International Accounting Standards Share on email Share on facebook Share on twitter Share on linkedin More Sharing Services

International Accounting Standards (IASs) were issued by the antecedent International Accounting Standards Council (IASC), and endorsed and amended by the International Accounting Standards Board (IASB). The IASB will also reissue standards in this series where it considers it appropriate.

# Name Issued

IAS 1 Presentation of Financial Statements 2007*

IAS 2 Inventories 2005*

IAS 3Consolidated Financial StatementsSuperseded in 1989 by IAS 27 and IAS 28

1976

IAS 4Depreciation AccountingWithdrawn in 1999

IAS 5Information to Be Disclosed in Financial StatementsSuperseded by IAS 1 effective 1 July 1998

1976

IAS 6Accounting Responses to Changing PricesSuperseded by IAS 15, which was withdrawn December 2003

IAS 7 Statement of Cash Flows 1992

IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors 2003

IAS 9Accounting for Research and Development ActivitiesSuperseded by IAS 38 effective 1 July 1999

IAS 10 Events After the Reporting Period 2003

IAS 11Construction ContractsWill be superseded by IFRS 15 as of 1 January 2017

1993

IAS 12 Income Taxes 1996*

IAS 13Presentation of Current Assets and Current LiabilitiesSuperseded by IAS 39 effective 1 July 1998

IAS 14Segment ReportingSuperseded by IFRS 8 effective 1 January 2009

1997

IAS 15Information Reflecting the Effects of Changing PricesWithdrawn December 2003

2003

IAS 16 Property, Plant and Equipment 2003*

IAS 17 Leases 2003*

IAS 18RevenueWill be superseded by IFRS 15 as of 1 January 2017

1993*

IAS 19Employee Benefits (1998)Superseded by IAS 19 (2011) effective 1 January 2013

1998

IAS 19 Employee Benefits (2011) 2011*

IAS 20 Accounting for Government Grants and Disclosure of Government Assistance 1983

IAS 21 The Effects of Changes in Foreign Exchange Rates 2003*

IAS 22Business CombinationsSuperseded by IFRS 3 effective 31 March 2004

1998*

IAS 23 Borrowing Costs 2007*

IAS 24 Related Party Disclosures 2009*

IAS 25Accounting for InvestmentsSuperseded by IAS 39 and IAS 40 effective 2001

IAS 26 Accounting and Reporting by Retirement Benefit Plans 1987

IAS 27 Separate Financial Statements (2011) 2011

IAS 27Consolidated and Separate Financial StatementsSuperseded by IFRS 10, IFRS 12 and IAS 27 (2011) effective 1 January 2013

2003

IAS 28 Investments in Associates and Joint Ventures (2011) 2011

IAS 28Investments in AssociatesSuperseded by IAS 28 (2011) and IFRS 12 effective 1 January 2013

2003

IAS 29 Financial Reporting in Hyperinflationary Economies 1989

IAS 30Disclosures in the Financial Statements of Banks and Similar Financial InstitutionsSuperseded by IFRS 7 effective 1 January 2007

1990

IAS 31Interests In Joint VenturesSuperseded by IFRS 11 and IFRS 12 effective 1 January 2013

2003*

IAS 32 Financial Instruments: Presentation 2003*

IAS 33 Earnings Per Share 2003*

IAS 34 Interim Financial Reporting 1998

IAS 35Discontinuing Operations Superseded by IFRS 5 effective 1 January 2005

1998

IAS 36 Impairment of Assets 2004*

IAS 37 Provisions, Contingent Liabilities and Contingent Assets 1998

IAS 38 Intangible Assets 2004*

IAS 39Financial Instruments: Recognition and MeasurementSuperseded by IFRS 9 where IFRS 9 is applied

2003*

IAS 40 Investment Property 2003*

IAS 41 Agriculture 2001

History of IAS 1

Date Development Comments

March 1974 Exposure Draft E1 Disclosure of Accounting Policies

January 1975 IAS 1 Disclosure of Accounting Policies issuedOperative for periods beginning on or after 1 January 1975

June 1975Exposure Draft E5 Information to Be Disclosed in Financial Statements published

October 1976 IAS 5 Information to Be Disclosed in Financial Statements issuedOperative for periods beginning on or after 1 January 1975

July 1978Exposure Draft E14 Current Assets and Current Liabilities published

November 1979IAS 13 Presentation of Current Assets and Current Liabilities issued

Operative for periods beginning on or after 1 January 1981

1994 IAS 1, IAS 5, and IAS 13 reformatted

July 1996Exposure Draft E53 Presentation of Financial Statements published

August 1997IAS 1 Presentation of Financial Statements (1997) issued

(Supersedes IAS 1 (1975), IAS 5, and IAS 13 (1979))

Operative for periods beginning on or after 1 July 1998

18 December 2003 IAS 1 Presentation of Financial Statements (2003) issuedEffective for annual periods beginning on or after 1 January 2005

18 August 2005 Amended by Amendment to IAS 1 — Capital Disclosures Effective for annual periods beginning on or after 1 January 2007

16 March 2006 Exposure Draft Proposed Amendments to IAS 1 – A Revised Presentation published

Comment deadline 17 July 2006

22 June 2006 Exposure Draft Financial Instruments Puttable at Fair Value and Obligations Arising on Liquidation published

Comment deadline 23 October 2006

6 September 2007 IAS 1 Presentation of Financial Statements (2007) issuedEffective for annual periods beginning on or after 1 January 2009

14 February 2008 Amended by Puttable Financial Instruments and Obligations Arising on Liquidation

Effective for annual reporting periods beginning on or after 1 January 2009

22 May 2008 Amended by Annual Improvements to IFRSs 2007 (classification of derivatives as current or non-current)

Effective for annual reporting periods beginning on or after 1 January 2009

16 April 2009 Amended by Improvements to IFRSs 2009 (classification of liabilities as current)

Effective for annual periods beginning on or after 1 January 2010

6 May 2010 Amended by Improvements to IFRSs 2010 (clarification of statement of changes in equity)

Effective for annual periods beginning on or after 1 January 2011

27 May 2010 Exposure Draft ED/2010/5 Presentation of Items of Other Comprehensive Income published

Comment deadline 30 September 2010

16 June 2011 Amended by Presentation of Items of Other Comprehensive Income

Effective for annual periods beginning on or after 1 July 2012

17 May 2012 Amended by Annual Improvements 2009-2011 Cycle (comparative information)

Effective for annual periods beginning on or after 1 July 2013

Objective of IAS 1

The objective of IAS 1 (2007) is to prescribe the basis for presentation of general purpose financial statements, to ensure comparability both with the entity's financial statements of previous periods and with the financial statements of other entities. IAS 1 sets out the overall requirements for the presentation of financial statements, guidelines for their structure and minimum requirements for their content. [IAS 1.1] Standards for recognising, measuring, and disclosing specific transactions are addressed in other Standards and Interpretations. [IAS 1.3]

Scope

IAS 1 applies to all general purpose financial statements that are prepared and presented in accordance with International Financial Reporting Standards (IFRSs). [IAS 1.2]

General purpose financial statements are those intended to serve users who are not in a position to require financial reports tailored to their particular information needs. [IAS 1.7]

Objective of financial statements

The objective of general purpose financial statements is to provide information about the financial position, financial performance, and cash flows of an entity that is useful to a wide range of users in making economic decisions. To meet that objective, financial statements provide information about an entity's: [IAS 1.9]

assets liabilities equity income and expenses, including gains and losses contributions by and distributions to owners (in their capacity as owners) cash flows.

That information, along with other information in the notes, assists users of financial statements in predicting the entity's future cash flows and, in particular, their timing and certainty.

Components of financial statements

A complete set of financial statements includes: [IAS 1.10]

a statement of financial position (balance sheet) at the end of the period a statement of profit or loss and other comprehensive income for the period (presented as a single

statement, or by presenting the profit or loss section in a separate statement of profit or loss, immediately followed by a statement presenting comprehensive income beginning with profit or loss)

a statement of changes in equity for the period a statement of cash flows for the period notes, comprising a summary of significant accounting policies and other explanatory notes comparative information prescribed by the standard.

An entity may use titles for the statements other than those stated above.  All financial statements are required to be presented with equal prominence. [IAS 1.10] 

When an entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements, or when it reclassifies items in its financial statements, it must also present a statement of financial position (balance sheet) as at the beginning of the earliest comparative period.

Reports that are presented outside of the financial statements – including financial reviews by management, environmental reports, and value added statements – are outside the scope of IFRSs. [IAS 1.14]

Fair presentation and compliance with IFRSs

The financial statements must "present fairly" the financial position, financial performance and cash flows of an entity. Fair presentation requires the faithful representation of the effects of transactions, other events, and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the Framework. The application of IFRSs, with additional disclosure when necessary, is presumed to result in financial statements that achieve a fair presentation. [IAS 1.15]

IAS 1 requires an entity whose financial statements comply with IFRSs to make an explicit and unreserved statement of such compliance in the notes. Financial statements cannot be described as complying with IFRSs unless they comply with all the requirements of IFRSs (which includes International Financial Reporting Standards, International Accounting Standards, IFRIC Interpretations and SIC Interpretations). [IAS 1.16]

Inappropriate accounting policies are not rectified either by disclosure of the accounting policies used or by notes or explanatory material. [IAS 1.18]

IAS 1 acknowledges that, in extremely rare circumstances, management may conclude that compliance with an IFRS requirement would be so misleading that it would conflict with the objective of financial statements set out in the Framework. In such a case, the entity is required to depart from the IFRS requirement, with detailed disclosure of the nature, reasons, and impact of the departure. [IAS 1.19-21]

Going concern

The Conceptual Framework notes that financial statements are normally prepared assuming the entity is a going concern and will continue in operation for the foreseeable future. [Conceptual Framework, paragraph 4.1]

IAS 1 requires management to make an assessment of an entity's ability to continue as a going concern.  If management has significant concerns about the entity's ability to continue as a going concern, the uncertainties must be disclosed. If management concludes that the entity is not a going concern, the financial statements should not be prepared on a going concern basis, in which case IAS 1 requires a series of disclosures. [IAS 1.25]

Accrual basis of accounting

IAS 1 requires that an entity prepare its financial statements, except for cash flow information, using the accrual basis of accounting. [IAS 1.27]

Consistency of presentation

The presentation and classification of items in the financial statements shall be retained from one period to the next unless a change is justified either by a change in circumstances or a requirement of a new IFRS. [IAS 1.45]

Materiality and aggregation

Each material class of similar items must be presented separately in the financial statements. Dissimilar items may be aggregated only if the are individually immaterial. [IAS 1.29]

Offsetting

Assets and liabilities, and income and expenses, may not be offset unless required or permitted by an IFRS. [IAS 1.32]

Comparative information

IAS 1 requires that comparative information to be disclosed in respect of the previous period for all amounts reported in the financial statements, both on the face of the financial statements and in the notes, unless another Standard requires otherwise. Comparative information is provided for narrative and descriptive where it is relevant to understanding the financial statements of the current period. [IAS 1.38]

An entity is required to present at least two of each of the following primary financial statements: [IAS 1.38A]

statement of financial position* statement of profit or loss and other comprehensive income separate statements of profit or loss (where presented) statement of cash flows statement of changes in equity related notes for each of the above items.

* A third statement of financial position is required to be presented if the entity retrospectively applies an accounting policy, restates items, or reclassifies items, and those adjustments had a material effect on the information in the statement of financial position at the beginning of the comparative period. [IAS 1.40A]

Where comparative amounts are changed or reclassified, various disclosures are required. [IAS 1.41]

Structure and content of financial statements in general

IAS 1 requires an entity to clearly identify: [IAS 1.49-51]

the financial statements, which must be distinguished from other information in a published document each financial statement and the notes to the financial statements.

In addition, the following information must be displayed prominently, and repeated as necessary: [IAS 1.51]

the name of the reporting entity and any change in the name whether the financial statements are a group of entities or an individual entity information about the reporting period the presentation currency (as defined by IAS   21 The Effects of Changes in Foreign Exchange Rates) the level of rounding used (e.g. thousands, millions).

Reporting period

There is a presumption that financial statements will be prepared at least annually. If the annual reporting period changes and financial statements are prepared for a different period, the entity must disclose the reason for the change and state that amounts are not entirely comparable. [IAS 1.36]

Statement of financial position (balance sheet)

Current and non-current classification

An entity must normally present a classified statement of financial position, separating current and non-current assets and liabilities, unless presentation based on liquidity provides information that is reliable. [IAS 1.60] In either case, if an asset (liability) category combines amounts that will be received (settled) after 12 months with assets (liabilities) that will be received (settled) within 12 months, note disclosure is required that separates the longer-term amounts from the 12-month amounts. [IAS 1.61]

Current assetsare assets that are: [IAS 1.66]

expected to be realised in the entity's normal operating cycle held primarily for the purpose of trading expected to be realised within 12 months after the reporting period cash and cash equivalents (unless restricted).

All other assets are non-current. [IAS 1.66]

Current liabilitiesare those: [IAS 1.69]

expected to be settled within the entity's normal operating cycle held for purpose of trading due to be settled within 12 months for which the entity does not have an unconditional right to defer settlement beyond 12 months (settlement

by the issue of equity instruments does not impact classification).Other liabilities are non-current.

When a long-term debt is expected to be refinanced under an existing loan facility, and the entity has the discretion to do so, the debt is classified as non-current, even if the liability would otherwise be due within 12 months. [IAS 1.73]

If a liability has become payable on demand because an entity has breached an undertaking under a long-term loan agreement on or before the reporting date, the liability is current, even if the lender has agreed, after the reporting date and before the authorisation of the financial statements for issue, not to demand payment as a consequence of the breach. [IAS 1.74] However, the liability is classified as non-current if the lender agreed by the reporting date to provide a period of grace ending at least 12 months after the end of the reporting period, within which the entity can rectify the breach and during which the lender cannot demand immediate repayment. [IAS 1.75]

Minimum line items

The minimum line items to be included on the face of the statement of financial position are: [IAS 1.54](a) property, plant and equipment(b) investment property(c) intangible assets(d) financial assets (excluding amounts shown under (e), (h), and (i))(e) investments accounted for using the equity method(f) biological assets(g) inventories(h) trade and other receivables(i) cash and cash equivalents(j) assets held for sale(k) trade and other payables(l) provisions(m) financial liabilities (excluding amounts shown under (k) and (l))(n) current tax liabilities and current tax assets, as defined in IAS 12(o) deferred tax liabilities and deferred tax assets, as defined in IAS 12

(p) liabilities included in disposal groups(q) non-controlling interests, presented within equity(r) issued capital and reserves attributable to owners of the parent.

Additional line items, headings and subtotals may be needed to fairly present the entity's financial position. [IAS 1.55] 

Further sub-classifications of line items presented are made in the statement or in the notes, for example: [IAS 1.77-78]:

classes of property, plant and equipment disaggregation of receivables disaggregation of inventories in accordance with IAS   2 Inventories disaggregation of provisions into employee benefits and other items classes of equity and reserves.

Format of statement

IAS 1 does not prescribe the format of the statement of financial position. Assets can be presented current then non-current, or vice versa, and liabilities and equity can be presented current then non-current then equity, or vice versa. A net asset presentation (assets minus liabilities) is allowed. The long-term financing approach used in UK and elsewhere – fixed assets + current assets - short term payables = long-term debt plus equity – is also acceptable.

Share capital and reserves

Regarding issued share capital and reserves, the following disclosures are required: [IAS 1.79]

numbers of shares authorised, issued and fully paid, and issued but not fully paid par value (or that shares do not have a par value) a reconciliation of the number of shares outstanding at the beginning and the end of the period description of rights, preferences, and restrictions treasury shares, including shares held by subsidiaries and associates shares reserved for issuance under options and contracts a description of the nature and purpose of each reserve within equity.

Additional disclosures are required in respect of entities without share capital and where an entity has reclassified puttable financial instruments.  [IAS 1.80-80A]

Statement of profit or loss and other comprehensive income

Concepts of profit or loss and comprehensive income

Profit or loss is defined as "the total of income less expenses, excluding the components of other comprehensive income".  Other comprehensive income is defined as comprising "items of income and expense (including reclassification adjustments) that are not recognised in profit or loss as required or permitted by other IFRSs".  Total comprehensive income is defined as "the change in equity during a period resulting from transactions and other events, other than those changes resulting from transactions with owners in their capacity as owners". [IAS 1.7]

Comprehensive incomefor the period  =  Profit

or loss  +  Othercomprehensive income

All items of income and expense recognised in a period must be included in profit or loss unless a Standard or an Interpretation requires otherwise. [IAS 1.88] Some IFRSs require or permit that some components to be excluded from profit or loss and instead to be included in other comprehensive income.

Examples of items recognised outside of profit or loss Changes in revaluation surplus where the revaluation method is used under IAS   16 Property, Plant and

Equipment and IAS   38 Intangible Assets Remeasurements of a net defined benefit liability or asset recognised in accordance with IAS   19 Employee

Benefits (2011) Exchange differences from translating functional currencies into presentation currency in accordance with

IAS   21 The Effects of Changes in Foreign Exchange Rates Gains and losses on remeasuring available-for-sale financial assets in accordance with IAS   39 Financial

Instruments: Recognition and Measurement The effective portion of gains and losses on hedging instruments in a cash flow hedge under IAS 39 or

IFRS   9 Financial Instruments Gains and losses on remeasuring an investment in equity instruments where the entity has elected to present

them in other comprehensive income in accordance with IFRS 9 The effects of changes in the credit risk of a financial liability designated as at fair value through profit and

loss under IFRS 9.

In addition, IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors requires the correction of errors and the effect of changes in accounting policies to be recognised outside profit or loss for the current period. [IAS 1.89]

Choice in presentation and basic requirements

An entity has a choice of presenting:

a single statement of profit or loss and other comprehensive income, with profit or loss and other comprehensive income presented in two sections, or

two statements: o a separate statement of profit or losso a statement of comprehensive income, immediately following the statement of profit or loss and

beginning with profit or loss [IAS 1.10A]

The statement(s) must present: [IAS 1.81A]

profit or loss total other comprehensive income comprehensive income for the period an allocation of profit or loss and comprehensive income for the period between non-controlling interests

and owners of the parent.

Profit or loss section or statement

The following minimum line items must be presented in the profit or loss section (or separate statement of profit or loss, if presented): [IAS 1.82-82A]

revenue gains and losses from the derecognition of financial assets measured at amortised cost finance costs share of the profit or loss of associates and joint ventures accounted for using the equity method certain gains or losses associated with the reclassification of financial assets tax expense

a single amount for the total of discontinued items

Expenses recognised in profit or loss should be analysed either by nature (raw materials, staffing costs, depreciation, etc.) or by function (cost of sales, selling, administrative, etc). [IAS 1.99] If an entity categorises by function, then additional information on the nature of expenses – at a minimum depreciation, amortisation and employee benefits expense – must be disclosed. [IAS 1.104]

Other comprehensive income section

The other comprehensive income section is required to present line items which are classified by their nature, and grouped between those items that will or will not be reclassified to profit and loss in subsequent periods. [IAS 1.82A]

Other requirements

Additional line items may be needed to fairly present the entity's results of operations. [IAS 1.85]

Items cannot be presented as 'extraordinary items' in the financial statements or in the notes. [IAS 1.87]

Certain items must be disclosed separately either in the statement of comprehensive income or in the notes, if material, including: [IAS 1.98]

write-downs of inventories to net realisable value or of property, plant and equipment to recoverable amount, as well as reversals of such write-downs

restructurings of the activities of an entity and reversals of any provisions for the costs of restructuring disposals of items of property, plant and equipment disposals of investments discontinuing operations litigation settlements other reversals of provisions

Statement of cash flows

Rather than setting out separate requirements for presentation of the statement of cash flows, IAS 1.111 refers to IAS   7 Statement of Cash Flows.

