is on a provisional basis and why

– Unless impracticable:• Revenue of the combined entity as

though the acquisition date had been the beginning of the period

• Profit and loss under the same assumption

• Disclose that fact and explain why


Disclosures

– Disclosure of information for business combinations occurring after the balance sheet date but before authorisation for issue unless impracticable

– Disclose information on gains, losses, error corrections and other adjustments relating to former business combinations


Disclosures

• Changes in the carrying amount of goodwill– Gross amount of goodwill and accumulated

impairment loss

– Additional goodwill recognised

– Adjustment due to subsequent recognition of deferred tax assets

– Derecognition on disposal

– Impairment losses recognised during the period

– Net exchange differences

– Any other changes during the period


Consolidated and Separate Statements (IAS 27)


Scope

• The Standard specifies: – When the entity must consolidate the

financial statements of another entity

– the accounting for changes in the level of ownership interest in a subsidiary;

– the accounting for the loss of control of a subsidiary; and

– the information that an entity must disclose


Accounting for Investments

Four scenarios

IFRS 3IAS 27

Control

Consolidate

IAS 31 IAS 28

Significant influence

Proportionate consolidation

Equity accounting

IAS 39

Other

Fair value or cost

Jointcontrol

Power to Govern Shared Power Power to

ParticipateSimple

Investment


Defining Control

• Control has two parts– Power to govern the financial and operating

policies of an entity– Ability to obtain benefits from its activities


Explaining Control

• Existence of control– Investor have more than 50% of voting power

• Significant Influence– Investor hold more than 20% of voting power


Explaining Control

• Control exists if there is power – Over majority of voting rights by virtue of an

agreement with other investors– To govern financial and operating policies

under statute or agreement– To appoint or remove majority members of

board or equivalent body– To cast majority of votes at meeting of board

or equivalent body


Potential Voting Rights and Control

• Are rights presently exercisable?– Yes: Consider to assess control– No: Do not consider

• Rights held by other entities– Consider if rights are presently exercisable


Minority Interest

• Is that portion of the profit or loss, and net assets of a subsidiary attributable to equity interests that are not owned, directly or indirectly through subsidiaries, by the parent.

• Group financial statements– Income statement

• Profit and loss should be allocated to the parent and minority interest on the face of income statement

– Balance sheet• Minority interest within equity, but separate from parent

shareholders’ equity



• Consolidated financial statements should include– the parent and all its foreign and domestic subsidiaries

(including those that have dissimilar activities),– special purpose entities if the substance of relationship

indicates control,– subsidiaries that are classified as “held for sale,” and– subsidiaries held by venture capital entities, mutual

funds, unit trusts, and similar entities.– Subsidiaries acquired for sale and classified as `non

current asset’ under IFRS 5 are excluded


Accounting Treatment• Combination of the financial statements of the

parent and its subsidiaries on a line-by-line basis • The carrying amount of parent’s investment and

its portion of equity of each subsidiary are eliminated.

• Minority interests in the net assets are identified and presented as part of equity.

• Intra-group balances and intra-group transactions are eliminated in full.

• Minority interests in the profit or loss are identified but are not deducted from profit for the period.


Thus it goes



• Consolidated profits are adjusted for the subsidiary’s cumulative preferred dividends.

• An investment is accounted for in terms of IAS 39 from the date that it ceases to be a subsidiary.

• The losses applicable to the minority interest exceeding the their interest in equity of subsidiary is charged against the majority interest.

• Consolidated financial statements should be prepared using uniform accounting policies for like transactions and events.


Disclosures

• More disclosures required– Nature of relationship when parent does not own

more than half of the voting power in a subsidiary– Reasons why owning more than half of voting power

of an investee does not constitute control– Reporting date of the FS of a subsidiary if different

from the parent– the nature and extent of any significant restrictions on

the ability of subsidiaries to transfer funds to parent


Investment in Associates (IAS 28)


Scope

• Applies to each investment in an associate. – Identification and requirements for the significant

influence test.– Prescription of the equity method of accounting for

associates.



• Equity Method: This is applied as follows:– Initial measurement is applied at cost (excluding

borrowing costs).– Subsequent measurement is adjusted for post-

acquisition change in the investor’s share of• the net assets of the associate share of profit or loss

included in income statement, and• the share of other changes included in other

comprehensive income.