Statement of changes in equity

IAS 1 requires an entity to present a separate statement of changes in equity. The statement must show: [IAS 1.106]

total comprehensive income for the period, showing separately amounts attributable to owners of the parent and to non-controlling interests

the effects of any retrospective application of accounting policies or restatements made in accordance with IAS   8 , separately for each component of other comprehensive income

reconciliations between the carrying amounts at the beginning and the end of the period for each component of equity, separately disclosing:

o profit or losso other comprehensive income*o transactions with owners, showing separately contributions by and distributions to owners and

changes in ownership interests in subsidiaries that do not result in a loss of control

* An analysis of other comprehensive income by item is required to be presented either in the statement or in the notes. [IAS 1.106A]

The following amounts may also be presented on the face of the statement of changes in equity, or they may be presented in the notes: [IAS 1.107]

amount of dividends recognised as distributions the related amount per share.

Notes to the financial statements

The notes must: [IAS 1.112]

present information about the basis of preparation of the financial statements and the specific accounting policies used

disclose any information required by IFRSs that is not presented elsewhere in the financial statements and provide additional information that is not presented elsewhere in the financial statements but is relevant to

an understanding of any of them

Notes are presented in a systematic manner and cross-referenced from the face of the financial statements to the relevant note. [IAS 1.113]

IAS 1.114 suggests that the notes should normally be presented in the following order:

a statement of compliance with IFRSs a summary of significant accounting policies applied, including: [IAS 1.117]

o the measurement basis (or bases) used in preparing the financial statementso the other accounting policies used that are relevant to an understanding of the financial statements

supporting information for items presented on the face of the statement of financial position (balance sheet), statement(s) of profit or loss and other comprehensive income, statement of changes in equity and statement of cash flows, in the order in which each statement and each line item is presented

other disclosures, including: o contingent liabilities (see IAS 37) and unrecognised contractual commitmentso non-financial disclosures, such as the entity's financial risk management objectives and policies

(see IFRS   7 Financial Instruments: Disclosures)

Other disclosures

Judgements and key assumptions

An entity must disclose, in the summary of significant accounting policies or other notes, the judgements, apart from those involving estimations, that management has made in the process of applying the entity's accounting policies that have the most significant effect on the amounts recognised in the financial statements. [IAS 1.122]

Examples cited in IAS 1.123 include management's judgements in determining:

when substantially all the significant risks and rewards of ownership of financial assets and lease assets are transferred to other entities

whether, in substance, particular sales of goods are financing arrangements and therefore do not give rise to revenue.

An entity must also disclose, in the notes, information about the key assumptions concerning the future, and other key sources of estimation uncertainty at the end of the reporting period, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. [IAS 1.125] These disclosures do not involve disclosing budgets or forecasts. [IAS 1.130]

Dividends

In addition to the distributions information in the statement of changes in equity (see above), the following must be disclosed in the notes: [IAS 1.137]

the amount of dividends proposed or declared before the financial statements were authorised for issue but which were not recognised as a distribution to owners during the period, and the related amount per share

the amount of any cumulative preference dividends not recognised.

Capital disclosures

An entity discloses information about its objectives, policies and processes for managing capital. [IAS 1.134] To comply with this, the disclosures include: [IAS 1.135]

qualitative information about the entity's objectives, policies and processes for managing capital, including>

o description of capital it manageso nature of external capital requirements, if anyo how it is meeting its objectives

quantitative data about what the entity regards as capital changes from one period to another whether the entity has complied with any external capital requirements and if it has not complied, the consequences of such non-compliance.

Puttable financial instruments

IAS 1.136A requires the following additional disclosures if an entity has a puttable instrument that is classified as an equity instrument:

summary quantitative data about the amount classified as equity the entity's objectives, policies and processes for managing its obligation to repurchase or redeem the

instruments when required to do so by the instrument holders, including any changes from the previous period

the expected cash outflow on redemption or repurchase of that class of financial instruments and information about how the expected cash outflow on redemption or repurchase was determined.

Other information

The following other note disclosures are required by IAS 1 if not disclosed elsewhere in information published with the financial statements: [IAS 1.138]

domicile and legal form of the entity country of incorporation address of registered office or principal place of business description of the entity's operations and principal activities if it is part of a group, the name of its parent and the ultimate parent of the group if it is a limited life entity, information regarding the length of the life

Terminology

The 2007 comprehensive revision to IAS 1 introduced some new terminology. Consequential amendments were made at that time to all of the other existing IFRSs, and the new terminology has been used in subsequent IFRSs including amendments. IAS 1.8 states: "Although this Standard uses the terms 'other comprehensive income', 'profit or loss' and 'total comprehensive income', an entity may use other terms to describe the totals as long as the meaning is clear. For example, an entity may use the term 'net income' to describe profit or loss." Also, IAS 1.57(b) states: "The descriptions used and the ordering of items or aggregation of similar items may be amended according to the nature of the entity and its transactions, to provide information that is relevant to an understanding of the entity's financial position."Term before 2007 revision of IAS 1 Term as amended by IAS 1 (2007)balance sheet statement of financial positioncash flow statement statement of cash flows

income statement statement of comprehensive income (income statement is retained in case of a two-statement approach)

recognised in the income statement recognised in profit or lossrecognised [directly] in equity (only for OCI components) recognised in other comprehensive income

recognised [directly] in equity (for recognition both in OCI and equity) recognised outside profit or loss (either in OCI or equity)

removed from equity and recognised in profit or loss ('recycling')

reclassified from equity to profit or loss as a reclassification adjustment

Standard or/and Interpretation IFRSson the face of inequity holders owners (exception for 'ordinary equity holders')balance sheet date end of the reporting periodreporting date end of the reporting periodafter the balance sheet date after the reporting period

IAS-2 INVENTORIES

IAS 2 Inventories contains the requirements on how to account for most types of inventory. The standard requires inventories to be measured at the lower of cost and net realisable value (NRV) and outlines acceptable methods of determining cost, including specific identification (in some cases), first-in first-out (FIFO) and weighted average cost.

A revised version of IAS 2 was issued in December 2003 and applies to annual periods beginning on or after 1 January 2005.

History of IAS 2

Date Development Comments

September 1974Exposure Draft E2 Valuation and Presentation of Inventories in the Context of the Historical Cost System published

October 1975IAS 2 Valuation and Presentation of Inventories in the Context of the Historical Cost System issued

August 1991 Exposure Draft E38 Inventories published

December 1993 IAS 9 (1993) Inventories issuedOperative for annual financial statements covering periods beginning on or after 1 January 1995

18 December 2003 IAS 2 Inventories issuedEffective for annual periods beginning on or after 1 January 2005

Related Interpretations

IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine

SIC-1 Consistency - Different Cost Formulas for Inventories. SIC-1 was superseded by and incorporated into IAS 2 (Revised 2003).

Summary of IAS 2

Objective of IAS 2

The objective of IAS 2 is to prescribe the accounting treatment for inventories. It provides guidance for determining the cost of inventories and for subsequently recognising an expense, including any write-down to net realisable value. It also provides guidance on the cost formulas that are used to assign costs to inventories.

Scope

Inventories include assets held for sale in the ordinary course of business (finished goods), assets in the production process for sale in the ordinary course of business (work in process), and materials and supplies that are consumed in production (raw materials). [IAS 2.6]

However, IAS 2 excludes certain inventories from its scope: [IAS 2.2]

work in process arising under construction contracts (see IAS 11 Construction Contracts)

financial instruments (see IAS 39 Financial Instruments: Recognition and Measurement)

biological assets related to agricultural activity and agricultural produce at the point of harvest (see IAS 41 Agriculture).

Also, while the following are within the scope of the standard, IAS 2 does not apply to the measurement of inventories held by: [IAS 2.3]

producers of agricultural and forest products, agricultural produce after harvest, and minerals and mineral products, to the extent that they are measured at net realisable value (above or below cost) in accordance with well-established practices in those industries. When such inventories are measured at net realisable value, changes in that value are recognised in profit or loss in the period of the change

commodity brokers and dealers who measure their inventories at fair value less costs to sell. When such inventories are measured at fair value less costs to sell, changes in fair value less costs to sell are recognised in profit or loss in the period of the change.

Fundamental principle of IAS 2

Inventories are required to be stated at the lower of cost and net realisable value (NRV). [IAS 2.9]

Measurement of inventories

Cost should include all: [IAS 2.10]

costs of purchase (including taxes, transport, and handling) net of trade discounts received

costs of conversion (including fixed and variable manufacturing overheads) and

other costs incurred in bringing the inventories to their present location and condition

IAS   23 Borrowing Costs identifies some limited circumstances where borrowing costs (interest) can be included in cost of inventories that meet the definition of a qualifying asset. [IAS 2.17 and IAS 23.4]

Inventory cost should not include: [IAS 2.16 and 2.18]

abnormal waste

storage costs

administrative overheads unrelated to production

selling costs

foreign exchange differences arising directly on the recent acquisition of inventories invoiced in a foreign currency

interest cost when inventories are purchased with deferred settlement terms.

The standard cost and retail methods may be used for the measurement of cost, provided that the results approximate actual cost. [IAS 2.21-22]

For inventory items that are not interchangeable, specific costs are attributed to the specific individual items of inventory. [IAS 2.23]

For items that are interchangeable, IAS 2 allows the FIFO or weighted average cost formulas. [IAS 2.25] The LIFO formula, which had been allowed prior to the 2003 revision of IAS 2, is no longer allowed.

The same cost formula should be used for all inventories with similar characteristics as to their nature and use to the entity. For groups of inventories that have different characteristics, different cost formulas may be justified. [IAS 2.25]

Write-down to net realisable value

NRV is the estimated selling price in the ordinary course of business, less the estimated cost of completion and the estimated costs necessary to make the sale. [IAS 2.6] Any write-down to NRV should be recognised as an expense in the period in which the write-down occurs. Any reversal should be recognised in the income statement in the period in which the reversal occurs. [IAS 2.34]

Expense recognition

IAS 18 Revenue addresses revenue recognition for the sale of goods. When inventories are sold and revenue is recognised, the carrying amount of those inventories is recognised as an expense (often called cost-of-goods-sold). Any write-down to NRV and any inventory losses are also recognised as an expense when they occur. [IAS 2.34]

Disclosure

Required disclosures: [IAS 2.36]

accounting policy for inventories

carrying amount, generally classified as merchandise, supplies, materials, work in progress, and finished goods. The classifications depend on what is appropriate for the entity

carrying amount of any inventories carried at fair value less costs to sell

amount of any write-down of inventories recognised as an expense in the period

amount of any reversal of a write-down to NRV and the circumstances that led to such reversal

carrying amount of inventories pledged as security for liabilities

cost of inventories recognised as expense (cost of goods sold).

IAS 2 acknowledges that some enterprises classify income statement expenses by nature (materials, labour, and so on) rather than by function (cost of goods sold, selling expense, and so on). Accordingly, as an alternative to disclosing cost of goods sold expense, IAS 2 allows an entity to disclose operating costs recognised during the period by nature of the cost (raw materials and consumables, labour costs, other operating costs) and the amount of the net change in inventories for the period). [IAS 2.39] This is consistent with IAS 1 Presentation of Financial Statements, which allows presentation of expenses by function or nature.

IAS-7 STATEMENT OF CASH FLOWS

IAS 7 Statement of Cash Flows requires an entity to present a statement of cash flows as an integral part of its primary financial statements. Cash flows are classified and presented into operating activities (either using the

'direct' or 'indirect' method), investing activities or financing activities, with the latter two categories generally presented on a gross basis.

IAS 7 was reissued in December 1992, retitled in September 2007, and is operative for financial statements covering periods beginning on or after 1 January 1994.

History of IAS 7June 1976 Exposure Draft E7 Statement of Source and Application of Funds

October 1977 IAS 7 Statement of Changes in Financial Position

July 1991 Exposure Draft E36 Cash Flow Statements

December 1992 IAS 7 (1992) Cash Flow Statements

1 January 1994 Effective date of IAS 7 (1992)

6 September 2007Retitled from Cash Flow Statements to Statement of Cash Flows as a consequential amendment resulting from revisions to IAS 1

16 April 2009IAS 7 amended by Annual Improvements to IFRSs 2009 with respect to expenditures that do not result in a recognised asset.

1 July 2009 Effective date for amendments from IAS 27(2008) relating to changes in ownership of a subsidiary

1 January 2010 Effective date of the April 2009 revisions to IAS 7

Related Interpretations

None

Amendments under consideration by the IASB

Disclosure initiative – Reconciliation of liabilities from financing activities Disclosure initiative – Principles of disclosure (research project)

Summary of IAS 7

Objective of IAS 7

The objective of IAS 7 is to require the presentation of information about the historical changes in cash and cash equivalents of an entity by means of a statement of cash flows, which classifies cash flows during the period according to operating, investing, and financing activities.

Fundamental principle in IAS 7

All entities that prepare financial statements in conformity with IFRSs are required to present a statement of cash flows. [IAS 7.1]

The statement of cash flows analyses changes in cash and cash equivalents during a period. Cash and cash equivalents comprise cash on hand and demand deposits, together with short-term, highly liquid investments that are readily convertible to a known amount of cash, and that are subject to an insignificant risk of changes in value. Guidance notes indicate that an investment normally meets the definition of a cash equivalent when it has a maturity of three months or less from the date of acquisition. Equity investments are normally excluded, unless they are in substance a cash equivalent (e.g. preferred shares acquired within three months of their specified redemption date). Bank overdrafts which are repayable on demand and which form an integral part of an entity's cash management are also included as a component of cash and cash equivalents. [IAS 7.7-8]

Presentation of the Statement of Cash Flows

Cash flows must be analysed between operating, investing and financing activities. [IAS 7.10]

Key principles specified by IAS 7 for the preparation of a statement of cash flows are as follows:

operating activities are the main revenue-producing activities of the entity that are not investing or financing activities, so operating cash flows include cash received from customers and cash paid to suppliers and employees [IAS 7.14]

investing activities are the acquisition and disposal of long-term assets and other investments that are not considered to be cash equivalents [IAS 7.6]

financing activities are activities that alter the equity capital and borrowing structure of the entity [IAS 7.6] interest and dividends received and paid may be classified as operating, investing, or financing cash flows, provided

that they are classified consistently from period to period [IAS 7.31] cash flows arising from taxes on income are normally classified as operating, unless they can be specifically identified

with financing or investing activities [IAS 7.35] for operating cash flows, the direct method of presentation is encouraged, but the indirect method is acceptable [IAS

7.18]

The direct method shows each major class of gross cash receipts and gross cash payments. The operating cash flows section of the statement of cash flows under the direct method would appear something like this:

Cash receipts from customers xx,xxx

Cash paid to suppliers xx,xxx

Cash paid to employees xx,xxx

Cash paid for other operating expenses xx,xxx

Interest paid xx,xxx

Income taxes paid xx,xxx

Net cash from operating activities xx,xxx

The indirect method adjusts accrual basis net profit or loss for the effects of non-cash transactions. The operating cash flows section of the statement of cash flows under the indirect method would appear something like this:

Profit before interest and income taxes xx,xxx

Add back depreciation xx,xxx

Add back impairment of assets xx,xxx

Increase in receivables xx,xxx

Decrease in inventories xx,xxx

Increase in trade payables xx,xxx

Interest expense xx,xxx

Less Interest accrued but not yet paid xx,xxx

Interest paid xx,xxx

Income taxes paid xx,xxx

Net cash from operating activities xx,xxx

the exchange rate used for translation of transactions denominated in a foreign currency should be the rate in effect at the date of the cash flows [IAS 7.25]

cash flows of foreign subsidiaries should be translated at the exchange rates prevailing when the cash flows took place [IAS 7.26]

as regards the cash flows of associates and joint ventures, where the equity method is used, the statement of cash flows should report only cash flows between the investor and the investee; where proportionate consolidation is used, the cash flow statement should include the venturer's share of the cash flows of the investee [IAS 7.37-38]

aggregate cash flows relating to acquisitions and disposals of subsidiaries and other business units should be presented separately and classified as investing activities, with specified additional disclosures. [IAS 7.39] The aggregate cash paid or received as consideration should be reported net of cash and cash equivalents acquired or disposed of [IAS 7.42]

cash flows from investing and financing activities should be reported gross by major class of cash receipts and major class of cash payments except for the following cases, which may be reported on a net basis: [IAS 7.22-24]

o cash receipts and payments on behalf of customers (for example, receipt and repayment of demand deposits by banks, and receipts collected on behalf of and paid over to the owner of a property)

o cash receipts and payments for items in which the turnover is quick, the amounts are large, and the maturities are short, generally less than three months (for example, charges and collections from credit card customers, and purchase and sale of investments)

o cash receipts and payments relating to deposits by financial institutionso cash advances and loans made to customers and repayments thereof

investing and financing transactions which do not require the use of cash should be excluded from the statement of cash flows, but they should be separately disclosed elsewhere in the financial statements [IAS 7.43]

the components of cash and cash equivalents should be disclosed, and a reconciliation presented to amounts reported in the statement of financial position [IAS 7.45]

the amount of cash and cash equivalents held by the entity that is not available for use by the group should be disclosed, together with a commentary by management [IAS 7.48]

You will find sample IFRS statements of cash flows in our Model IFRS financial statements.

IAS 8 — Accounting Policies, Changes in Accounting Estimates and Errors

AS 8 Accounting Policies, Changes in Accounting Estimates and Errors is applied in selecting and applying accounting policies, accounting for changes in estimates and reflecting corrections of prior period errors.

The standard requires compliance with any specific IFRS applying to a transaction, event or condition, and provides guidance on developing accounting policies for other items that result in relevant and reliable information. Changes in accounting policies and corrections of errors are generally retrospectively accounted for, whereas changes in accounting estimates are generally accounted for on a prospective basis.

IAS 8 was reissued in December 2005 and applies to annual periods beginning on or after 1 January 2005.

History of IAS 8

October 1976Exposure Draft E8 The Treatment in the Income Statement of Unusual Items and Changes in Accounting Estimates and Accounting Policies

February 1978 IAS 8 Unusual and Prior Period Items and Changes in Accounting Policies

July 1992 Exposure Draft E46 Extraordinary Items, Fundamental Errors and Changes in Accounting Policies

December 1993IAS 8 (1993) Net Profit or Loss for the Period, Fundamental Errors and Changes in Accounting Policies (revised as part of the 'Comparability of Financial Statements' project)

1 January 1995 Effective date of IAS 8 (1993)

18 December 2003 Revised version of IAS 8 issued by the IASB

1 January 2005 Effective date of IAS 8 (2003)

Related Interpretations

IAS 8(2003) supersedes SIC-2 Consistency - Capitalisation of Borrowing Costs IAS 8(2003) supersedes SIC-18 Consistency - Alternative Methods.

Amendments under consideration by the IASB

Disclosure initiative – Principles of disclosure (research project) Disclosure initiative – Materiality (research project)

Summary of IAS 8

Key definitions [IAS 8.5]

Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements.

A change in accounting estimate is an adjustment of the carrying amount of an asset or liability, or related expense, resulting from reassessing the expected future benefits and obligations associated with that asset or liability.

International Financial Reporting Standardsare standards and interpretations adopted by the International Accounting Standards Board (IASB). They comprise:

o International Financial Reporting Standards (IFRSs)o International Accounting Standards (IASs)o Interpretations developed by the International Financial Reporting Interpretations Committee (IFRIC) or the

former Standing Interpretations Committee (SIC) and approved by the IASB. Materiality. Omissions or misstatements of items are material if they could, by their size or nature, individually or

collectively, influence the economic decisions of users taken on the basis of the financial statements. Prior period errors are omissions from, and misstatements in, an entity's financial statements for one or more prior

periods arising from a failure to use, or misuse of, reliable information that was available and could reasonably be expected to have been obtained and taken into account in preparing those statements. Such errors result from mathematical mistakes, mistakes in applying accounting policies, oversights or misinterpretations of facts, and fraud.

Selection and application of accounting policies

When a Standard or an Interpretation specifically applies to a transaction, other event or condition, the accounting policy or policies applied to that item must be determined by applying the Standard or Interpretation and considering any relevant Implementation Guidance issued by the IASB for the Standard or Interpretation. [IAS 8.7]

In the absence of a Standard or an Interpretation that specifically applies to a transaction, other event or condition, management must use its judgement in developing and applying an accounting policy that results in information that is relevant and reliable. [IAS 8.10]. In making that judgement, management must refer to, and consider the applicability of, the following sources in descending order:

the requirements and guidance in IASB standards and interpretations dealing with similar and related issues; and the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the

Framework. [IAS 8.11]

Management may also consider the most recent pronouncements of other standard-setting bodies that use a similar conceptual framework to develop accounting standards, other accounting literature and accepted industry practices, to the extent that these do not conflict with the sources in paragraph 11. [IAS 8.12]

Consistency of accounting policies

An entity shall select and apply its accounting policies consistently for similar transactions, other events and conditions, unless a Standard or an Interpretation specifically requires or permits categorisation of items for which different policies may be appropriate. If a Standard or an Interpretation requires or permits such categorisation, an appropriate accounting policy shall be selected and applied consistently to each category. [IAS 8.13]

Changes in accounting policies

An entity is permitted to change an accounting policy only if the change:

is required by a standard or interpretation; or

results in the financial statements providing reliable and more relevant information about the effects of transactions, other events or conditions on the entity's financial position, financial performance, or cash flows. [IAS 8.14]

Note that changes in accounting policies do not include applying an accounting policy to a kind of transaction or event that did not occur previously or were immaterial. [IAS 8.16]

If a change in accounting policy is required by a new IASB standard or interpretation, the change is accounted for as required by that new pronouncement or, if the new pronouncement does not include specific transition provisions, then the change in accounting policy is applied retrospectively. [IAS 8.19]

Retrospective application means adjusting the opening balance of each affected component of equity for the earliest prior period presented and the other comparative amounts disclosed for each prior period presented as if the new accounting policy had always been applied. [IAS 8.22]

However, if it is impracticable to determine either the period-specific effects or the cumulative effect of the change for one or more prior periods presented, the entity shall apply the new accounting policy to the carrying amounts of assets and liabilities as at the beginning of the earliest period for which retrospective application is practicable, which may be the current period, and shall make a corresponding adjustment to the opening balance of each affected component of equity for that period. [IAS 8.24]

Also, if it is impracticable to determine the cumulative effect, at the beginning of the current period, of applying a new accounting policy to all prior periods, the entity shall adjust the comparative information to apply the new accounting policy prospectively from the earliest date practicable. [IAS 8.25]

Disclosures relating to changes in accounting policies

Disclosures relating to changes in accounting policy caused by a new standard or interpretation include: [IAS 8.28]

the title of the standard or interpretation causing the change the nature of the change in accounting policy a description of the transitional provisions, including those that might have an effect on future periods for the current period and each prior period presented, to the extent practicable, the amount of the adjustment:

o for each financial statement line item affected, ando for basic and diluted earnings per share (only if the entity is applying IAS 33)

the amount of the adjustment relating to periods before those presented, to the extent practicable if retrospective application is impracticable, an explanation and description of how the change in accounting policy

was applied.

Financial statements of subsequent periods need not repeat these disclosures.

Disclosures relating to voluntary changes in accounting policy include: [IAS 8.29]

the nature of the change in accounting policy the reasons why applying the new accounting policy provides reliable and more relevant information for the current period and each prior period presented, to the extent practicable, the amount of the adjustment:

o for each financial statement line item affected, ando for basic and diluted earnings per share (only if the entity is applying IAS 33)

the amount of the adjustment relating to periods before those presented, to the extent practicable if retrospective application is impracticable, an explanation and description of how the change in accounting policy

was applied.

Financial statements of subsequent periods need not repeat these disclosures.

If an entity has not applied a new standard or interpretation that has been issued but is not yet effective, the entity must disclose that fact and any and known or reasonably estimable information relevant to assessing the possible impact that the new pronouncement will have in the year it is applied. [IAS 8.30]

Changes in accounting estimates

The effect of a change in an accounting estimate shall be recognised prospectively by including it in profit or loss in: [IAS 8.36]

the period of the change, if the change affects that period only, or the period of the change and future periods, if the change affects both.

However, to the extent that a change in an accounting estimate gives rise to changes in assets and liabilities, or relates to an item of equity, it is recognised by adjusting the carrying amount of the related asset, liability, or equity item in the period of the change. [IAS 8.37]

Disclosures relating to changes in accounting estimates

Disclose:

the nature and amount of a change in an accounting estimate that has an effect in the current period or is expected to have an effect in future periods

if the amount of the effect in future periods is not disclosed because estimating it is impracticable, an entity shall disclose that fact. [IAS 8.39-40]

Errors

The general principle in IAS 8 is that an entity must correct all material prior period errors retrospectively in the first set of financial statements authorised for issue after their discovery by: [IAS 8.42]

restating the comparative amounts for the prior period(s) presented in which the error occurred; or if the error occurred before the earliest prior period presented, restating the opening balances of assets, liabilities

and equity for the earliest prior period presented.

However, if it is impracticable to determine the period-specific effects of an error on comparative information for one or more prior periods presented, the entity must restate the opening balances of assets, liabilities, and equity for the earliest period for which retrospective restatement is practicable (which may be the current period). [IAS 8.44]

Further, if it is impracticable to determine the cumulative effect, at the beginning of the current period, of an error on all prior periods, the entity must restate the comparative information to correct the error prospectively from the earliest date practicable. [IAS 8.45]

Disclosures relating to prior period errors

Disclosures relating to prior period errors include: [IAS 8.49]

the nature of the prior period error for each prior period presented, to the extent practicable, the amount of the correction:

o for each financial statement line item affected, ando for basic and diluted earnings per share (only if the entity is applying IAS 33)

the amount of the correction at the beginning of the earliest prior period presented if retrospective restatement is impracticable, an explanation and description of how the error has been corrected.

Financial statements of subsequent periods need not repeat these disclosures.

IAS 10 — Events After the Reporting Period

IAS 10 Events After The Reporting Period contains requirements for when events after the end of the reporting period should be adjusted in the financial statements. Adjusting events are those providing evidence of conditions existing at the end of the reporting period, whereas non-adjusting events are indicative of conditions arising after the reporting period (the latter being disclosed where material).

IAS 10 was reissued in December 2003 and applies to annual periods beginning on or after 1 January 2005.

History of IAS 10

July 1977 Exposure Draft E10 Contingencies and Events Occurring After the Balance Sheet Date

October 1978 IAS 10 Contingencies and Events Occurring After the Balance Sheet Date effective 1 January 1980

1994 IAS 10 (1978) was reformatted

August 1997 Exposure Draft E59 Provisions, Contingent Liabilities and Contingent Assets

September 1998 IAS 37 Provisions, Contingent Liabilities and Contingent Assets

1 July 1999 Effective date of IAS 37, which superseded those portions of IAS 10 (1978) dealing with contingencies

November 1998 Exposure Draft E63 Events After the Balance Sheet Date

May 1999 IAS 10 (1999) Events After the Balance Sheet Date superseded those portions of IAS 10 (1978) dealing with events after the balance sheet date

1 January 2000 Effective date of IAS 10 (1999)

18 December 2003 Revised version of IAS 10 issued by the IASB

1 January 2005 Effective date of IAS 10 (Revised 2003)

6 September 2007 Retitled Events after the Reporting Period as a consequential amendment resulting from revisions to IAS 1

Key definitions

Event after the reporting period: An event, which could be favourable or unfavourable, that occurs between the end of the reporting period and the date that the financial statements are authorised for issue. [IAS 10.3]

Adjusting event: An event after the reporting period that provides further evidence of conditions that existed at the end of the reporting period, including an event that indicates that the going concern assumption in relation to the whole or part of the enterprise is not appropriate. [IAS 10.3]

Non-adjusting event: An event after the reporting period that is indicative of a condition that arose after the end of the reporting period. [IAS 10.3]

Accounting

Adjust financial statements for adjusting events - events after the balance sheet date that provide further evidence of conditions that existed at the end of the reporting period, including events that indicate that the going concern assumption in relation to the whole or part of the enterprise is not appropriate. [IAS 10.8]

Do not adjust for non-adjusting events - events or conditions that arose after the end of the reporting period. [IAS 10.10]

If an entity declares dividends after the reporting period, the entity shall not recognise those dividends as a liability at the end of the reporting period. That is a non-adjusting event. [IAS 10.12]

Going concern issues arising after end of the reporting period

An entity shall not prepare its financial statements on a going concern basis if management determines after the end of the reporting period either that it intends to liquidate the entity or to cease trading, or that it has no realistic alternative but to do so. [IAS 10.14]

Disclosure

Non-adjusting events should be disclosed if they are of such importance that non-disclosure would affect the ability of users to make proper evaluations and decisions. The required disclosure is (a) the nature of the event and (b) an estimate of its financial effect or a statement that a reasonable estimate of the effect cannot be made. [IAS 10.21]

A company should update disclosures that relate to conditions that existed at the end of the reporting period to reflect any new information that it receives after the reporting period about those conditions. [IAS 10.19]

Companies must disclose the date when the financial statements were authorised for issue and who gave that authorisation. If the enterprise's owners or others have the power to amend the financial statements after issuance, the enterprise must disclose that fact. [IAS 10.17]

IAS 11 — Construction Contracts Share on email Share on facebook Share on twitter Share on linkedin More Sharing Services

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Overview

IAS 11 Construction Contracts provides requirements on the allocation of contract revenue and contract costs to accounting periods in which construction work is performed. Contract revenues and expenses are recognised by reference to the stage of completion of contract activity where the outcome of the construction contract can be estimated reliably, otherwise revenue is recognised only to the extent of recoverable contract costs incurred.

IAS 11 was reissued in December 1993 and is applicable for periods beginning on or after 1 January 1995.

History of IAS 11December 1977 Exposure Draft E11 Accounting for Construction Contracts

March 1979 IAS 11 Accounting for Construction Contracts

1 January 1980 Effective date of IAS 11

May 1992 Exposure Draft E42 Construction Contracts

December 1993 IAS 11 (1993) Construction Contracts (revised as part of the 'Comparability of Financial Statements' project)

1 January 1995 Effective date of IAS 11 (1993)

1 January 2017 IAS 11 will be superseded by IFRS 15 Revenue from Contracts with Customers

Related Interpretations

IFRIC 15 Agreements for the Construction of Real Estate IFRIC 12 Service Concession Arrangements

Summary of IAS 11

Objective of IAS 11

The objective of IAS 11 is to prescribe the accounting treatment of revenue and costs associated with construction contracts.

What is a construction contract?

A construction contract is a contract specifically negotiated for the construction of an asset or a group of interrelated assets. [IAS 11.3]

Under IAS 11, if a contract covers two or more assets, the construction of each asset should be accounted for separately if (a) separate proposals were submitted for each asset, (b) portions of the contract relating to each asset were negotiated separately, and (c) costs and revenues of each asset can be measured. Otherwise, the contract should be accounted for in its entirety. [IAS 11.8]

Two or more contracts should be accounted for as a single contract if they were negotiated together and the work is interrelated. [IAS 11.9]

If a contract gives the customer an option to order one or more additional assets, construction of each additional asset should be accounted for as a separate contract if either (a) the additional asset differs significantly from the original asset(s) or (b) the price of the additional asset is separately negotiated. [IAS 11.10]

What is included in contract revenue and costs?

Contract revenue should include the amount agreed in the initial contract, plus revenue from alternations in the original contract work, plus claims and incentive payments that (a) are expected to be collected and (b) that can be measured reliably. [IAS 11.11]

Contract costs should include costs that relate directly to the specific contract, plus costs that are attributable to the contractor's general contracting activity to the extent that they can be reasonably allocated to the contract, plus such other costs that can be specifically charged to the customer under the terms of the contract. [IAS 11.16]

Accounting

If the outcome of a construction contract can be estimated reliably, revenue and costs should be recognised in proportion to the stage of completion of contract activity. This is known as the percentage of completion method of accounting. [IAS 11.22]

To be able to estimate the outcome of a contract reliably, the entity must be able to make a reliable estimate of total contract revenue, the stage of completion, and the costs to complete the contract. [IAS 11.23-24]

If the outcome cannot be estimated reliably, no profit should be recognised. Instead, contract revenue should be recognised only to the extent that contract costs incurred are expected to be recoverable and contract costs should be expensed as incurred. [IAS 11.32]

The stage of completion of a contract can be determined in a variety of ways - including the proportion that contract costs incurred for work performed to date bear to the estimated total contract costs, surveys of work performed, or completion of a physical proportion of the contract work. [IAS 11.30]

An expected loss on a construction contract should be recognised as an expense as soon as such loss is probable. [IAS 11.22 and 11.36]

Disclosure

amount of contract revenue recognised; [IAS 11.39(a)] method used to determine revenue; [IAS 11.39(b)] method used to determine stage of completion; [IAS 11.39(c)] and for contracts in progress at balance sheet date: [IAS 11.40]

o aggregate costs incurred and recognised profito amount of advances receivedo amount of retentions

Presentation

The gross amount due from customers for contract work should be shown as an asset. [IAS 11.42]

The gross amount due to customers for contract work should be shown as a liability. [IAS 11.42]

IAS 12 — Income Taxes Share on email Share on facebook Share on twitter Share on linkedin More Sharing Services

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Overview

IAS 12 Income Taxes implements a so-called 'comprehensive balance sheet method' of accounting for income taxes which recognises both the current tax consequences of transactions and events and the future tax consequences of the future recovery or settlement of the carrying amount of an entity's assets and liabilities. Differences between the carrying amount and tax base of assets and liabilities, and carried forward tax losses and credits, are recognised, with limited exceptions, as deferred tax liabilities or deferred tax assets, with the latter also being subject to a 'probable profits' test.

IAS 12 was reissued in October 1996 and is applicable to annual periods beginning on or after 1 January 1998.

History of IAS 12Date Development Comments

April 1978Exposure Draft E13 Accounting for Taxes on Income published

July 1979 IAS 12 Accounting for Taxes on Income issued

January 1989Exposure Draft E33 Accounting for Taxes on Income published

1994 IAS 12 (1979) was reformatted

October 1994 Exposure Draft E49 Income Taxes published

October 1996 IAS 12 Income Taxes issuedOperative for financial statements covering periods beginning on or after 1 January 1988

October 2000Limited Revisions to IAS 12 published (tax consequences of dividends)

Operative for financial statements covering periods beginning on or after 1 January 2001

31 March 2009 Exposure Draft ED/2009/2 Income Tax publishedComment deadline 31 July 2009(proposals were not finalised)

10 September 2010Exposure Draft ED/2010/11 Deferred Tax: Recovery of Underlying Assets (Proposed amendments to IAS 12) published

Comment deadline 9 November 2010

20 December 2010 Amended by Deferred Tax: Recovery of Underlying Assets Effective for annual periods beginning on or

after 1 January 2012

Related Interpretations

IFRIC 7 Applying the Restatement Approach under IAS 29 'Financial Reporting in Hyperinflationary Economies' SIC-21 Income Taxes – Recovery of Revalued Non-Depreciable Assets (SIC-21 was incorporated into IAS 12 and

withdrawn by the December 2010 amendments made by Deferred Tax: Recovery of Underlying Assets) SIC-25 Income Taxes – Changes in the Tax Status of an Enterprise or its Shareholders

Amendments under consideration by the IASB

IAS 12 — Recognition of deferred tax assets for unrealised losses Research project — Income taxes (longer term)

Summary of IAS 12

Objective of IAS 12

The objective of IAS 12 (1996) is to prescribe the accounting treatment for income taxes.

In meeting this objective, IAS 12 notes the following:

It is inherent in the recognition of an asset or liability that that asset or liability will be recovered or settled, and this recovery or settlement may give rise to future tax consequences which should be recognised at the same time as the asset or liability

An entity should account for the tax consequences of transactions and other events in the same way it accounts for the transactions or other events themselves.

Key definitions

[IAS 12.5]

Tax base The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes

Temporary differences

Differences between the carrying amount of an asset or liability in the statement of financial position and its tax bases

Taxable temporary differences

Temporary differences that will result in taxable amounts in determining taxable profit (tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled

Deductible temporary differences

Temporary differences that will result in amounts that are deductible in determining taxable profit (tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled

Deferred tax liabilities The amounts of income taxes payable in future periods in respect of taxable temporary differences

Deferred tax assets The amounts of income taxes recoverable in future periods in respect of:

1. deductible temporary differences2. the carryforward of unused tax losses, and

3. the carryforward of unused tax credits

Current tax

Current tax for the current and prior periods is recognised as a liability to the extent that it has not yet been settled, and as an asset to the extent that the amounts already paid exceed the amount due. [IAS 12.12] The benefit of a tax loss which can be carried back to recover current tax of a prior period is recognised as an asset. [IAS 12.13]

Current tax assets and liabilities are measured at the amount expected to be paid to (recovered from) taxation authorities, using the rates/laws that have been enacted or substantively enacted by the balance sheet date. [IAS 12.46]

Calculation of deferred taxes

Formulae

Deferred tax assets and deferred tax liabilities can be calculated using the following formulae:

Temporary difference = Carrying amount - Tax base

Deferred tax asset or liability = Temporary difference x Tax rate

The following formula can be used in the calculation of deferred taxes arising from unused tax losses or unused tax credits:

Deferred tax asset = Unused tax loss or unused tax credits x Tax rate

Tax bases

The tax base of an item is crucial in determining the amount of any temporary difference, and effectively represents the amount at which the asset or liability would be recorded in a tax-based balance sheet. IAS 12 provides the following guidance on determining tax bases:

Assets. The tax base of an asset is the amount that will be deductible against taxable economic benefits from recovering the carrying amount of the asset. Where recovery of an asset will have no tax consequences, the tax base is equal to the carrying amount. [IAS 12.7]

Revenue received in advance. The tax base of the recognised liability is its carrying amount, less revenue that will not be taxable in future periods [IAS 12.8]

Other liabilities. The tax base of a liability is its carrying amount, less any amount that will be deductible for tax purposes in respect of that liability in future periods [IAS 12.8]

Unrecognised items. If items have a tax base but are not recognised in the statement of financial position, the carrying amount is nil [IAS 12.9]

Tax bases not immediately apparent. If the tax base of an item is not immediately apparent, the tax base should effectively be determined in such as manner to ensure the future tax consequences of recovery or settlement of the item is recognised as a deferred tax amount [IAS 12.10]

Consolidated financial statements. In consolidated financial statements, the carrying amounts in the consolidated financial statements are used, and the tax bases determined by reference to any consolidated tax return (or otherwise from the tax returns of each entity in the group). [IAS 12.11]

Examples

The determination of the tax base will depend on the applicable tax laws and the entity's expectations as to recovery and settlement of its assets and liabilities. The following are some basic examples:

Property, plant and equipment. The tax base of property, plant and equipment that is depreciable for tax purposes that is used in the entity's operations is the unclaimed tax depreciation permitted as deduction in future periods

Receivables. If receiving payment of the receivable has no tax consequences, its tax base is equal to its carrying amount

Goodwill. If goodwill is not recognised for tax purposes, its tax base is nil (no deductions are available) Revenue in advance. If the revenue is taxed on receipt but deferred for accounting purposes, the tax base of the

liability is equal to its carrying amount (as there are no future taxable amounts). Conversely, if the revenue is recognised for tax purposes when the goods or services are received, the tax base will be equal to nil

Loans. If there are no tax consequences from repayment of the loan, the tax base of the loan is equal to its carrying amount. If the repayment has tax consequences (e.g. taxable amounts or deductions on repayments of foreign currency loans recognised for tax purposes at the exchange rate on the date the loan was drawn down), the tax consequence of repayment at carrying amount is adjusted against the carrying amount to determine the tax base (which in the case of the aforementioned foreign currency loan would result in the tax base of the loan being determined by reference to the exchange rate on the draw down date).