Equity Method

Initial cost

+ Share in profits

- Share in losses

- Dividends received

+/- Share in direct changes in equity

= Carrying amount– Unrealised profits/losses from transactions

between investor/ associate must be eliminated



• Discontinue equity accounting – the investor ceases to have significant

influence, but retains whole or part of the investment; and

– the associate operates under severe long-term restrictions that significantly impair its ability to transfer funds.


Disclosures

• Balance sheet and notes – Investment in associates classified as non-current– List and description of significant associates,

• name,• nature of the business, and• proportion of ownership interest or proportion of voting power

– If the investor does not present consolidated financial statements and does not equity account the investment,

• description of what the effect would have been had the equity method been applied should be disclosed.


Disclosures

– The investor’s share of the contingent liabilities and capital commitments of an associate for which it is contingently liable.

• Income statement and notes – investor’s share of:

• profits and losses for the period• prior period items

• Accounting policies - Method used for:– associates– goodwill and negative goodwill– amortisation period for goodwill


Disclosures

• The fair value of investments in associates for which there are published price quotations should be disclosed.

• The reasons for deviating from the significant influence presumptions

• The reporting date of the financial statements of an associate

• The nature and extent of any significant restrictions on the ability of associates to transfer funds to the investor


Interests in Joint Ventures

(IAS 31)


Scope

• The Standard specifically outlines:– Classification as a joint venture.– The distinction between jointly controlled

operations, assets and entities – Accounting requirements for each.


Key Concepts

• Contractual Agreement

• 3 forms– jointly controlled operations, – jointly controlled assets, and – jointly controlled entities

• Proportionate Consolidation



• jointly controlled operations, recognise – the assets that it controls,

– the liabilities that it incurs,

– the expenses that it incurs, and

– its share of the income that it earns from the joint venture

• jointly controlled assets, recognise – its share of the assets,

– any liabilities that it has incurred,

– its share of any liabilities incurred jointly

– any income it receives from the joint venture,

– its share of any expenses incurred by the joint venture, and

– any expenses that it has incurred in respect of its interest in the joint venture.



• jointly controlled operations, recognise – the assets that it controls,– the liabilities that it incurs,– the expenses that it incurs, and– its share of the income that it earns from the joint venture

• jointly controlled assets, recognise – its share of the assets,– any liabilities that it has incurred,– its share of any liabilities incurred jointly – any income it receives from the joint venture,– its share of any expenses incurred by the joint venture, and– any expenses that it has incurred in respect of its interest in the

joint venture.



• An entity should account for its interest

• Proportionate consolidation– Combine the share of assets, liabilities,

income and expense with the same captions in consolidated financial statements; or

– Show the share of assets, liabilities, income and expense as separate line items in consolidated financial statements

• Equity method



• Transactions between a venturer and a joint venture – Eliminate

• Venturer’s share of unrealised profits on sales or contribution of assets to a joint venture.

• Full unrealised loss on sale or contribution of assets to a joint venture.

• Venturer’s share of profits or losses on sales of assets by a joint venture to the venturer.

– Operators or managers of a joint venture should account for any fees as revenue in terms of IAS 18.


Disclosures

• The following contingent liabilities should be shown separately from others:– Incurred jointly with other venturers– Share of a joint venture’s contingent liabilities– Contingencies for liabilities of other venturers

• Amount of commitments shown separately include:– Incurred jointly with other venturers– Share of a joint venture’s commitments


Disclosures

• Present a listing of significant joint ventures, including:– Names– A description of the interests in all joint ventures– The proportion of ownership

• A venturer should disclose – aggregate amounts of each of the current assets,

long-term assets, current liabilities, long-term liabilities, income, and expenses related to the joint ventures.


Noncurrent Assets held for Sale and Discontinued Operations

(IFRS 5)


Scope• Classification and presentation requirements apply

to all non-current assets and disposal groups • Measurement requirements apply to all non-current

assets and disposal groups except the following:– financial assets within the scope of IAS 39, – deferred tax assets, – assets related to employee benefits and insurance

contracts and – certain assets whose subsequent measurement is based

upon fair value (e.g. investment properties).

• The measurement of excluded liabilities and assets continue to be dealt with by the relevant standards.



• Non-current assets (and disposal groups) held for sale– Step 1: Before classification as held for sale, non-current assets

are re-measured in accordance with the relevant standards.– Step 2: Non-current assets (or disposal group) are measured at

the lower of carrying amount and fair value less costs to sell. – Step 3: Losses on a disposal group are allocated to the non-

current assets in that group that are within the scope of the measurement requirements of IFRS 5 in the order of allocation required by IAS 36.