 

Recognition and measurement of deferred taxes

Recognition of deferred tax liabilities

The general principle in IAS 12 is that a deferred tax liability is recognised for all taxable temporary differences. There are three exceptions to the requirement to recognise a deferred tax liability, as follows:

liabilities arising from initial recognition of goodwill [IAS 12.15(a)] liabilities arising from the initial recognition of an asset/liability other than in a business combination which, at the

time of the transaction, does not affect either the accounting or the taxable profit [IAS 12.15(b)] liabilities arising from temporary differences associated with investments in subsidiaries, branches, and associates,

and interests in joint arrangements, but only to the extent that the entity is able to control the timing of the reversal of the differences and it is probable that the reversal will not occur in the foreseeable future. [IAS 12.39]

Example

An entity undertaken a business combination which results in the recognition of goodwill in accordance with IFRS   3 Business Combinations. The goodwill is not tax depreciable or otherwise recognised for tax purposes.

As no future tax deductions are available in respect of the goodwill, the tax base is nil. Accordingly, a taxable temporary difference arises in respect of the entire carrying amount of the goodwill. However, the taxable temporary difference does not result in the recognition of a deferred tax liability because of the recognition exception for deferred tax liabilities arising from goodwill.

 

Recognition of deferred tax assets

A deferred tax asset is recognised for deductible temporary differences, unused tax losses and unused tax credits to the extent that it is probable that taxable profit will be available against which the deductible temporary differences can be utilised, unless the deferred tax asset arises from: [IAS 12.24]

the initial recognition of an asset or liability other than in a business combination which, at the time of the transaction, does not affect accounting profit or taxable profit.

Deferred tax assets for deductible temporary differences arising from investments in subsidiaries, branches and associates, and interests in joint arrangements, are only recognised to the extent that it is probable that the temporary difference will reverse in the foreseeable future and that taxable profit will be available against which the temporary difference will be utilised. [IAS 12.44]

The carrying amount of deferred tax assets are reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow the benefit of part or all of that deferred tax asset to be utilised. Any such reduction is subsequently reversed to the extent that it becomes probable that sufficient taxable profit will be available. [IAS 12.37]

A deferred tax asset is recognised for an unused tax loss carryforward or unused tax credit if, and only if, it is considered probable that there will be sufficient future taxable profit against which the loss or credit carryforward can be utilised. [IAS 12.34]

Measurement of deferred tax

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates/laws that have been enacted or substantively enacted by the end of the reporting period. [IAS 12.47] The measurement reflects the entity's expectations, at the end of the reporting period, as to the manner in which the carrying amount of its assets and liabilities will be recovered or settled. [IAS 12.51]

IAS 12 provides the following guidance on measuring deferred taxes:

Where the tax rate or tax base is impacted by the manner in which the entity recovers its assets or settles its liabilities (e.g. whether an asset is sold or used), the measurement of deferred taxes is consistent with the way in which an asset is recovered or liability settled [IAS 12.51A]

Where deferred taxes arise from revalued non-depreciable assets (e.g. revalued land), deferred taxes reflect the tax consequences of selling the asset [IAS 12.51B]

Deferred taxes arising from investment property measured at fair value under IAS 40 Investment Property reflect the rebuttable presumption that the investment property will be recovered through sale [IAS 12.51C-51D]

If dividends are paid to shareholders, and this causes income taxes to be payable at a higher or lower rate, or the entity pays additional taxes or receives a refund, deferred taxes are measured using the tax rate applicable to undistributed profits [IAS 12.52A]

Deferred tax assets and liabilities cannot be discounted. [IAS 12.53]

Recognition of tax amounts for the period

Amount of income tax to recognise

The following formula summarises the amount of tax to be recognised in an accounting period:

Tax to recognise for the period = Current tax for the period + Movement in deferred tax balances for the period

Where to recognise income tax for the period

Consistent with the principles underlying IAS 12, the tax consequences of transactions and other events are recognised in the same way as the items giving rise to those tax consequences. Accordingly, current and deferred tax is recognised as income or expense and included in profit or loss for the period, except to the extent that the tax arises from: [IAS 12.58]

transactions or events that are recognised outside of profit or loss (other comprehensive income or equity) - in which case the related tax amount is also recognised outside of profit or loss [IAS 12.61A]

a business combination - in which case the tax amounts are recognised as identifiable assets or liabilities at the acquisition date, and accordingly effectively taken into account in the determination of goodwill when applying IFRS 3 Business Combinations. [IAS 12.66]

Example

An entity undertakes a capital raising and incurs incremental costs directly attributable to the equity transaction, including regulatory fees, legal costs and stamp duties. In accordance with the requirements of IAS   32 Financial Instruments: Presentation, the costs are accounted for as a deduction from equity.

Assume that the costs incurred are immediately deductible for tax purposes, reducing the amount of current tax payable for the period. When the tax benefit of the deductions is recognised, the current tax amount associated with the costs of the equity transaction is recognised directly in equity, consistent with the treatment of the costs themselves.

IAS 12 provides the following additional guidance on the recognition of income tax for the period:

Where it is difficult to determine the amount of current and deferred tax relating to items recognised outside of profit or loss (e.g. where there are graduated rates or tax), the amount of income tax recognised outside of profit or loss is determined on a reasonable pro-rata allocation, or using another more appropriate method [IAS 12.63]

In the circumstances where the payment of dividends impacts the tax rate or results in taxable amounts or refunds, the income tax consequences of dividends are considered to be more directly linked to past transactions or events and so are recognised in profit or loss unless the past transactions or events were recognised outside of profit or loss [IAS 12.52B]

The impact of business combinations on the recognition of pre-combination deferred tax assets are not included in the determination of goodwill as part of the business combination, but are separately recognised [IAS 12.68]

The recognition of acquired deferred tax benefits subsequent to a business combination are treated as 'measurement period' adjustments (see IFRS 3 Business Combinations) if they qualify for that treatment, or otherwise are recognised in profit or loss [IAS 12.68]

Tax benefits of equity settled share based payment transactions that exceed the tax effected cumulative remuneration expense are considered to relate to an equity item and are recognised directly in equity. [IAS 12.68C]

Presentation

Current tax assets and current tax liabilities can only be offset in the statement of financial position if the entity has the legal right and the intention to settle on a net basis. [IAS 12.71]

Deferred tax assets and deferred tax liabilities can only be offset in the statement of financial position if the entity has the legal right to settle current tax amounts on a net basis and the deferred tax amounts are levied by the same taxing authority on the same entity or different entities that intend to realise the asset and settle the liability at the same time. [IAS 12.74]

The amount of tax expense (or income) related to profit or loss is required to be presented in the statement(s) of profit or loss and other comprehensive income. [IAS 12.77]

The tax effects of items included in other comprehensive income can either be shown net for each item, or the items can be shown before tax effects with an aggregate amount of income tax for groups of items (allocated between items that will and will not be reclassified to profit or loss in subsequent periods). [IAS 1.91]

Disclosure

IAS 12.80 requires the following disclosures:

major components of tax expense (tax income) [IAS 12.79] Examples include: o current tax expense (income)o any adjustments of taxes of prior periodso amount of deferred tax expense (income) relating to the origination and reversal of temporary differenceso amount of deferred tax expense (income) relating to changes in tax rates or the imposition of new taxeso amount of the benefit arising from a previously unrecognised tax loss, tax credit or temporary difference of

a prior periodo write down, or reversal of a previous write down, of a deferred tax asseto amount of tax expense (income) relating to changes in accounting policies and corrections of errors.

IAS 12.81 requires the following disclosures:

aggregate current and deferred tax relating to items recognised directly in equity tax relating to each component of other comprehensive income explanation of the relationship between tax expense (income) and the tax that would be expected by applying the

current tax rate to accounting profit or loss (this can be presented as a reconciliation of amounts of tax or a reconciliation of the rate of tax)

changes in tax rates amounts and other details of deductible temporary differences, unused tax losses, and unused tax credits temporary differences associated with investments in subsidiaries, branches and associates, and interests in joint

arrangements for each type of temporary difference and unused tax loss and credit, the amount of deferred tax assets or liabilities

recognised in the statement of financial position and the amount of deferred tax income or expense recognised in profit or loss

tax relating to discontinued operations tax consequences of dividends declared after the end of the reporting period information about the impacts of business combinations on an acquirer's deferred tax assets recognition of deferred tax assets of an acquiree after the acquisition date.

Other required disclosures:

details of deferred tax assets [IAS 12.82] tax consequences of future dividend payments. [IAS 12.82A]

In addition to the disclosures required by IAS 12, some disclosures relating to income taxes are required by IAS   1 Presentation of Financial Statements, as follows:

Disclosure on the face of the statement of financial position about current tax assets, current tax liabilities, deferred tax assets, and deferred tax liabilities [IAS 1.54(n) and (o)]

Disclosure of tax expense (tax income) in the profit or loss section of the statement of profit or loss and other comprehensive income (or separate statement if presented). [IAS 1.82(d)]

IAS 14 — Segment Reporting (Superseded) Share on email Share on facebook Share on twitter Share on linkedin More Sharing Services

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Overview

IAS 14 Segment Reporting requires reporting of financial information by business or geographical area. It requires disclosures for 'primary' and 'secondary' segment reporting formats, with the primary format based on whether the entity's risks and returns are affected predominantly by the products and services it produces or by the fact that it operates in different geographical areas.

IAS 14 was issued in August 1997, was applicable to annual periods beginning on or after 1 July 1998, and was superseded by IFRS 8 Operating Segments with effect from annual periods beginning on or after 1 January 2009.

History of IAS 14March 1980 Exposure Draft E15 Reporting Financial Information by Segment

August 1981 IAS 14 Reporting Financial Information by Segment

1 January 1983 Effective date of IAS 14 (1981)

1994 IAS 14 (1981) was reformatted

December 1995 Exposure Draft E51 Reporting Financial Information by Segment

August 1997 IAS 14 Segment Reporting

1 July 1998 Effective date of IAS 14 (1997)

30 November 2006 IAS 14 is superseded by IFRS 8 Operating Segments effective for annual periods beginning 1 January 2009

Related Interpretations

None

Summary of IAS 14

Objective of IAS 14

The objective of IAS 14 (Revised 1997) is to establish principles for reporting financial information by line of business and by geographical area. It applies to entities whose equity or debt securities are publicly traded and to entities in the process of issuing securities to the public. In addition, any entity voluntarily providing segment information should comply with the requirements of the Standard.

Applicability

IAS 14 must be applied by entities whose debt or equity securities are publicly traded and those in the process of issuing such securities in public securities markets. [IAS 14.3]

If an entity that is not publicly traded chooses to report segment information and claims that its financial statements conform to IFRSs, then it must follow IAS 14 in full. [IAS 14.5]

Segment information need not be presented in the separate financial statements of a (a) parent, (b) subsidiary, (c) equity method associate, or (d) equity method joint venture that are presented in the same report as the consolidated statements. [IAS 14.6-7]

Key definitions

Business segment: a component of an entity that (a) provides a single product or service or a group of related products and services and (b) that is subject to risks and returns that are different from those of other business segments. [IAS 14.9]

Geographical segment: a component of an entity that (a) provides products and services within a particular economic environment and (b) that is subject to risks and returns that are different from those of components operating in other economic environments. [IAS 14.9]

Reportable segment: a business segment or geographical segment for which IAS 14 requires segment information to be reported. [IAS 14.9]

Segment revenue: revenue, including intersegment revenue, that is directly attributable or reasonably allocable to a segment. Includes interest and dividend income and related securities gains only if the segment is a financial segment (bank, insurance company, etc.). [IAS 14.16]

Segment expenses: expenses, including expenses relating to intersegment transactions, that (a) result from operating activities and (b) are directly attributable or reasonably allocable to a segment. Includes interest expense and related securities losses only if the segment is a financial segment (bank, insurance company, etc.). Segment expenses do not include:

interest losses on sales of investments or debt extinguishments losses on investments accounted for by the equity method income taxes general corporate administrative and head-office expenses that relate to the entity as a whole [IAS 14.16]

Segment result: segment revenue minus segment expenses, before deducting minority interest. [IAS 14.16]

Segment assets and segment liabilities: those operating assets (liabilities) that are directly attributable or reasonably allocable to a segment. [IAS 14.16]

Identifying business and geographical segments

An entity must look to its organisational structure and internal reporting system to identify reportable segments. In particular, IAS 14 presumes that segmentation in internal financial reports prepared for the board of directors and chief executive officer should normally determine segments for external financial reporting purposes. Only if internal segments are not along either product/service or geographical lines is further disaggregation appropriate. [IAS 14.26]

Geographical segments may be based either on where the entity's assets are located or on where its customers are located. [IAS 14.14] Whichever basis is used, several items of data must be presented on the other basis if significantly different. [IAS 14.71-72]

Primary and secondary segments

For most entities one basis of segmentation is primary and the other is secondary, with considerably less disclosure required for secondary segments. The entity should determine whether business or geographical segments are to be used for its primary segment reporting format based on whether the entity's risks and returns are affected predominantly by the products and services it produces or by the fact that it operates in different geographical areas. The basis for identification of the predominant source and nature of risks and differing rates of return facing the entity will usually be the entity's internal organisational and management structure and its system of internal financial reporting to senior management. [IAS 14.26-27]

Which segments are reportable?

The entity's reportable segments are its business and geographical segments for which a majority of their revenue is earned from sales to external customers and for which: [IAS 14.35]

revenue from sales to external customers and from transactions with other segments is 10% or more of the total revenue, external and internal, of all segments; or

segment result, whether profit or loss, is 10% or more the combined result of all segments in profit or the combined result of all segments in loss, whichever is greater in absolute amount; or

assets are 10% or more of the total assets of all segments.

Segments deemed too small for separate reporting may be combined with each other, if related, but they may not be combined with other significant segments for which information is reported internally. Alternatively, they may be separately reported. If neither combined nor separately reported, they must be included as an unallocated reconciling item. [IAS 14.36]

If total external revenue attributable to reportable segments identified using the 10% thresholds outlined above is less than 75% of the total consolidated or entity revenue, additional segments should be identified as reportable segments until at least 75% of total consolidated or entity revenue is included in reportable segments. [IAS 14.37]

Vertically integrated segments (those that earn a majority of their revenue from intersegment transactions) may be, but need not be, reportable segments. [IAS 14.39] If not separately reported, the selling segment is combined with the buying segment. [IAS 14.41]

IAS 14.42-43 contain special rules for identifying reportable segments in the years in which a segment reaches or loses 10% significance.

What accounting policies should a segment follow?

Segment accounting policies must be the same as those used in the consolidated financial statements. [IAS 14.44]

If assets used jointly by two or more segments are allocated to segments, the related revenue and expenses must also be allocated. [IAS 14.47]

What must be disclosed?

IAS 14 has detailed guidance as to which items of revenue and expense are included in segment revenue and segment expense. All companies will report a standardised measure of segment result – basically operating profit before interest, taxes, and head office expenses. For an entity's primary segments, revised IAS 14 requires disclosure of: [IAS 14.51-67]

sales revenue (distinguishing between external and intersegment) result assets the basis of intersegment pricing liabilities capital additions depreciation and amortisation significant unusual items non-cash expenses other than depreciation equity method income

Segment revenue includes "sales" from one segment to another. Under IAS 14, these intersegment transfers must be measured on the basis that the entity actually used to price the transfers. [IAS 14.75]

For secondary segments, disclose: [IAS 14.69-72]

revenue assets capital additions

Other disclosure matters addressed in IAS 14:

Disclosure is required of external revenue for a segment that is not deemed a reportable segment because a majority of its sales are intersegment sales but nonetheless its external sales are 10% or more of consolidated revenue. [IAS 14.74]

Special disclosures are required for changes in segment accounting policies. [IAS 14.76] Where there has been a change in the identification of segments, prior year information should be restated. If this is

not practicable, segment data should be reported for both the old and new bases of segmentation in the year of change. [IAS 14.76]

Disclosure is required of the types of products and services included in each reported business segment and of the composition of each reported geographical segment, both primary and secondary. [IAS 14.81]

An entity must present a reconciliation between information reported for segments and consolidated information. At a minimum: [IAS 14.67]

segment revenue should be reconciled to consolidated revenue segment result should be reconciled to a comparable measure of consolidated operating profit or loss and

consolidated net profit or loss segment assets should be reconciled to entity assets segment liabilities should be reconciled to entity liabilities.

IAS 16 — Property, Plant and Equipment Share on email Share on facebook Share on twitter Share on linkedin More Sharing Services

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Overview

IAS 16 Property, Plant and Equipment outlines the accounting treatment for most types of property, plant and equipment. Property, plant and equipment is initially measured at its cost, subsequently measured either using a cost or revaluation model, and depreciated so that its depreciable amount is allocated on a systematic basis over its useful life.

IAS 16 was reissued in December 2003 and applies to annual periods beginning on or after 1 January 2005.

History of IAS 16Date Development Comments

August 1980Exposure Draft E18 Accounting for Property, Plant and Equipment in the Context of the Historical Cost System published

March 1982 IAS 16 Accounting for Property, Plant and Equipment issuedOperative for financial statements covering periods beginning on or after 1 January 1983

1 January 1992 Exposure Draft E43 Property, Plant and Equipment published

December 1993 IAS 16 Property, Plant and Equipment issued Operative for financial statements

(revised as part of the 'Comparability of Financial Statements' project)

covering periods beginning on or after 1 January 1995

April and July 1998 Amended to be consistent with IAS 22, IAS 36 and IAS 37Operative for annual financial statements covering periods beginning on or after 1 July 1999

18 December 2003 IAS 16 Property, Plant and Equipment issuedEffective for annual periods beginning on or after 1 January 2005

22 May 2008Amended by Improvements to IFRSs (routine sales of assets held for rental)

Effective for annual periods beginning on or after 1 January 2009

17 May 2012Amended by Annual Improvements 2009-2011 Cycle (classification of servicing equipment)

Effective for annual periods beginning on or after 1 January 2013

12 December 2013Amended by Annual Improvements to IFRSs 2010–2012 Cycle (proportionate restatement of accumulated depreciation under the revaluation method)

Effective for annual periods beginning on or after 1 July 2014

12 May 2014Amended by Clarification of Acceptable Methods of Depreciation and Amortisation (Amendments to IAS 16 and IAS 38)

Effective for annual periods beginning on or after 1 January 2016

30 June 2014Amended by Agriculture: Bearer Plants (Amendments to IAS 16 and IAS 41)

Effective for annual periods beginning on or after 1 January 2016

Related Interpretations

IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine SIC-6 Costs of Modifying Existing Software. SIC-6 was superseded by and incorporated into IAS 16 (2003). SIC-14 Property, Plant and Equipment – Compensation for the Impairment or Loss of Items. SIC-14 was superseded by

and incorporated into IAS 16 (2003). SIC-23 Property, Plant and Equipment - Major Inspection or Overhaul Costs. SIC-23 was superseded by and

incorporated into IAS 16 (2003).

Amendments under consideration by the IASB

none

Summary of IAS 16

Objective of IAS 16

The objective of IAS 16 is to prescribe the accounting treatment for property, plant, and equipment. The principal issues are the recognition of assets, the determination of their carrying amounts, and the depreciation charges and impairment losses to be recognised in relation to them.

Scope

IAS 16 applies to the accounting for property, plant and equipment, except where another standards requires or permits differing accounting treatments, for example:

assets classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations

biological assets related to agricultural activity accounted for under IAS 41 Agriculture exploration and evaluation assets recognised in accordance with IFRS 6 Exploration for and Evaluation of Mineral

Resources mineral rights and mineral reserves such as oil, natural gas and similar non-regenerative resources.

The standard does apply to property, plant, and equipment used to develop or maintain the last three categories of assets. [IAS 16.3]

The cost model in IAS 16 also applies to investment property accounted for using the cost model under IAS   40 Investment Property. [IAS 16.5]

The standard does apply to bearer plants but it does not apply to the produce on bearer plants. [IAS 16.3]

Note: Bearer plants were brought into the scope of IAS 16 by Agriculture: Bearer Plants (Amendments to IAS 16 and IAS 41), which applies to annual periods beginning on or after 1 January 2016.

 

Recognition

Items of property, plant, and equipment should be recognised as assets when it is probable that: [IAS 16.7]

it is probable that the future economic benefits associated with the asset will flow to the entity, and the cost of the asset can be measured reliably.

This recognition principle is applied to all property, plant, and equipment costs at the time they are incurred. These costs include costs incurred initially to acquire or construct an item of property, plant and equipment and costs incurred subsequently to add to, replace part of, or service it.

IAS 16 does not prescribe the unit of measure for recognition – what constitutes an item of property, plant, and equipment. [IAS 16.9] Note, however, that if the cost model is used (see below) each part of an item of property, plant, and equipment with a cost that is significant in relation to the total cost of the item must be depreciated separately. [IAS 16.43]

IAS 16 recognises that parts of some items of property, plant, and equipment may require replacement at regular intervals. The carrying amount of an item of property, plant, and equipment will include the cost of replacing the part of such an item when that cost is incurred if the recognition criteria (future benefits and measurement reliability) are met. The carrying amount of those parts that are replaced is derecognised in accordance with the derecognition provisions of IAS 16.67-72. [IAS 16.13]

Also, continued operation of an item of property, plant, and equipment (for example, an aircraft) may require regular major inspections for faults regardless of whether parts of the item are replaced. When each major inspection is performed, its cost is recognised in the carrying amount of the item of property, plant, and equipment as a replacement if the recognition criteria are satisfied. If necessary, the estimated cost of a future similar inspection may be used as an indication of what the cost of the existing inspection component was when the item was acquired or constructed. [IAS 16.14]

Initial measurement

An item of property, plant and equipment should initially be recorded at cost. [IAS 16.15] Cost includes all costs necessary to bring the asset to working condition for its intended use. This would include not only its original

purchase price but also costs of site preparation, delivery and handling, installation, related professional fees for architects and engineers, and the estimated cost of dismantling and removing the asset and restoring the site (see IAS 37 Provisions, Contingent Liabilities and Contingent Assets). [IAS 16.16-17]

If payment for an item of property, plant, and equipment is deferred, interest at a market rate must be recognised or imputed. [IAS 16.23]

If an asset is acquired in exchange for another asset (whether similar or dissimilar in nature), the cost will be measured at the fair value unless (a) the exchange transaction lacks commercial substance or (b) the fair value of neither the asset received nor the asset given up is reliably measurable. If the acquired item is not measured at fair value, its cost is measured at the carrying amount of the asset given up. [IAS 16.24]

Measurement subsequent to initial recognition

IAS 16 permits two accounting models:

Cost model. The asset is carried at cost less accumulated depreciation and impairment. [IAS 16.30] Revaluation model. The asset is carried at a revalued amount, being its fair value at the date of revaluation less

subsequent depreciation and impairment, provided that fair value can be measured reliably. [IAS 16.31]

The revaluation model

Under the revaluation model, revaluations should be carried out regularly, so that the carrying amount of an asset does not differ materially from its fair value at the balance sheet date. [IAS 16.31]

If an item is revalued, the entire class of assets to which that asset belongs should be revalued. [IAS 16.36]

Revalued assets are depreciated in the same way as under the cost model (see below).

If a revaluation results in an increase in value, it should be credited to other comprehensive income and accumulated in equity under the heading "revaluation surplus" unless it represents the reversal of a revaluation decrease of the same asset previously recognised as an expense, in which case it should be recognised in profit or loss. [IAS 16.39]

A decrease arising as a result of a revaluation should be recognised as an expense to the extent that it exceeds any amount previously credited to the revaluation surplus relating to the same asset. [IAS 16.40]

When a revalued asset is disposed of, any revaluation surplus may be transferred directly to retained earnings, or it may be left in equity under the heading revaluation surplus. The transfer to retained earnings should not be made through profit or loss. [IAS 16.41]

Depreciation (cost and revaluation models)

For all depreciable assets:

The depreciable amount (cost less residual value) should be allocated on a systematic basis over the asset's useful life [IAS 16.50].

The residual value and the useful life of an asset should be reviewed at least at each financial year-end and, if expectations differ from previous estimates, any change is accounted for prospectively as a change in estimate under IAS 8. [IAS 16.51]

The depreciation method used should reflect the pattern in which the asset's economic benefits are consumed by the entity [IAS 16.60]; a depreciation method that is based on revenue that is generated by an activity that includes the use of an asset is not appropriate. [IAS 16.62A]

Note: The clarification regarding the revenue-based depreciation method was introduced by Clarification of Acceptable Methods of Depreciation and Amortisation, which applies to annual periods beginning on or after 1 January 2016.

The depreciation method should be reviewed at least annually and, if the pattern of consumption of benefits has changed, the depreciation method should be changed prospectively as a change in estimate under IAS 8. [IAS 16.61] Expected future reductions in selling prices could be indicative of a higher rate of consumption of the future economic benefits embodied in an asset. [IAS 16.56]

Note: The guidance on expected future reductions in selling prices was introduced by Clarification of Acceptable Methods of Depreciation and Amortisation, which applies to annual periods beginning on or after 1 January 2016.

Depreciation should be charged to profit or loss, unless it is included in the carrying amount of another asset [IAS 16.48].

Depreciation begins when the asset is available for use and continues until the asset is derecognised, even if it is idle. [IAS 16.55]

Recoverability of the carrying amount

IAS   16 Property, Plant and Equipment requires impairment testing and, if necessary, recognition for property, plant, and equipment. An item of property, plant, or equipment shall not be carried at more than recoverable amount. Recoverable amount is the higher of an asset's fair value less costs to sell and its value in use.

Any claim for compensation from third parties for impairment is included in profit or loss when the claim becomes receivable. [IAS 16.65]

Derecognition (retirements and disposals)

An asset should be removed from the statement of financial position on disposal or when it is withdrawn from use and no future economic benefits are expected from its disposal. The gain or loss on disposal is the difference between the proceeds and the carrying amount and should be recognised in profit and loss. [IAS 16.67-71]

If an entity rents some assets and then ceases to rent them, the assets should be transferred to inventories at their carrying amounts as they become held for sale in the ordinary course of business. [IAS 16.68A]

Disclosure

Information about each class of property, plant and equipment

For each class of property, plant, and equipment, disclose: [IAS 16.73]

basis for measuring carrying amount depreciation method(s) used useful lives or depreciation rates gross carrying amount and accumulated depreciation and impairment losses reconciliation of the carrying amount at the beginning and the end of the period, showing:

o additions

o disposalso acquisitions through business combinationso revaluation increases or decreaseso impairment losseso reversals of impairment losseso depreciationo net foreign exchange differences on translationo other movements

Additional disclosures

The following disclosures are also required: [IAS 16.74]

restrictions on title and items pledged as security for liabilities expenditures to construct property, plant, and equipment during the period contractual commitments to acquire property, plant, and equipment compensation from third parties for items of property, plant, and equipment that were impaired, lost or given up that

is included in profit or loss.

IAS 16 also encourages, but does not require, a number of additional disclosures. [IAS 16.79]

Revalued property, plant and equipment

If property, plant, and equipment is stated at revalued amounts, certain additional disclosures are required: [IAS 16.77]

the effective date of the revaluation whether an independent valuer was involved for each revalued class of property, the carrying amount that would have been recognised had the assets been

carried under the cost model the revaluation surplus, including changes during the period and any restrictions on the distribution of the balance to

shareholders.

Entities with property, plant and equipment stated at revalued amounts are also required to make disclosures under IFRS   13 Fair Value Measurement.

IAS 17 — Leases Share on email Share on facebook Share on twitter Share on linkedin More Sharing Services

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Overview

IAS 17 Leases prescribes the accounting policies and disclosures applicable to leases, both for lessees and lessors. Leases are required to be classified as either finance leases (which transfer substantially all the risks and rewards of ownership, and give rise to asset and liability recognition by the lessee and a receivable by the lessor) and operating leases (which result in expense recognition by the lessee, with the asset remaining recognised by the lessor).

IAS 17 was reissued in December 2003 and applies to annual periods beginning on or after 1 January 2005.

History of IAS 17October 1980 Exposure Draft E19 Accounting for Leases

September 1982 IAS 17 Accounting for Leases

1 January 1984 Effective date of IAS 17 (1982)

1994 IAS 17 (1982) was reformatted

April 1997 Exposure Draft E56, Leases

December 1997 IAS 17 Leases

1 January 1999 Effective date of IAS 17 (1997) Leases

18 December 2003 Revised version of IAS 17 issued by the IASB

1 January 2005 Effective date of IAS 17 (Revised 2003)

16 April 2009 IAS 17 amended for Annual Improvements to IFRSs 2009 about classification of land leases

1 January 2010 Effective date of the April 2009 revisions to IAS 17, with early application permitted (with disclosure)

Related Interpretations

IFRIC 4 Determining Whether an Arrangement Contains a Lease SIC-15 Operating Leases – Incentives SIC-27 Evaluating the Substance of Transactions in the Legal Form of a Lease

Amendments under consideration by the IASB

Leases – Comprehensive project

Summary of IAS 17

Objective of IAS 17

The objective of IAS 17 (1997) is to prescribe, for lessees and lessors, the appropriate accounting policies and disclosures to apply in relation to finance and operating leases.

Scope

IAS 17 applies to all leases other than lease agreements for minerals, oil, natural gas, and similar regenerative resources and licensing agreements for films, videos, plays, manuscripts, patents, copyrights, and similar items. [IAS 17.2]

However, IAS 17 does not apply as the basis of measurement for the following leased assets: [IAS 17.2]

property held by lessees that is accounted for as investment property for which the lessee uses the fair value model set out in IAS 40

investment property provided by lessors under operating leases (see IAS 40) biological assets held by lessees under finance leases (see IAS 41) biological assets provided by lessors under operating leases (see IAS 41)

Classification of leases

A lease is classified as a finance lease if it transfers substantially all the risks and rewards incident to ownership. All other leases are classified as operating leases. Classification is made at the inception of the lease. [IAS 17.4]

Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form. Situations that would normally lead to a lease being classified as a finance lease include the following: [IAS 17.10]

the lease transfers ownership of the asset to the lessee by the end of the lease term the lessee has the option to purchase the asset at a price which is expected to be sufficiently lower than fair value at

the date the option becomes exercisable that, at the inception of the lease, it is reasonably certain that the option will be exercised

the lease term is for the major part of the economic life of the asset, even if title is not transferred at the inception of the lease, the present value of the minimum lease payments amounts to at least substantially all of

the fair value of the leased asset the lease assets are of a specialised nature such that only the lessee can use them without major modifications being

made

Other situations that might also lead to classification as a finance lease are: [IAS 17.11]

if the lessee is entitled to cancel the lease, the lessor's losses associated with the cancellation are borne by the lessee gains or losses from fluctuations in the fair value of the residual fall to the lessee (for example, by means of a rebate

of lease payments) the lessee has the ability to continue to lease for a secondary period at a rent that is substantially lower than market

rent

When a lease includes both land and buildings elements, an entity assesses the classification of each element as a finance or an operating lease separately. In determining whether the land element is an operating or a finance lease, an important consideration is that land normally has an indefinite economic life [IAS 17.15A]. Whenever necessary in order to classify and account for a lease of land and buildings, the minimum lease payments (including any lump-sum upfront payments) are allocated between the land and the buildings elements in proportion to the relative fair values of the leasehold interests in the land element and buildings element of the lease at the inception of the lease. [IAS 17.16] For a lease of land and buildings in which the amount that would initially be recognised for the land element is immaterial, the land and buildings may be treated as a single unit for the purpose of lease classification and classified as a finance or operating lease. [IAS 17.17] However, separate measurement of the land and buildings elements is not required if the lessee's interest in both land and buildings is classified as an investment property in accordance with IAS 40 and the fair value model is adopted. [IAS 17.18]

Accounting by lessees

The following principles should be applied in the financial statements of lessees:

at commencement of the lease term, finance leases should be recorded as an asset and a liability at the lower of the fair value of the asset and the present value of the minimum lease payments (discounted at the interest rate implicit in the lease, if practicable, or else at the entity's incremental borrowing rate) [IAS 17.20]

finance lease payments should be apportioned between the finance charge and the reduction of the outstanding liability (the finance charge to be allocated so as to produce a constant periodic rate of interest on the remaining balance of the liability) [IAS 17.25]

the depreciation policy for assets held under finance leases should be consistent with that for owned assets. If there is no reasonable certainty that the lessee will obtain ownership at the end of the lease – the asset should be depreciated over the shorter of the lease term or the life of the asset [IAS 17.27]

for operating leases, the lease payments should be recognised as an expense in the income statement over the lease term on a straight-line basis, unless another systematic basis is more representative of the time pattern of the user's benefit [IAS 17.33]

Incentives for the agreement of a new or renewed operating lease should be recognised by the lessee as a reduction of the rental expense over the lease term, irrespective of the incentive's nature or form, or the timing of payments. [SIC-15]

Accounting by lessors

The following principles should be applied in the financial statements of lessors:

at commencement of the lease term, the lessor should record a finance lease in the balance sheet as a receivable, at an amount equal to the net investment in the lease [IAS 17.36]

the lessor should recognise finance income based on a pattern reflecting a constant periodic rate of return on the lessor's net investment outstanding in respect of the finance lease [IAS 17.39]

assets held for operating leases should be presented in the balance sheet of the lessor according to the nature of the asset. [IAS 17.49] Lease income should be recognised over the lease term on a straight-line basis, unless another systematic basis is more representative of the time pattern in which use benefit is derived from the leased asset is diminished [IAS 17.50]

Incentives for the agreement of a new or renewed operating lease should be recognised by the lessor as a reduction of the rental income over the lease term, irrespective of the incentive's nature or form, or the timing of payments. [SIC-15]

Manufacturers or dealer lessors should include selling profit or loss in the same period as they would for an outright sale. If artificially low rates of interest are charged, selling profit should be restricted to that which would apply if a commercial rate of interest were charged. [IAS 17.42]

Under the 2003 revisions to IAS 17, initial direct and incremental costs incurred by lessors in negotiating leases must be recognised over the lease term. They may no longer be charged to expense when incurred. This treatment does not apply to manufacturer or dealer lessors where such cost recognition is as an expense when the selling profit is recognised.

Sale and leaseback transactions

For a sale and leaseback transaction that results in a finance lease, any excess of proceeds over the carrying amount is deferred and amortised over the lease term. [IAS 17.59]

For a transaction that results in an operating lease: [IAS 17.61]

if the transaction is clearly carried out at fair value - the profit or loss should be recognised immediately

if the sale price is below fair value - profit or loss should be recognised immediately, except if a loss is compensated for by future rentals at below market price, the loss it should be amortised over the period of use

if the sale price is above fair value - the excess over fair value should be deferred and amortised over the period of use

if the fair value at the time of the transaction is less than the carrying amount – a loss equal to the difference should be recognised immediately [IAS 17.63]

Disclosure: lessees – finance leases [IAS 17.31]

carrying amount of asset reconciliation between total minimum lease payments and their present value amounts of minimum lease payments at balance sheet date and the present value thereof, for:

o the next yearo years 2 through 5 combinedo beyond five years

contingent rent recognised as an expense total future minimum sublease income under noncancellable subleases general description of significant leasing arrangements, including contingent rent provisions, renewal or purchase

options, and restrictions imposed on dividends, borrowings, or further leasing

Disclosure: lessees – operating leases [IAS 17.35]

amounts of minimum lease payments at balance sheet date under noncancellable operating leases for: o the next yearo years 2 through 5 combinedo beyond five years

total future minimum sublease income under noncancellable subleases lease and sublease payments recognised in income for the period contingent rent recognised as an expense general description of significant leasing arrangements, including contingent rent provisions, renewal or purchase

options, and restrictions imposed on dividends, borrowings, or further leasing

Disclosure: lessors – finance leases [IAS 17.47]

reconciliation between gross investment in the lease and the present value of minimum lease payments; gross investment and present value of minimum lease payments receivable for:

o the next yearo years 2 through 5 combinedo beyond five years

unearned finance income unguaranteed residual values accumulated allowance for uncollectible lease payments receivable contingent rent recognised in income general description of significant leasing arrangements

Disclosure: lessors – operating leases [IAS 17.56]

amounts of minimum lease payments at balance sheet date under noncancellable operating leases in the aggregate and for:

o the next yearo years 2 through 5 combinedo beyond five years

contingent rent recognised as in income general description of significant leasing arrangements

IAS 18 — Revenue Share on email Share on facebook Share on twitter Share on linkedin More Sharing Services

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Overview

IAS 18 Revenue outlines the accounting requirements for when to recognise revenue from the sale of goods, rendering of services, and for interest, royalties and dividends. Revenue is measured at the fair value of the consideration received or receivable and recognised when prescribed conditions are met, which depend on the nature of the revenue.

IAS 18 was reissued in December 1993 and is operative for periods beginning on or after 1 January 1995.