– Step 4: A disposal group continues to be consolidated while held for sale. However, assets held for sale are not depreciated or amortised.


Disposal Group

Disposal group

+

=

Group of assets (must include at least one non-current asset within

the scope of IFRS 5)

Directly associated liabilities

Single Single transactiotransactio

nn

Held for sale?Held for sale?

Yes if carrying amount to be recovered

principally through sale (same criteria as for individual assets)


Subsequent Measurement

• Non-current assets (and disposal groups) held for sale:

– Step 1: Re-measurement of a disposal group, in accordance with the individual standards that deal with that asset / liability.

– Step 2: Subsequently, disposal groups and non-currents assets are re-measured at their fair value less costs to sell but the recognition of gains is restricted.

– Gains / losses on a disposal group are allocated to the non-current assets in that group that are within the scope of the measurement requirements of IFRS 5 in the order of allocation required by IAS 36.


• Step 3: Gains and losses on subsequent re-measurement are included in profit or loss whether or not the asset was (or the disposal group includes assets that were) previously measured at revalued amounts.

• Step 4: Step 1 and 2 are repeated until disposal. Any additional gain or loss should be recognise at the date of sale.

Subsequent Measurement


Disclosure

• Non-current assets held for sale and assets and liabilities (held for sale) of a disposal group should be presented separately

• Income statement or notes should disclose – the amounts and analyses of revenue, expenses, and

pre-tax profit or loss attributable to the discontinued operation, and

– the amount of any gain or loss that is recognised on the disposal of assets or settlement of liabilities and the related income tax expense.


Disclosure

• The cash flow statement – net cash flows attributable to the operating, investing, and

financing activities of the discontinued operation.

• Notes– A description of the non-current asset (or disposal group)– A description of the facts and circumstances of the sale, – The gain, loss, or impairment recognised – IFRS 8 - segment of the non-current asset – Reason and facts for decision to change the plan to sell

the non-current asset (or disposal group),


Events after Balance Sheet Date (IAS 10)


Scope

• Accounting and disclosure of all post balance sheet events, favourable and unfavourable, that occur before the date on which the financial statements are authorised for issue

Information made public

Financial statements authorised

Balance sheet date

Events after the balance sheet date

covered by IAS 10

Events after the balance sheet date

not covered by IAS 10

Start of the reporting period

Shareholdermeeting


Key Concepts

• Adjusting events:– Provide evidence of conditions at the balance sheet

date– Should adjust amounts recognised in the financial

statements

• Non-adjusting events:– Indicate conditions that arose after the balance sheet

date– Should not adjust amounts recognised in the financial

statements • Disclosure requirements for material non-adjusting events


Key Concepts

• Dividends– Dividends ‘declared’ after the balance sheet date

should not be recognised as a liability at the balance sheet date but should be disclosed in notes

– ‘Declared’: appropriately authorised and no longer at the discretion of the entity

• Going concern– If the going concern assumption becomes

inappropriate after the balance sheet date, the financial statements should not be prepared on a going concern basis


Disclosures

• Date of authorisation for issue – Date when financial statements were authorised for

issue– Name of the person who gave the authorisation– Name of the party (if any) with the power to amend

the financial statements after issuance

• Non-adjusting events– Nature of the event– Estimate of the financial effect– A statement if such an estimate cannot be made


Segment Reporting (IFRS 8)


Scope

Mandatory

Applies

Public traded companies

Companies in the process of issuing

equity or debt securities in public market

Other companies

Consolidated and company

only financial statements

Voluntary


Key Concepts

• An operating segment – engages in business activities from which it

earns incomes and incurs expenses.– whose operating results are regularly

reviewed by the chief operating decision maker to make decisions of resource allocation and assess its performance.

– For which discrete financial information is available.


Key Concepts

• Reportable Segment : Similar economic characteristics and similar in the following– The nature of products and services– The nature of the production processes– The type or class of customers for their

products and services– The methods used to distribute their products

or provide their services and

– If, applicable, the nature of the regulatory environment


Key Concepts

• Reportable Segment : Operating segments exceeds quantitative thresholds– Its revenue from sales, segment result, or

assets is greater than or equal to 10 percent of the appropriate total amount of all segments.