History of IAS 18April 1981 Exposure Draft E20 Revenue Recognition

December 1982 IAS 18 Revenue Recognition

1 January 1984 Effective date of IAS 18 (1982)

May 1992 E41 Revenue Recognition

December 1993 IAS 18 Revenue Recognition (revised as part of the 'Comparability of Financial Statements' project)

1 January 1995 Effective date of IAS 18 (1993) Revenue Recognition

December 1998 Amended by IAS 39 Financial Instruments: Recognition and Measurement, effective 1 January 2001

16 April 2009 Appendix to IAS 18 amended for Annual Improvements to IFRSs 2009. It now provides guidance for determining whether an entity is acting as a principal or as an agent.

1 January 2017 IAS 18 will be superseded by IFRS 15 Revenue from Contracts with Customers

Related Interpretations

IFRIC 18 Transfers of Assets from Customers IFRIC 15 Agreements for the Construction of Real Estate IFRIC 13 Customer Loyalty Programmes IFRIC 12 Service Concession Arrangements SIC-27 Evaluating the Substance of Transactions in the Legal Form of a Lease SIC-31 Revenue – Barter Transactions Involving Advertising Services

Summary of IAS 18

Objective of IAS 18

The objective of IAS 18 is to prescribe the accounting treatment for revenue arising from certain types of transactions and events.

Key definition

Revenue: the gross inflow of economic benefits (cash, receivables, other assets) arising from the ordinary operating activities of an entity (such as sales of goods, sales of services, interest, royalties, and dividends). [IAS 18.7]

Measurement of revenue

Revenue should be measured at the fair value of the consideration received or receivable. [IAS 18.9] An exchange for goods or services of a similar nature and value is not regarded as a transaction that generates revenue. However, exchanges for dissimilar items are regarded as generating revenue. [IAS 18.12]

If the inflow of cash or cash equivalents is deferred, the fair value of the consideration receivable is less than the nominal amount of cash and cash equivalents to be received, and discounting is appropriate. This would occur, for instance, if the seller is providing interest-free credit to the buyer or is charging a below-market rate of interest. Interest must be imputed based on market rates. [IAS 18.11]

Recognition of revenue

Recognition, as defined in the IASB Framework, means incorporating an item that meets the definition of revenue (above) in the income statement when it meets the following criteria:

it is probable that any future economic benefit associated with the item of revenue will flow to the entity, and the amount of revenue can be measured with reliability

IAS 18 provides guidance for recognising the following specific categories of revenue:

Sale of goods

Revenue arising from the sale of goods should be recognised when all of the following criteria have been satisfied: [IAS 18.14]

the seller has transferred to the buyer the significant risks and rewards of ownership the seller retains neither continuing managerial involvement to the degree usually associated with ownership nor

effective control over the goods sold the amount of revenue can be measured reliably it is probable that the economic benefits associated with the transaction will flow to the seller, and the costs incurred or to be incurred in respect of the transaction can be measured reliably

Rendering of services

For revenue arising from the rendering of services, provided that all of the following criteria are met, revenue should be recognised by reference to the stage of completion of the transaction at the balance sheet date (the percentage-of-completion method): [IAS 18.20]

the amount of revenue can be measured reliably; it is probable that the economic benefits will flow to the seller; the stage of completion at the balance sheet date can be measured reliably; and the costs incurred, or to be incurred, in respect of the transaction can be measured reliably.

When the above criteria are not met, revenue arising from the rendering of services should be recognised only to the extent of the expenses recognised that are recoverable (a "cost-recovery approach". [IAS 18.26]

Interest, royalties, and dividends

For interest, royalties and dividends, provided that it is probable that the economic benefits will flow to the enterprise and the amount of revenue can be measured reliably, revenue should be recognised as follows: [IAS 18.29-30]

interest: using the effective interest method as set out in IAS 39 royalties: on an accruals basis in accordance with the substance of the relevant agreement dividends: when the shareholder's right to receive payment is established

Disclosure [IAS 18.35]

accounting policy for recognising revenue amount of each of the following types of revenue:

o sale of goodso rendering of serviceso interesto royaltieso dividendso within each of the above categories, the amount of revenue from exchanges of goods or services

Implementation guidance

Appendix A to IAS 18 provides illustrative examples of how the above principles apply to certain transactions.

IAS 19 — Employee Benefits (2011) Share on email Share on facebook Share on twitter Share on linkedin More Sharing Services

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Overview

IAS 19 Employee Benefits (amended 2011) outlines the accounting requirements for employee benefits, including short-term benefits (e.g. wages and salaries, annual leave), post-employment benefits such as retirement benefits, other long-term benefits (e.g. long service leave) and termination benefits. The standard establishes the principle that the cost of providing employee benefits should be recognised in the period in which the benefit is earned by the employee, rather than when it is paid or payable, and outlines how each category of employee benefits are measured, providing detailed guidance in particular about post-employment benefits.

IAS 19 (2011) was issued in 2011, supersedes IAS 19 Employee Benefits (1998), and is applicable to annual periods beginning on or after 1 January 2013.

History of IAS 19Date Development Comments

April 1980 Exposure Draft E16 Accounting for Retirement Benefits in Financial Statements of Employers published

January 1983 IAS 19 Accounting for Retirement Benefits in Financial Statements of Employers issued

Operative for financial statements covering periods beginning on or after 1 January 1985

December 1992 E47 Retirement Benefit Costs published

December 1993 IAS 19 Retirement Benefit Costs issuedOperative for financial statements covering periods beginning on or after 1 January 1995

October 1996 E54 Employee Benefits published Comment deadline 31 January 1997

February 1998 IAS 19 Employee Benefits issuedOperative for financial statements covering periods beginning on or after 1 January 1999

July 2000 E67 Pension Plan Assets published

October 2000Amended to change the definition of plan assets and to introduce recognition, measurement and disclosure requirements for reimbursements

Operative for annual financial statements covering periods beginning on or after 1 January 2001

May 2002Amended to prevent the recognition of gains solely as a result of actuarial losses or past service cost and the recognition of losses solely as a result of actuarial gains

Operative for annual financial statements covering periods ending on or after 31 May 2002

5 December 2002 ED 2 Share-based Payment published, proposing to replace the equity compensation benefits requirements of IAS 19 Comment deadline 7 March 2003

February 2004 Equity compensation benefits requirements replaced by IFRS 2 Share-based Payment

Effective for annual reporting periods beginning on or after 1 January 2005

29 April 2004Exposure Draft Proposed Amendments to IAS 19 Employee Benefits: Actuarial Gains and Losses, Group Plans and Disclosures published

Comment deadline 31 July 2004

19 December 2004 Actuarial Gains and Losses, Group Plans and Disclosures issued Effective for annual periods beginning on or after 1 January 2006

22 May 2008 Amended by Annual Improvements to IFRSs (negative past service costs and curtailments)

Effective for annual periods beginning on or after 1 January 2009

20 August 2009 ED/2009/10 Discount Rate for Employee Benefits (Proposed amendments to IAS 19) published

Comment deadline 30 September 2009(proposals were not finalised)

29 April 2010 ED/2010/3 Defined Benefit Plans (Proposed amendments to IAS 19) published Comment deadline 6 September 2010

16 June 2011 IAS 19 Employee Benefits (amended 2011) issued Effective for annual periods beginning on or after 1 January 2013

25 March 2013 ED/2013/4 Defined Benefit Plans: Employee Contributions (Proposed amendments to IAS 19) published Comment deadline 25 July 2013

21 November 2013 Defined Benefit Plans: Employee Contributions (Amendments to IAS 19) issued

Effective for annual periods beginning on or after 1 July 2014

25 September 2014 Amended by Improvements to IFRSs 2014 (discount rate: regional market issue)

Effective for annual periods beginning on or after 1 January 2016

Related Interpretations

IFRIC 14 IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction

Amendments under consideration by the IASB

Research project — Discount rates Post-employment Benefits — Comprehensive reconsideration of IAS 19 (longer term project)

In addition, the IASB has signalled an intention to conduct a post-implementation review, commencing in 2015.

Summary of IAS 19 (2011)Amended version of IAS 19 issued in 2011

IAS 19 Employee Benefits (2011) is an amended version of, and supersedes, IAS 19 Employee Benefits (1998), effective for annual periods beginning on or after 1 January 2013. The summary that follows refers to IAS 19 (2011). Readers interested in the requirements of IAS 19 Employee Benefits (1998) should refer to our summary of IAS   19 (1998).

Changes introduced by IAS 19 (2011) as compared to IAS 19 (1998) include:

Introducing a requirement to fully recognise changes in the net defined benefit liability (asset) including immediate recognition of defined benefit costs, and require disaggregation of the overall defined benefit cost into components and requiring the recognition of remeasurements in other comprehensive income (eliminating the 'corridor' approach)

Introducing enhanced disclosures about defined benefit plans Modifications to the accounting for termination benefits, including distinguishing between benefits provided in

exchange for service and benefits provided in exchange for the termination of employment, and changing the recognition and measurement of termination benefits

Clarification of miscellaneous issues, including the classification of employee benefits, current estimates of mortality rates, tax and administration costs and risk-sharing and conditional indexation features

Incorporating other matters submitted to the IFRS Interpretations Committee.

Objective of IAS 19 (2011)

The objective of IAS 19 is to prescribe the accounting and disclosure for employee benefits, requiring an entity to recognise a liability where an employee has provided service and an expense when the entity consumes the economic benefits of employee service. [IAS 19(2011).2]

Scope

IAS 19 applies to (among other kinds of employee benefits):

wages and salaries compensated absences (paid vacation and sick leave) profit sharing and bonuses medical and life insurance benefits during employment non-monetary benefits such as houses, cars, and free or subsidised goods or services retirement benefits, including pensions and lump sum payments post-employment medical and life insurance benefits long-service or sabbatical leave 'jubilee' benefits deferred compensation programmes

termination benefits.

IAS 19 (2011) does not apply to employee benefits within the scope of IFRS   2 Share-based Payment or the reporting by employee benefit plans (see IAS   26 Accounting and Reporting by Retirement Benefit Plans).

Short-term employee benefits

Short-term employee benefits are those expected to be settled wholly before twelve months after the end of the annual reporting period during which employee services are rendered, but do not include termination benefits.[IAS 19(2011).8] Examples include wages, salaries, profit-sharing and bonuses and non-monetary benefits paid to current employees.

The undiscounted amount of the benefits expected to be paid in respect of service rendered by employees in an accounting period is recognised in that period. [IAS 19(2011).11] The expected cost of short-term compensated absences is recognised as the employees render service that increases their entitlement or, in the case of non-accumulating absences, when the absences occur, and includes any additional amounts an entity expects to pay as a result of unused entitlements at the end of the period. [IAS 19(2011).13-16]

Profit-sharing and bonus payments

An entity recognises the expected cost of profit-sharing and bonus payments when, and only when, it has a legal or constructive obligation to make such payments as a result of past events and a reliable estimate of the expected obligation can be made. [IAS 19.19]

Types of post-employment benefit plans

Post-employment benefit plans are informal or formal arrangements where an entity provides post-employment benefits to one or more employees, e.g. retirement benefits (pensions or lump sum payments), life insurance and medical care.

The accounting treatment for a post-employment benefit plan depends on the economic substance of the plan and results in the plan being classified as either a defined contribution plan or a defined benefit plan:

Defined contribution plans. Under a defined contribution plan, the entity pays fixed contributions into a fund but has no legal or constructive obligation to make further payments if the fund does not have sufficient assets to pay all of the employees' entitlements to post-employment benefits. The entity's obligation is therefore effectively limited to the amount it agrees to contribute to the fund and effectively place actuarial and investment risk on the employee

Defined benefit plans These are post-employment benefit plans other than a defined contribution plans. These plans create an obligation on the entity to provide agreed benefits to current and past employees and effectively places actuarial and investment risk on the entity.

Defined contribution plans

For defined contribution plans, the amount recognised in the period is the contribution payable in exchange for service rendered by employees during the period. [IAS 19(2011).51]

Contributions to a defined contribution plan which are not expected to be wholly settled within 12 months after the end of the annual reporting period in which the employee renders the related service are discounted to their present value. [IAS 19.52]

Defined benefit plans

Basic requirements

An entity is required to recognise the net defined benefit liability or asset in its statement of financial performance. [IAS 19(2011).63] However, the measurement of a net defined benefit asset is the lower of any surplus in the fund and the 'asset ceiling' (i.e. the present value of any economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan). [IAS 19(2011).64]

Measurement

The measurement of a net defined benefit liability or assets requires the application of an actuarial valuation method, the attribution of benefits to periods of service, and the use of actuarial assumptions. [IAS 19(2011).66] The fair value of any plan assets is deducted from the present value of the defined benefit obligation in determining the net deficit or surplus. [IAS 19(2011).113]

The determination of the net defined benefit liability (or asset) is carried out with sufficient regularity such that the amounts recognised in the financial statements do not differ materially from those that would be determined at end of the reporting period. [IAS 19(2011).58]

The present value of an entity's defined benefit obligations and related service costs is determined using the 'projected unit credit method', which sees each period of service as giving rise to an additional unit of benefit entitlement and measures each unit separately in building up the final obligation. [IAS 19(2011).67-68] This requires an entity to attribute benefit to the current period (to determine current service cost) and the current and prior periods (to determine the present value of defined benefit obligations). Benefit is attributed to periods of service using the plan's benefit formula, unless an employee's service in later years will lead to a materially higher of benefit than in earlier years, in which case a straight-line basis is used [IAS 19(2011).70]

Actuarial assumptions used in measurement

The overall actuarial assumptions used must be unbiased and mutually compatible, and represent the best estimate of the variables determining the ultimate post-employment benefit cost. [IAS 19(2011).75-76]:

Financial assumptions must be based on market expectations at the end of the reporting period [IAS 19(2011).80] Mortality assumptions are determined by reference to the best estimate of the mortality of plan members during and

after employment [IAS 19(2011).81] The discount rate used is determined by reference to market yields at the end of the reporting period on high quality

corporate bonds, or where there is no deep market in such bonds, by reference to market yields on government bonds. Currencies and terms of bond yields used must be consistent with the currency and estimated term of the obligation being discounted [IAS 19(2011).83]

Assumptions about expected salaries and benefits reflect the terms of the plan, future salary increases, any limits on the employer's share of cost, contributions from employees or third parties*, and estimated future changes in state benefits that impact benefits payable [IAS 19(2011).87]

Medical cost assumptions incorporate future changes resulting from inflation and specific changes in medical costs [IAS 19(2011).96]

* Defined Benefit Plans: Employee Contributions (Amendments to IAS 19 Employee Benefits) amends IAS 19(2011) to clarify the requirements that relate to how contributions from employees or third parties that are linked to service should be attributed to periods of service. In addition, it permits a practical expedient if the amount of the contributions is independent of the number of years of service, in that contributions, can, but are not required, to be recognised as a reduction in the service cost in the period in which the related service is rendered. These amendments are effective for annual periods beginning on or after 1 July 2014.

Past service costs

Past service cost is the term used to describe the change in a defined benefit obligation for employee service in prior periods, arising as a result of changes to plan arrangements in the current period (i.e. plan amendments introducing or changing benefits payable, or curtailments which significantly reduce the number of covered employees) .

Past service cost may be either positive (where benefits are introduced or improved) or negative (where existing benefits are reduced). Past service cost is recognised as an expense at the earlier of the date when a plan amendment or curtailment occurs and the date when an entity recognises any termination benefits, or related restructuring costs under IAS   37 Provisions, Contingent Liabilities and Contingent Assets. [IAS 19(2011).103]

Gains or losses on the settlement of a defined benefit plan are recognised when the settlement occurs. [IAS 19(2011).110]

Before past service costs are determined, or a gain or loss on settlement is recognised, the net defined benefit liability or asset is required to be remeasured, however an entity is not required to distinguish between past service costs resulting from curtailments and gains and losses on settlement where these transactions occur together. [IAS 19(2011).99-100]

Recognition of defined benefit costs

The components of defined benefit cost is recognised as follows: [IAS 19(2011).120-130]

Component Recognition

Service cost attributable to the current and past periods Profit or loss

Net interest on the net defined benefit liability or asset, determined using the discount rate at the beginning of the period Profit or loss

Remeasurements of the net defined benefit liability or asset, comprising:

actuarial gains and losses return on plan assets some changes in the effect of the asset ceiling

Other comprehensive income(Not reclassified to profit or loss in a subsequent period)

Other guidance

IAS 19 also provides guidance in relation to:

when an entity should recognise a reimbursement of expenditure to settle a defined benefit obligation [IAS 19(2011).116-119]

when it is appropriate to offset an asset relating to one plan against a liability relating to another plan [IAS 19(2011).131-132]

accounting for multi-employer plans by individual employers [IAS 19(2011).32-39] defined benefit plans sharing risks between entities under common control [IAS 19.40-42] entities participating in state plans [IAS 19(2011).43-45] insurance premiums paid to fund post-employment benefit plans [IAS 19(2011).46-49]

Disclosures about defined benefit plans

IAS 19(2011) sets the following disclosure objectives in relation to defined benefit plans [IAS 19(2011).135]:

an explanation of the characteristics of an entity's defined benefit plans, and the associated risks

identification and explanation of the amounts arising in the financial statements from defined benefit plans a description of how defined benefit plans may affect the amount, timing and uncertainty of the entity's future cash

flows.

Extensive specific disclosures in relation to meeting each the above objectives are specified, e.g. a reconciliation from the opening balance to the closing balance of the net defined benefit liability or asset, disaggregation of the fair value of plan assets into classes, and sensitivity analysis of each significant actuarial assumption. [IAS 19(2011).136-147]

Additional disclosures are required in relation to multi-employer plans and defined benefit plans sharing risk between entities under common control. [IAS 19(2011).148-150].

Other long-term benefits

IAS 19 (2011) prescribes a modified application of the post-employment benefit model described above for other long-term employee benefits: [IAS 19(2011).153-154]

the recognition and measurement of a surplus or deficit in an other long-term employee benefit plan is consistent with the requirements outlined above

service cost, net interest and remeasurements are all recognised in profit or loss (unless recognised in the cost of an asset under another IFRS), i.e. when compared to accounting for defined benefit plans, the effects of remeasurements are not recognised in other comprehensive income.

Termination benefits

A termination benefit liability is recognised at the earlier of the following dates: [IAS 19.165-168]

when the entity can no longer withdraw the offer of those benefits - additional guidance is provided on when this date occurs in relation to an employee's decision to accept an offer of benefits on termination, and as a result of an entity's decision to terminate an employee's employment

when the entity recognises costs for a restructuring under IAS 37 Provisions, Contingent Liabilities and Contingent Assets which involves the payment of termination benefits.

Termination benefits are measured in accordance with the nature of employee benefit, i.e. as an enhancement of other post-employment benefits, or otherwise as a short-term employee benefit or other long-term employee benefit. [IAS 19(2011).169]

IAS 20 — Accounting for Government Grants and Disclosure of Government Assistance Share on email Share on facebook Share on twitter Share on linkedin More Sharing Services

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Overview

IAS 20 Accounting for Government Grants and Disclosure of Government Assistance outlines how to account for government grants and other assistance. Government grants are recognised in profit or loss on a systematic basis over the periods in which the entity recognises expenses for the related costs for which the grants are intended to compensate, which in the case of grants related to assets requires setting up the grant as deferred income or deducting it from the carrying amount of the asset.

IAS 20 was issued in April 1983 and is applicable to annual periods beginning on or after 1 January 1984.

History of IAS 20September 1981 Exposure Draft E21 Accounting for Government Grants and Disclosure of Government Assistance

April 1983 IAS 20 Accounting for Government Grants and Disclosure of Government Assistance

1 January 1984 Effective date of IAS 20 (1983)

1994 IAS 20 (1983) was reformatted

22 May 2008IAS 20 amended for Annual Improvements to IFRSs 2007 to bring it in line with IAS 39 in respect of loans with the below market-rate of interest

1 January 2009 Effective date of May 2008 amendment to IAS 20

Related Interpretations

SIC-10 Government Assistance – No Specific Relation to Operating Activities

Amendments under consideration by the IASB

Government Grants – Reconsideration of IAS 20 Emission Trading Schemes

Summary of IAS 20

Objective of IAS 20

The objective of IAS 20 is to prescribe the accounting for, and disclosure of, government grants and other forms of government assistance.

Scope

IAS 20 applies to all government grants and other forms of government assistance. [IAS 20.1] However, it does not cover government assistance that is provided in the form of benefits in determining taxable income. It does not cover government grants covered by IAS 41 Agriculture, either. [IAS 20.2] The benefit of a government loan at a below-market rate of interest is treated as a government grant. [IAS 20.10A]

Accounting for grants

A government grant is recognised only when there is reasonable assurance that (a) the entity will comply with any conditions attached to the grant and (b) the grant will be received. [IAS 20.7]

The grant is recognised as income over the period necessary to match them with the related costs, for which they are intended to compensate, on a systematic basis. [IAS 20.12]

Non-monetary grants, such as land or other resources, are usually accounted for at fair value, although recording both the asset and the grant at a nominal amount is also permitted. [IAS 20.23]

Even if there are no conditions attached to the assistance specifically relating to the operating activities of the entity (other than the requirement to operate in certain regions or industry sectors), such grants should not be credited to equity. [SIC-10]

A grant receivable as compensation for costs already incurred or for immediate financial support, with no future related costs, should be recognised as income in the period in which it is receivable. [IAS 20.20]

A grant relating to assets may be presented in one of two ways: [IAS 20.24]

as deferred income, or by deducting the grant from the asset's carrying amount.

A grant relating to income may be reported separately as 'other income' or deducted from the related expense. [IAS 20.29]

If a grant becomes repayable, it should be treated as a change in estimate. Where the original grant related to income, the repayment should be applied first against any related unamortised deferred credit, and any excess should be dealt with as an expense. Where the original grant related to an asset, the repayment should be treated as increasing the carrying amount of the asset or reducing the deferred income balance. The cumulative depreciation which would have been charged had the grant not been received should be charged as an expense. [IAS 20.32]

Disclosure of government grants

The following must be disclosed: [IAS 20.39]

accounting policy adopted for grants, including method of balance sheet presentation nature and extent of grants recognised in the financial statements unfulfilled conditions and contingencies attaching to recognised grants

Government assistance

Government grants do not include government assistance whose value cannot be reasonably measured, such as technical or marketing advice. [IAS 20.34] Disclosure of the benefits is required. [IAS 20.39(b)]

IAS 21 — The Effects of Changes in Foreign Exchange Rates Share on email Share on facebook Share on twitter Share on linkedin More Sharing Services

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Overview

IAS 21 The Effects of Changes in Foreign Exchange Rates outlines how to account for foreign currency transactions and operations in financial statements, and also how to translate financial statements into a presentation currency. An entity is required to determine a functional currency (for each of its operations if necessary) based on the primary economic environment in which it operates and generally records foreign currency transactions using the spot conversion rate to that functional currency on the date of the transaction.

IAS 21 was reissued in December 2003 and applies to annual periods beginning on or after 1 January 2005.

History of IAS 21December 1977 Exposure Draft E11 Accounting for Foreign Transactions and Translation of Foreign Financial Statements

March 1982E11 was modified and re-exposed as Exposure Draft E23 Accounting for the Effects of Changes in Foreign Exchange Rates

July 1983 IAS 21 Accounting for the Effects of Changes in Foreign Exchange Rates

1 January 1985 Effective date of IAS 21 (1983)

1993 IAS 21 (1983) was revised as part of the comparability of financial statements project

May 1992 Exposure Draft E44 The Effects of Changes in Foreign Exchange Rates

December 1993IAS 21 (1993) The Effects of Changes in Foreign Exchange Rates (revised as part of the 'Comparability of Financial Statements' project)

1 January 1995 Effective date of IAS 21 (1993)

18 December 2003 Revised version of IAS 21 issued by the IASB

1 January 2005 Effective date of IAS 21 (Revised 2003)

December 2005 Minor Amendment to IAS 21 relating to net investment in a foreign operation

1 January 2006 Effective date of the December 2005 amendments

10 January 2008Some revisions of IAS 21 as a result of the Business Combinations Phase II Project relating to disposals of foreign operations

1 July 2009 Effective date of the January 2008 amendments

Related Interpretations

IFRIC 16 Hedge of a Net Investment in a Foreign Operation SIC-30 Reporting Currency – Translation from Measurement Currency to Presentation Currency. SIC-30 was

superseded and incorporated into the 2003 revision of IAS 21. SIC-19 Reporting Currency – Measurement and Presentation of Financial Statements under IAS 21 and IAS 29. SIC-19

was superseded and incorporated into the 2003 revision of IAS 21. SIC-11 Foreign Exchange – Capitalisation of Losses Resulting from Severe Currency Devaluations. SIC-11 was

superseded and incorporated into the 2003 revision of IAS 21. SIC-7 Introduction of the Euro

Amendments under consideration by the IASB

Research project — Foreign currency translation

Summary of IAS 21

Objective of IAS 21

The objective of IAS 21 is to prescribe how to include foreign currency transactions and foreign operations in the financial statements of an entity and how to translate financial statements into a presentation currency. [IAS 21.1] The principal issues are which exchange rate(s) to use and how to report the effects of changes in exchange rates in the financial statements. [IAS 21.2]

Key definitions [IAS 21.8]

Functional currency: the currency of the primary economic environment in which the entity operates. (The term 'functional currency' was used in the 2003 revision of IAS 21 in place of 'measurement currency' but with essentially the same meaning.)

Presentation currency: the currency in which financial statements are presented.

Exchange difference: the difference resulting from translating a given number of units of one currency into another currency at different exchange rates.

Foreign operation: a subsidiary, associate, joint venture, or branch whose activities are based in a country or currency other than that of the reporting entity.

Basic steps for translating foreign currency amounts into the functional currency

Steps apply to a stand-alone entity, an entity with foreign operations (such as a parent with foreign subsidiaries), or a foreign operation (such as a foreign subsidiary or branch).

1. the reporting entity determines its functional currency

2. the entity translates all foreign currency items into its functional currency

3. the entity reports the effects of such translation in accordance with paragraphs 20-37 [reporting foreign currency transactions in the functional currency] and 50 [reporting the tax effects of exchange differences].

Foreign currency transactions

A foreign currency transaction should be recorded initially at the rate of exchange at the date of the transaction (use of averages is permitted if they are a reasonable approximation of actual). [IAS 21.21-22]

At each subsequent balance sheet date: [IAS 21.23]

foreign currency monetary amounts should be reported using the closing rate non-monetary items carried at historical cost should be reported using the exchange rate at the date of the

transaction non-monetary items carried at fair value should be reported at the rate that existed when the fair values were

determined

Exchange differences arising when monetary items are settled or when monetary items are translated at rates different from those at which they were translated when initially recognised or in previous financial statements are reported in profit or loss in the period, with one exception. [IAS 21.28] The exception is that exchange differences arising on monetary items that form part of the reporting entity's net investment in a foreign operation are recognised, in the consolidated financial statements that include the foreign operation, in other comprehensive income; they will be recognised in profit or loss on disposal of the net investment. [IAS 21.32]

As regards a monetary item that forms part of an entity's investment in a foreign operation, the accounting treatment in consolidated financial statements should not be dependent on the currency of the monetary item. [IAS 21.33] Also, the accounting should not depend on which entity within the group conducts a transaction with the foreign operation. [IAS 21.15A] If a gain or loss on a non-monetary item is recognised in other comprehensive income (for example, a property revaluation under IAS 16), any foreign exchange component of that gain or loss is also recognised in other comprehensive income. [IAS 21.30]

Translation from the functional currency to the presentation currency

The results and financial position of an entity whose functional currency is not the currency of a hyperinflationary economy are translated into a different presentation currency using the following procedures: [IAS 21.39]

assets and liabilities for each balance sheet presented (including comparatives) are translated at the closing rate at the date of that balance sheet. This would include any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition of that foreign operation are treated as part of the assets and liabilities of the foreign operation [IAS 21.47];

income and expenses for each income statement (including comparatives) are translated at exchange rates at the dates of the transactions; and

all resulting exchange differences are recognised in other comprehensive income.

Special rules apply for translating the results and financial position of an entity whose functional currency is the currency of a hyperinflationary economy into a different presentation currency. [IAS 21.42-43]

Where the foreign entity reports in the currency of a hyperinflationary economy, the financial statements of the foreign entity should be restated as required by IAS 29 Financial Reporting in Hyperinflationary Economies, before translation into the reporting currency. [IAS 21.36]

The requirements of IAS 21 regarding transactions and translation of financial statements should be strictly applied in the changeover of the national currencies of participating Member States of the European Union to the Euro – monetary assets and liabilities should continue to be translated the closing rate, cumulative exchange differences should remain in equity and exchange differences resulting from the translation of liabilities denominated in participating currencies should not be included in the carrying amount of related assets. [SIC-7]

Disposal of a foreign operation

When a foreign operation is disposed of, the cumulative amount of the exchange differences recognised in other comprehensive income and accumulated in the separate component of equity relating to that foreign operation shall be recognised in profit or loss when the gain or loss on disposal is recognised. [IAS 21.48]

Tax effects of exchange differences

These must be accounted for using IAS 12 Income Taxes.

Disclosure

The amount of exchange differences recognised in profit or loss (excluding differences arising on financial instruments measured at fair value through profit or loss in accordance with IAS 39) [IAS 21.52(a)]

Net exchange differences recognised in other comprehensive income and accumulated in a separate component of equity, and a reconciliation of the amount of such exchange differences at the beginning and end of the period [IAS 21.52(b)]

When the presentation currency is different from the functional currency, disclose that fact together with the functional currency and the reason for using a different presentation currency [IAS 21.53]

A change in the functional currency of either the reporting entity or a significant foreign operation and the reason therefor [IAS 21.54]

When an entity presents its financial statements in a currency that is different from its functional currency, it may describe those financial statements as complying with IFRS only if they comply with all the requirements of each applicable Standard (including IAS 21) and each applicable Interpretation. [IAS 21.55]

Convenience translations

Sometimes, an entity displays its financial statements or other financial information in a currency that is different from either its functional currency or its presentation currency simply by translating all amounts at end-of-period exchange rates. This is sometimes called a convenience translation. A result of making a convenience translation is that the resulting financial information does not comply with all IFRS, particularly IAS 21. In this case, the following disclosures are required: [IAS 21.57]

Clearly identify the information as supplementary information to distinguish it from the information that complies with IFRS

Disclose the currency in which the supplementary information is displayed Disclose the entity's functional currency and the method of translation used to determine the supplementary

information

IAS 22 — Business Combinations (Superseded) Share on email Share on facebook Share on twitter Share on linkedin More Sharing Services

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History of IAS 22September 1981 Exposure Draft E22 Accounting for Business Combinations

November 1983 IAS 22 Accounting for Business Combinations

1 January 1985 Effective date of IAS 22 (1983)

June 1992 Exposure Draft E54 Business Combinations

December 1993 IAS 22 (1993), Business Combinations (revised as part of the 'Comparability of Financial Statements' project)

1 January 1995 Effective date of IAS 22 (1993)

August 1997 Exposure Draft E61 Business Combinations

September 1998 IAS 22 (1998) Business Combinations

1 July 1999 Effective date of IAS 22 (1998) Business Combinations

31 March 2004IAS 22 superseded by IFRS 3 Business Combinations (2004), effective for business combinations for which the agreement date is on or after 31 March 2004

Related Interpretations

SIC-9 Business Combinations – Classification either as Acquisitions or Unitings of Interests. Superseded by IFRS 3. SIC-22 Business Combinations – Subsequent Adjustment of Fair Values and Goodwill Initially Reported. Superseded by

IFRS 3. SIC-28 Business Combinations – 'Date of Exchange' and Fair Value of Equity Instruments. Superseded by IFRS 3.

Amendments under consideration by the IASB

IAS 23 — Borrowing Costs Share on email Share on facebook Share on twitter Share on linkedin More Sharing Services

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Overview

IAS 23 Borrowing Costs requires that borrowing costs directly attributable to the acquisition, construction or production of a 'qualifying asset' (one that necessarily takes a substantial period of time to get ready for its intended use or sale) are included in the cost of the asset. Other borrowing costs are recognised as an expense.

IAS 23 was reissued in March 2007 and applies to annual periods beginning on or after 1 January 2009.

History of IAS 23November 1982 Exposure Draft E24 Capitalisation of Borrowing Costs

March 1984 IAS 23 Capitalisation of Borrowing Costs

1 January 1986 Effective date of IAS 23 (1984)

August 1991 Exposure Draft E39 Capitalisation of Borrowing Costs

December 1993 IAS 23 (1993) Borrowing Costs (revised as part of the 'Comparability of Financial Statements' project)

1 January 1995 Effective date of IAS 23 (1993) Borrowing Costs

25 May 2006 Exposure Draft of proposed amendments to IAS 23

29 March 2007 IASB amends IAS 23 to require capitalisation of borrowing costs.

22 May 2008 IAS 23 amended for 'Annual Improvements to IFRSs 2007 for components of borrowing costs

1 January 2009 Effective date of March 2007 and May 2008 amendments to IAS 23

Related Interpretations

SIC-2 Consistency – Capitalisation of Borrowing Costs. SIC-2 was superseded by and incorporated into IAS 8 in December 2003.

Amendments under consideration by the IASB

None

Summary of IAS 23

Objective of IAS 23

The objective of IAS 23 is to prescribe the accounting treatment for borrowing costs. Borrowing costs include interest on bank overdrafts and borrowings, amortisation of discounts or premiums on borrowings, finance charges on finance leases and exchange differences on foreign currency borrowings where they are regarded as an adjustment to interest costs.

Key definitions

Borrowing cost may include: [IAS 23.6]

interest expense calculated by the effective interest method under IAS 39, finance charges in respect of finance leases recognised in accordance with IAS 17 Leases, and exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment

to interest costs

This standard does not deal with the actual or imputed cost of equity, including any preferred capital not classified as a liability pursuant to IAS 32. [IAS 23.3]

A qualifying asset is an asset that takes a substantial period of time to get ready for its intended use or sale. [IAS 23.5] That could be property, plant, and equipment and investment property during the construction period, intangible assets during the development period, or "made-to-order" inventories. [IAS 23.6]

Scope of IAS 23

Two types of assets that would otherwise be qualifying assets are excluded from the scope of IAS 23:

qualifying assets measured at fair value, such as biological assets accounted for under IAS 41 Agriculture inventories that are manufactured, or otherwise produced, in large quantities on a repetitive basis and that take a

substantial period to get ready for sale (for example, maturing whisky)

Accounting treatment

Recognition

Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset form part of the cost of that asset and, therefore, should be capitalised. Other borrowing costs are recognised as an expense. [IAS 23.8]

Measurement

Where funds are borrowed specifically, costs eligible for capitalisation are the actual costs incurred less any income earned on the temporary investment of such borrowings. [IAS 23.12] Where funds are part of a general pool, the eligible amount is determined by applying a capitalisation rate to the expenditure on that asset. The capitalisation rate will be the weighted average of the borrowing costs applicable to the general pool. [IAS 23.14]

Capitalisation should commence when expenditures are being incurred, borrowing costs are being incurred and activities that are necessary to prepare the asset for its intended use or sale are in progress (may include some activities prior to commencement of physical production). [IAS 23.17-18] Capitalisation should be suspended during periods in which active development is interrupted. [IAS 23.20] Capitalisation should cease when substantially all of

the activities necessary to prepare the asset for its intended use or sale are complete. [IAS 23.22] If only minor modifications are outstanding, this indicates that substantially all of the activities are complete. [IAS 23.23]

Where construction is completed in stages, which can be used while construction of the other parts continues, capitalisation of attributable borrowing costs should cease when substantially all of the activities necessary to prepare that part for its intended use or sale are complete. [IAS 23.24]

Disclosure [IAS 23.26]

amount of borrowing cost capitalised during the period capitalisation rate used

IAS 24 — Related Party Disclosures Share on email Share on facebook Share on twitter Share on linkedin More Sharing Services

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Overview

IAS 24 Related Party Disclosures requires disclosures about transactions and outstanding balances with an entity's related parties. The standard defines various classes of entities and people as related parties and sets out the disclosures required in respect of those parties, including the compensation of key management personnel.

IAS 24 was reissued in November 2009 and applies to annual periods beginning on or after 1 January 2011.

History of IAS 24Date Development Comments

March 1983 Exposure Draft E25 Disclosure of Related Party Transactions

July 1984 IAS 24 Related Party Disclosures issued Effective 1 January 1986

1994 IAS 24 was reformatted

18 December 2003 IAS 24 Related Party DisclosuresEffective for annual periods beginning on or after 1 January 2005

22 February 2007 Exposure Draft State-controlled Entities and the Definition of a Related Party published

Comment deadline 25 May 2007

11 December 2008 Exposure Draft Relationships with the State (Proposed amendments to IAS 24) published

Comment deadline 13 March 2009

4 November 2009 IAS 24 Related Party Disclosures issuedEffective for annual periods beginning on or after 1 January 2011

12 December 2013 Amended by Annual Improvements to IFRSs 2010–2012 Cycle (entities providing key management personnel services)

Effective for annual periods beginning on or after 1 July 2014

Related Interpretations

None

Amendments under consideration by the IASB

None

Summary of IAS 24

Objective of IAS 24

The objective of IAS 24 is to ensure that an entity's financial statements contain the disclosures necessary to draw attention to the possibility that its financial position and profit or loss may have been affected by the existence of related parties and by transactions and outstanding balances with such parties.

Who are related parties?

A related party is a person or entity that is related to the entity that is preparing its financial statements (referred to as the 'reporting entity') [IAS 24.9].

(a) A person or a close member of that person's family is related to a reporting entity if that person: o (i) has control or joint control over the reporting entity;o (ii) has significant influence over the reporting entity; oro (iii) is a member of the key management personnel of the reporting entity or of a parent of the reporting

entity. (b) An entity is related to a reporting entity if any of the following conditions applies:

o (i) The entity and the reporting entity are members of the same group (which means that each parent, subsidiary and fellow subsidiary is related to the others).

o (ii) One entity is an associate or joint venture of the other entity (or an associate or joint venture of a member of a group of which the other entity is a member).

o (iii) Both entities are joint ventures of the same third party.o (iv) One entity is a joint venture of a third entity and the other entity is an associate of the third entity.o (v) The entity is a post-employment defined benefit plan for the benefit of employees of either the

reporting entity or an entity related to the reporting entity. If the reporting entity is itself such a plan, the sponsoring employers are also related to the reporting entity.

o (vi) The entity is controlled or jointly controlled by a person identified in (a).o (vii) A person identified in (a)(i) has significant influence over the entity or is a member of the key

management personnel of the entity (or of a parent of the entity).o (viii) The entity, or any member of a group of which it is a part, provides key management personnel

services to the reporting entity or to the parent of the reporting entity*.