External revenue attributable to reportable segments >

75% of total consolidated revenue

If not, additional segments should be

Identified until 75% threshold

is reached


Key Concepts• Additional Requirements

– A reportable segment exceeding the 10% threshold in the previous period continue as reportable segment if of continuing significance

– If reportable segments number exceeds 10 consider whether a practical limit has been reached.

– Comparative information must be given for “first-time” reportable segments

• including restatement of prior year segment information

– Information about all other business activities shall be combined and reported separately in “all other segments” separate from reconciling items.


Accounting Policies

• Group’s accounting policies should be used preparing segment information– However, same accounting policies need not be

applied as if segments were separate stand-alone reporting entities

• Segment accounting policies include the same polices as for the company as a whole, plus: – identification of segments, – method of pricing inter-segment transfers, and – basis for allocating revenues and expenses to

segments



• Segment revenue, expenses, assets and liabilities are either (with few exceptions):– directly attributable to a segment, or

– allocated to a segment on a reasonable basis

• Segment result is segment revenue – segment expenses– determined before adjustments for minority interest

• If revenue or expense is included in segment result– any related asset or liability is included in the segment

assets or liabilities• e.g. depreciation of an asset


Disclosure

• The entity should disclose general information about– Factors used to identify the entity’s reportable

segments, including the basis of the organisation.– Types of products and services from which each

reportable segment derives its revenues.

• Information about reported segments profit and loss, assets and liabilities and the basis of measurement.


Disclosure

• The entity shall disclose– Revenue from external customers & other

segments– Interest revenue and expense– Material items of income and expense– Depreciation and amortisation– Other non-cash expenses– Entity’s interest in profit and loss of associates and

joint ventures – Income tax expense or income


Disclosure

• Reconciliation of the total segment revenues, reported segment profit or loss, segment assets, segment liabilities:– Reportable segment revenues to total revenue– Reportable segment’ measure of profit or loss to

the entity’s profit and loss before tax expense and discontinued operations.

– Reportable segments’ assets to total assets

– Reportable segments’ liabilities to total liabilities


Disclosure

– The total of the reportable segments’ amounts for every other material item of information disclosed to the corresponding amount in the entity.

• The entity should disclose the following if included in the decision making process – The amount of investment in associated and JVs.– The amount of additions to the non-current

assets other than financial instruments, deferred tax assets, post-employment benefit assets and rights arising from insurance contracts.


Disclosure

• Disclose:– The basis of accounting for any transactions between

reportable segments– The nature of any differences between measurements of

• the reportable segments’ profit or loss and the entity’s profit or loss.

• reportable segments’ assets and the entity’s assets.• reportable segments’ liabilities and the entity’s liabilities• changes from prior periods in the measurement methods

– The nature and effect of any asymmetrical allocations to reportable segments.


Disclosure

• Other information to be provided:– External customer revenue for each product / service.– Geographical area information

• External customers revenue from– country of domicile

– foreign operations

• non-current assets located in – country of domicile

– foreign countries

– Extent of reliance on its major customers• revenue from the external customer is 10% or more of the

revenue of the entity.


Related-Party Disclosures (IAS 24)


Scope

• Disclosure of related party relationships, related party transactions and outstanding balances in:– Consolidated financial statements, and– Separate and individual financial statements of a

parent, venturer or investor

• Scope includes state-controlled enterprises


Related Party Relationships

• entities that directly control, are controlled by, or are under common control with the reporting entity

• associates• individuals, including close family members,

owning, directly or indirectly, interest in the voting power in the reporting entity that gives them significant influence

• key management personnel responsible for planning, directing, and controlling the activities


Related Party Relationships• entities in which a substantial interest in the voting

power is held, either directly or indirectly, by individuals (key personnel and close family members) or

• entities over which these people can exercise significant influence

• parties with joint control over the entity,• joint ventures in which the entity is a venturer, and• post-employment benefit plans for the benefit of

employees of an entity, or of any entity that is a related party to that entity.


Disclosures

• Relationships between parent and subsidiaries should be disclosed

• Compensation of key management personnel should be disclosed in total and for each of the following categories of compensation:– Short-term employee benefits– Post-employment benefits– Other long-term benefits– Termination benefits– Equity compensation benefits


Disclosures

• For each related party transaction– Nature of related-party relationships– Nature of the transactions– Transactions and outstanding balances, including:– Amount of transactions and outstanding balances– Terms and conditions– Guarantees given or received– Provisions for doubtful debts and bad and doubtful

debt expense


Financial Reporting in Hyperinflationary Economies

(IAS 29)


Scope

• To financial statements of any entity whose functional currency is a currency of a hyperinflationary economy– Individual financial statements (including the

consolidated FS)– Before any translation into group presentation

currency on consolidation


Hyperinflationary Economies

• The general population prefers to keep its wealth in non-monetary assets or in a relatively stable foreign currency.

• Prices are normally quoted in a stable foreign currency.• Credit transactions take place at prices that compensate

for the expected loss of purchasing power.• Interest, wages, and prices are linked to price indices.• The cumulative inflation rate over 3 years is approaching

or is greater than 100 percent (that is, an average of more than 26 percent per annum).


Restatement

• This IAS requires that the financial statements of an entity operating in a hyperinflationary economy be restated in the measuring unit current at the reporting date.

• Steps to restatementStep 1: Identify the index to be used

Step 2: Restate comparative financial information

Step 3: Restate balance sheet items

Step 4: Restate income statement items

Step 5: Gain or loss on net monetary position


Restatement

• Rules applicable to the restatement of the balance sheet – Items shown at current cost are not restated.– Other items are restated in terms of the rules above.

• Income statement are restated into the measuring unit at balance sheet date by applying the general price index.

• If a gain or loss on the net monetary position is calculated, such an adjustment forms part of the gain or loss on the net monetary position calculated in terms of IAS 29.

• All cash flows are expressed in terms of the measuring unit at balance sheet date.


Restatement• Balance Sheet restatement

– Monetary items: no restatement required

– Index linked assets/liabilities: carried at adjusted amounts in accordance with contractual terms; no restatement required

– Non-monetary assets stated at NRV, market value, fair value at reporting date: no restatement required

– Revalued non-monetary items: restated for movement in index from date of last valuation to reporting date

– All other non-monetary items: restated for movement in index from transaction date to reporting date. However impairment test needed

– Shareholders’ equity: restated from date of previous restatement or date of contribution, whichever is later


Disclosures

• The fact of restatement• The fact that comparatives are restated• Whether the financial statements are based on

the historical cost approach or the current cost approach

• The identity and the level of the price index or stable currency at balance sheet date

• The movement in price index or stable currency during the current and previous financial years


Earning per Share (IAS 33)


Scope

• Applies to entities whose shares are publicly traded

• and prescribes the form of calculation and disclosure of – basic earnings per share– diluted earnings per share.


Basic Earning per Share

• Net profit or loss attributable to ordinary shareholders after deducting preference share dividends and gains or losses on settlement of preference shares (numerator)

divided by • Weighted average number of ordinary shares

outstanding during the period (denominator)

– Ordinary share: equity instrument that is subordinate to all other classes of equity instruments



• Numerator:– Objective: net income available to ordinary

shareholders– Deduct preference dividends:

• After-tax amount on non-cumulative preference shares• After-tax amount of cumulative dividends even if not declared

– Increasing rate preference shares – amortise upfront discount or premium

– Any difference in carrying amount from fair value of consideration paid to settle preference shares is an adjustment to the numerator



• Denominator:– Include shares from date consideration is

receivable – Contingently issuable shares – include from

date conditions satisfied– Passage of time is not a “condition”– Adjust retrospectively for events that have

changed the number of ordinary shares without a change in resources (e.g. share dividend, share split)


Diluted Earning per Share

• Numerator as in basic EPS adjusted for effects of all dilutive potential ordinary shares– For example, for convertible preference shares or bonds,

adjust for:• After-tax effect of dividends on dilutive potential ordinary shares• Interest recognised in period on dilutive convertible bonds• Other changes resulting from assumed conversion

• Potential ordinary share: financial instrument or other contract that may entitle its holder to ordinary shares– E.g. warrants, options, convertible preference shares,

convertible bonds



• Denominator as in basic EPS adjusted for effects of all dilutive potential ordinary shares:– On a weighted average basis– Assumption of conversion at beginning of period

or, if later, at date of issue

• Treated as dilutive only when conversion would decrease net profit from continuing operations per share



• Control number– Use profit/loss from continuing operations attributable to parent to

determine whether POS are dilutive or antidilutive

• Options and warrants– Determine bonus element based on average market price

• Contingently issuable potential ordinary shares – Include on same basis as in basic EPS

• Contracts that may be settled in cash or shares– At entity’s option – assume settlement in shares– At holder’s option – use most dilutive form of settlement

• POS issued by subsidiaries, JVs, associates– If POS of parent entity shares, then include in parent EPS calculation

• Unvested options– Treat as though vested


Other Issues

• Retrospective adjustments– Restate all basic and diluted EPS for all periods presented for effect of

share issues without a change in resources (eg., share split or bonus)– Do not restate diluted EPS for changes in assumptions or for conversion of

POS

• Prospective adjustments– Adjust basic EPS for shares issued and diluted EPS for potential ordinary

shares issued with a change in resources

• Two-class shares– Calculate EPS for each class based on profit participation rights

• EPS of component of net profit– If EPS also computed on a component of net profit other than net profit or

loss, then the same principles apply– Disclose in notes only


Disclosures

• Basic EPS and diluted EPS are shown with equal prominence on the face of the income statement for each class of ordinary share with different rights for:– Profit or loss from continuing operations

attributable to ordinary equity holders of the parent entity

– Profit or loss attributable to ordinary equity holders of the parent entity

– Any reported discontinued operation


Interim Financial Reporting (IAS 34)


Scope

• Applies to all entities that are required by law or regulatory bodies, or that voluntarily elect to publish interim financial reports covering a period shorter than a full financial year

• Interim period: financial reporting period shorter than a full financial year

• Interim financial report: financial report containing either– Complete set of financial statements, or – Set of condensed financial statements for the interim

period


Components

• Condensed balance sheet• Condensed comprehensive income statement

– Condensed single statement– Separate income statement and statement of

comprehensive income.

• Condensed statement of changes in equity• Condensed cash flow statement• Selected explanatory notes


Disclosures

• Purpose: provide updates and focus on new issues and activities

• Minimum: Same headings and sub-totals as in complete prior set of financial statements

• Basic and diluted earnings per share on face of income statement

• If complete set of financial statements published, IAS 1 applies to form and content– IAS 34 still applies to recognition and measurement


Disclosures

• Changes in accounting policies and methods compared with most recent annual financial statements

• Segment revenue and result for operating segments• Seasonal effects• Nature and amounts of unusual items• Changes in estimates, contingent liabilities & assets• Issues, repurchases and repayments of debt and

equity


Disclosures

• Dividends paid• Material subsequent events• Business combinations, acquisitions,

disposals of subsidiaries, long-term investments, restructurings and discontinued operations

• Changes in contingent liabilities or contingent assets

• Disclosure of compliance with IAS 34


Disclosures

• In annual financial Statement– Significant changes in estimate in current

interim period disclosed (nature and amount) in a note to annual financial statements if no separate interim report published

• E.g. actuarial gains/losses on pension obligations recognised directly in equity in the fourth quarter


Exploration for and Evaluation of Mineral Resources (IFRS 6)


Scope

• Applies to exploration and evaluation expenditures– the initial recognition criteria for exploration and

evaluation expenditure, – the measurement basis thereafter (cost or revaluation

model) and – testing for any subsequent impairment of asset value

• Does not apply to expenditures incurred:– In activities that precede obtaining the legal right to

explore (pre-exploration activities)– After the technical feasibility and commercial viability of

extracting a mineral resource are demonstrable (development activities)



• Exploration and evaluation assets – measured at cost.

• initial measurement of exploration and evaluation assets include expenditure of– acquisition of rights to explore;– topographical, geological, geochemical, and geophysical

studies;– exploratory drilling;– trenching;– sampling; and– activities in relation to evaluating technical feasibility and

commercial viability of extracting a mineral resource.



• Expenditures not to be included – the development of a mineral resource once technical

feasibility and commercial viability of extracting a mineral resource have been established, and

– administration and other general overhead costs.

• Cost Model• Revaluation Model• Assess for Impairment annually


Disclosures

• information that identifies and explains the amounts recognised

• its accounting policies – for exploration and evaluation expenditures;– for the recognition of exploration and evaluation assets;

• cash flows arising from the exploration for and evaluation of mineral resources; and

• the level at which the entity assesses exploration and evaluation assets for impairment.

Documents

© 2012: South-Asian Management Technologies Foundation International Financial Reporting Standards Self Study QAS CPE Program