* Requirement added by Annual Improvements to IFRSs 2010–2012 Cycle, effective for annual periods beginning on or after 1 July 2014.

The following are deemed not to be related: [IAS 24.11]

two entities simply because they have a director or key manager in common two venturers who share joint control over a joint venture providers of finance, trade unions, public utilities, and departments and agencies of a government that does not

control, jointly control or significantly influence the reporting entity, simply by virtue of their normal dealings with an entity (even though they may affect the freedom of action of an entity or participate in its decision-making process)

a single customer, supplier, franchiser, distributor, or general agent with whom an entity transacts a significant volume of business merely by virtue of the resulting economic dependence

What are related party transactions?

A related party transaction is a transfer of resources, services, or obligations between related parties, regardless of whether a price is charged. [IAS 24.9]

Disclosure

Relationships between parents and subsidiaries. Regardless of whether there have been transactions between a parent and a subsidiary, an entity must disclose the name of its parent and, if different, the ultimate controlling party. If neither the entity's parent nor the ultimate controlling party produces financial statements available for public use, the name of the next most senior parent that does so must also be disclosed. [IAS 24.16]

Management compensation. Disclose key management personnel compensation in total and for each of the following categories: [IAS 24.17]

short-term employee benefits post-employment benefits other long-term benefits termination benefits share-based payment benefits

Key management personnel are those persons having authority and responsibility for planning, directing, and controlling the activities of the entity, directly or indirectly, including any directors (whether executive or otherwise) of the entity. [IAS 24.9]

If an entity obtains key management personnel services from a management entity, the entity is not required to disclose the compensation paid or payable by the management entity to the management entity’s employees or directors. Instead the entity discloses the amounts incurred by the entity for the provision of key management personnel services that are provided by the separate management entity*. [IAS 24.17A, 18A]

* These requirements were introduced by Annual Improvements to IFRSs 2010–2012 Cycle, effective for annual periods beginning on or after 1 July 2014.

 

Related party transactions. If there have been transactions between related parties, disclose the nature of the related party relationship as well as information about the transactions and outstanding balances necessary for an understanding of the potential effect of the relationship on the financial statements. These disclosure would be made separately for each category of related parties and would include: [IAS 24.18-19]

the amount of the transactions the amount of outstanding balances, including terms and conditions and guarantees provisions for doubtful debts related to the amount of outstanding balances expense recognised during the period in respect of bad or doubtful debts due from related parties

Examples of the kinds of transactions that are disclosed if they are with a related party

purchases or sales of goods purchases or sales of property and other assets rendering or receiving of services leases transfers of research and development transfers under licence agreements transfers under finance arrangements (including loans and equity contributions in cash or in kind) provision of guarantees or collateral commitments to do something if a particular event occurs or does not occur in the future, including executory

contracts (recognised and unrecognised) settlement of liabilities on behalf of the entity or by the entity on behalf of another party

A statement that related party transactions were made on terms equivalent to those that prevail in arm's length transactions should be made only if such terms can be substantiated. [IAS 24.21]

IAS 26 — Accounting and Reporting by Retirement Benefit Plans Share on email Share on facebook Share on twitter Share on linkedin More Sharing Services

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Overview

IAS 26 Accounting and Reporting by Retirement Benefit Plans outlines the requirements for the preparation of financial statements of retirement benefit plans. It outlines the financial statements required and discusses the measurement of various line items, particularly the actuarial present value of promised retirement benefits for defined benefit plans.

IAS 26 was issued in January 1987 and applies to annual periods beginning on or after 1 January 1988.

History of IAS 26July 1985 Exposure Draft E27 Accounting and Reporting by Retirement Benefit Plans

January 1987 IAS 26 Accounting and Reporting by Retirement Benefit Plans

1 January 1988 Effective date of IAS 26 (1987)

1994 IAS 26 was reformatted

Related Interpretations

None

Summary of IAS 26

Objective of IAS 26

The objective of IAS 26 is to specify measurement and disclosure principles for the reports of retirement benefit plans. All plans should include in their reports a statement of changes in net assets available for benefits, a summary of significant accounting policies and a description of the plan and the effect of any changes in the plan during the period.

Key definitions

Retirement benefit plan: An arrangement by which an entity provides benefits (annual income or lump sum) to employees after they terminate from service. [IAS 26.8]

Defined contribution plan: A retirement benefit plan by which benefits to employees are based on the amount of funds contributed to the plan plus investment earnings thereon. [IAS 26.8]

Defined benefit plan: A retirement benefit plan by which employees receive benefits based on a formula usually linked to employee earnings. [IAS 26.8]

Defined contribution plans

The report of a defined contribution plan should contain a statement of net assets available for benefits and a description of the funding policy. [IAS 26.13]

Defined benefit plans

The report of a defined benefit plan should contain either: [IAS 26.17]

a statement that shows the net assets available for benefits, the actuarial present value of promised retirement benefits (distinguishing between vested benefits and non-vested benefits) and the resulting excess or deficit; or

a statement of net assets available for benefits, including either a note disclosing the actuarial present value of promised retirement benefits (distinguishing between vested benefits and non-vested benefits) or a reference to this information in an accompanying actuarial report.

If an actuarial valuation has not been prepared at the date of the report of a defined benefit plan, the most recent valuation should be used as a base and the date of the valuation disclosed. The actuarial present value of promised retirement benefits should be based on the benefits promised under the terms of the plan on service rendered to date, using either current salary levels or projected salary levels, with disclosure of the basis used. The effect of any changes in actuarial assumptions that have had a significant effect on the actuarial present value of promised retirement benefits should also be disclosed. [IAS 26.18]

The report should explain the relationship between the actuarial present value of promised retirement benefits and the net assets available for benefits, and the policy for the funding of promised benefits. [IAS 26.19]

Retirement benefit plan investments should be carried at fair value. For marketable securities, fair value means market value. If fair values cannot be estimated for certain retirement benefit plan investments, disclosure should be made of the reason why fair value is not used. [IAS 26.32]

Disclosure

Statement of net assets available for benefit, showing: [IAS 26.35(a)] o assets at the end of the periodo basis of valuationo details of any single investment exceeding 5% of net assets or 5% of any category of investmento details of investment in the employero liabilities other than the actuarial present value of plan benefits

Statement of changes in net assets available for benefits, showing: [IAS 26.35(b)] o employer contributionso employee contributionso investment incomeo other incomeo benefits paido administrative expenseso other expenseso income taxeso profit or loss on disposal of investmentso changes in fair value of investmentso transfers to/from other plans

Description of funding policy [IAS 26.35(c)] Other details about the plan [IAS 26.36] Summary of significant accounting policies [IAS 26.34(b)] Description of the plan and of the effect of any changes in the plan during the period [IAS 26.34(c)] Disclosures for defined benefit plans: [IAS 26.35(d) and (e)]

o actuarial present value of promised benefit obligationso description of actuarial assumptionso description of the method used to calculate the actuarial present value of promised benefit obligations

IAS 27 — Separate Financial Statements (2011) Share on email Share on facebook Share on twitter Share on linkedin More Sharing Services

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IAS 27 Separate Financial Statements (as amended in 2011) outlines the accounting and disclosure requirements for 'separate financial statements', which are financial statements prepared by a parent, or an investor in a joint venture or associate, where those investments are accounted for either at cost or in accordance with IAS 39 Financial Instruments: Recognition and Measurement or IFRS 9 Financial Instruments. The standard also outlines the accounting requirements for dividends and contains numerous disclosure requirements.

IAS 27 was reissued in May 2011 and applies to annual periods beginning on or after 1 January 2013, superseding IAS 27 Consolidated and Separate Financial Statements from that date.

History of IAS 27 (as amended in 2011)Date Development Comments

September 1987Exposure Draft E30 Consolidated Financial Statements and Accounting for Investments in Subsidiaries

April 1989IAS 27 Consolidated Financial Statements and Accounting for Investments in Subsidiaries issued

Effective 1 January 1990

1994 IAS 27 reformatted

December 1998Amended by IAS 39 Financial Instruments: Recognition and Measurement

Effective 1 January 2001

18 December 2003 IAS 27 Consolidated and Separate Financial Statements issuedEffective for annual periods beginning on or after 1 January 2005

25 June 2005 Exposure Draft of Proposed Amendments to IFRS 3 and IAS 27

10 January 2008 IAS 27 Consolidated and Separate Financial Statements (2008) issuedEffective for annual periods beginning on or after 1 July 2009

22 May 2008 Amended by Cost of a Subsidiary in the Separate Financial Statements of Effective for annual periods

a Parent on First-time Adoption of IFRSsbeginning on or after 1 January 2009

22 May 2008 Amended by Annual Improvements to IFRSs (investments in subsidiaries held for sale)

Effective for annual periods beginning on or after 1 January 2009

6 May 2010 Amended by Annual Improvements to IFRSs 2010 (transitional requirements)

Effective for annual periods beginning on or after 1 July 2010

12 May 2011

Reissued as IAS 27 Separate Financial Statements (as amended in 2011). Consolidation requirements previously forming part of IAS 27 (2008) have been revised and are now contained in IFRS 10 Consolidated Financial Statements

Effective for annual periods beginning on or after 1 January 2013

31 October 2012Amended by Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27) (project history)

Effective for annual periods beginning on or after 1 January 2014

12 August 2014Amended by Equity Method in Separate Financial Statements (Amendments to IAS 27) (project history)

Effective for annual periods beginning on or after 1 January 2016, with earlier application permitted

Amendments under consideration by the IASB

IFRS 13 — Unit of account Research project — Common control transactions

Summary of IAS 27 (as amended in 2011)

The summary below applies to IAS 27 Separate Financial Statements, issued in May 2011 and applying to annual reporting periods beginning on or after 1 January 2013. For earlier reporting periods, refer to our summary of IAS 27 Consolidated and Separate Financial Statements.

Objectives of IAS 27

IAS 27 has the objective of setting standards to be applied in accounting for investments in subsidiaries, jointly ventures, and associates when an entity elects, or is required by local regulations, to present separate (non-consolidated) financial statements.

Key definitions

[IAS 27(2011).4]

Consolidated financial statements

Financial statements of a group in which the assets, liabilities, equity, income, expenses and cash flows of the parent and its subsidiaries are presented as those of a single economic entity

Separate financial statements

Financial statements presented by a parent (i.e. an investor with control of a subsidiary), an investor with joint control of, or significant influence over, an investee, in which the investments are accounted for at

cost or in accordance with IFRS 9 Financial Instruments

Preparation of separate financial statements

Requirement for separate financial statements

IAS 27 does not mandate which entities produce separate financial statements available for public use. It applies when an entity prepares separate financial statements that comply with International Financial Reporting Standards. [IAS 27(2011).3]

Financial statements in which the equity method is applied are not separate financial statements. Similarly, the financial statements of an entity that does not have a subsidiary, associate or joint venturer's interest in a joint venture are not separate financial statements. [IAS 27(2011).7]

An investment entity that is required, throughout the current period and all comparative periods presented, to apply the exception to consolidation for all of its subsidiaries in accordance with of IFRS   10 Consolidated Financial Statements presents separate financial statements as its only financial statements. [IAS 27(2011).8A]

[Note: The investment entity consolidation exemption was introduced into IFRS 10 by Investment Entities, issued on 31 October 2012 and effective for annual periods beginning on or after 1 January 2014.]

Choice of accounting method

When an entity prepares separate financial statements, investments in subsidiaries, associates, and jointly controlled entities are accounted for either: [IAS 27(2011).10]

at cost, or in accordance with IFRS 9 Financial Instruments (or IAS 39 Financial Instruments: Recognition and Measurement for

entities that have not yet adopted IFRS 9), or using the equity method as decribed in IAS 28 Investments in Associates and Joint Ventures. [See the amendment

information below.]

The entity applies the same accounting for each category of investments. Investments that are accounted for at cost and classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations are accounted for in accordance with that IFRS. Investments carried at cost should be measured at the lower of their carrying amount and fair value less costs to sell. The measurement of investments accounted for in accordance with IFRS 9 is not changed in such circumstances.

If an entity elects, in accordance with IAS 28 (as amended in 2011), to measure its investments in associates or joint ventures at fair value through profit or loss in accordance with IFRS 9, it shall also account for those investments in the same way in its separate financial statements. [IAS 27(2011).11]

Investment entities

[Note: The investment entity consolidation exemption was introduced into IFRS 10 by Investment Entities, issued on 31 October 2012 and effective for annual periods beginning on or after 1 January 2014.]

If a parent investment entity is required, in accordance with IFRS   10 , to measure its investment in a subsidiary at fair value through profit or loss in accordance with IFRS 9 or IAS 39, it is required to also account for its investment in a subsidiary in the same way in its separate financial statements. [IAS 27(2011).11A]

When a parent ceases to be an investment entity, the entity can account for an investment in a subsidiary at cost (based on fair value at the date of change or status) or in accordance with IFRS 9.  When an entity becomes an investment entity, it accounts for an investment in a subsidiary at fair value through profit or loss in accordance with IFRS 9. [IAS 27(2011).11B]

Recognition of dividends

An entity recognises a dividend from a subsidiary, joint venture or associate in profit or loss in its separate financial statements when its right to receive the dividend in established. [IAS 27(2011).12]

(Accounting for dividends where the equity method is applied to investments in joint ventures and associates is specified in IAS 28 Investments in Associates and Joint Ventures.)

Group reorganisations

Specified accounting applies in separate financial statements when a parent reorganises the structure of its group by establishing a new entity as its parent in a manner satisfying the following criteria: [IAS 27(2011).13]

the new parent obtains control of the original parent by issuing equity instruments in exchange for existing equity instruments of the original parent

the assets and liabilities of the new group and the original group are the same immediately before and after the reorganisation, and

the owners of the original parent before the reorganisation have the same absolute and relative interests in the net assets of the original group and the new group immediately before and after the reorganisation.

Where these criteria are met, and the new parent accounts for its investment in the original parent at cost, the new parent measures the carrying amount of its share of the equity items shown in the separate financial statements of the original parent at the date of the reorganisation. [IAS 27(2011).13]

The above requirements:

apply to the establishment of an intermediate parent within a group, as well as establishment of a new ultimate parent of a group [IAS 27(2011).BC24]

apply to an entity that is not a parent entity and establishes a parent in a manner that satisfies the above criteria [IAS 27(2011).14]

apply only where the criteria above are satisfied and do not apply to other types of reorganisations or for common control transactions more broadly. [IAS 27(2011).BC27].

Disclosure

When a parent, in accordance with paragraph 4(a) of IFRS 10, elects not to prepare consolidated financial statements and instead prepares separate financial statements, it shall disclose in those separate financial statements: [IAS 27(2011).16]

the fact that the financial statements are separate financial statements; that the exemption from consolidation has been used; the name and principal place of business (and country of incorporation if different) of the entity whose consolidated financial statements that comply with IFRS have been produced for public use; and the address where those consolidated financial statements are obtainable,

a list of significant investments in subsidiaries, jointly controlled entities, and associates, including the name, principal place of business (and country of incorporation if different), proportion of ownership interest and, if different, proportion of voting rights, and

a description of the method used to account for the foregoing investments.

When an investment entity that is a parent prepares separate financial statements as its only financial statements, it shall disclose that fact. The investment entity shall also present the disclosures relating to investment entities required by IFRS   12 . [IAS 27(2011).16A]

[Note: The investment entity consolidation exemption was introduced into IFRS 10 by Investment Entities, issued on 31 October 2012 and effective for annual periods beginning on or after 1 January 2014.]

When a parent (other than a parent covered by the above circumstances) or an investor with joint control of, or significant influence over, an investee prepares separate financial statements, the parent or investor shall identify the financial statements prepared in accordance with IFRS   10 , IFRS   11 or IAS   28 (as amended in 2011) to which they relate. The parent or investor shall also disclose in its separate financial statements: [IAS 27(2011).17]

the fact that the statements are separate financial statements and the reasons why those statements are prepared if not required by law,

a list of significant investments in subsidiaries, jointly controlled entities, and associates, including the name, principal place of business (and country of incorporation if different), proportion of ownership interest and, if different, proportion of voting rights, and

a description of the method used to account for the foregoing investments.

Applicability and early adoption

IAS 27 (as amended in 2011) is applicable to annual reporting periods beginning on or after 1 January 2013. [IAS 27(2011).18]

An entity may apply IAS 27 (as amended in 2011) to an earlier accounting period, but if doing so it must disclose the fact that is has early adopted the standard and also apply: [IAS 27(2011).18]

IFRS 10 Consolidated Financial Statements IFRS 11 Joint Arrangements IFRS 12 Disclosure of Interests in Other Entities IAS 28 Investments in Associates and Joint Ventures (as amended in 2011).

The amendments to IAS 27 (2011) made by Investment Entities are applicable to annual reporting periods beginning on or after 1 January 2014 and special transitional provisions apply.

Equity Method in Separate Financial Statements (Amendments to IAS 27), issued in August 2014, amended paragraphs 4–7, 10, 11B and 12. An entity shall apply those amendments for annual periods beginning on or after 1 January 2016 retrospectively in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. Earlier application is permitted. If an entity applies those amendments for an earlier period, it shall disclose that fact. [IAS 27(2011).18A-18J].

IAS 28 — Investments in Associates and Joint Ventures (2011) Quick article links

Overview

IAS 28 Investments in Associates and Joint Ventures (as amended in 2011) outlines how to apply, with certain limited exceptions, the equity method to investments in associates and joint ventures. The standard also defines an associate by reference to the concept of "significant influence", which requires power to participate in financial and operating policy decisions of an investee (but not joint control or control of those polices).

IAS 28 was reissued in May 2011 and applies to annual periods beginning on or after 1 January 2013.

History of IAS 28 (as amended in 2011)Date Development Comments

July 1986Exposure Draft E28 Accounting for Investments in Associates and Joint Ventures

April 1989 IAS 28 Accounting for Investments in Associates issued Effective 1 January 1990

1994 IAS 28 was reformatted

December 1998Amended by IAS 39 Financial Instruments: Recognition and Measurement

Effective 1 January 2001

18 December 2003 IAS 28 Investments in Associates issuedEffective for annual periods beginning on or after 1 January 2005

10 January 2008 Amended by IFRS 3 Business Combinations (loss of significant influence)

Effective for annual periods beginning on or after 1 July 2009

22 May 2008 Amended by Improvements to IFRSs (impairment testing)Effective for annual periods beginning on or after 1 January 2009

12 May 2011 IAS 28 Investments in Associates and Joint Ventures (2011) issued (supersedes IAS 28 (2003))

Effective for annual periods beginning on or after 1 January 2013

11 September 2014 Amended by Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (Amendments to IFRS 10 and IAS 28)

Effective on a prospective basis to transactions occurring in annual periods beginning on or after 1 January 2016

Related Interpretations

None

Amendments under consideration by the IASB

IAS 28 — Elimination of gains arising from 'downstream' transactions IFRS 10/IAS 28 — Investment entity amendments IFRS 13 — Unit of account

Research project — Equity method of accounting Research project — Common control transactions

Summary of IAS 28 (as amended in 2011)

The summary below applies to IAS 28 Investments in Associates and Joint Ventures, issued in May 2011 and applying to annual reporting periods beginning on or after 1 January 2013. For earlier reporting periods, refer to our summary of IAS 28 Investments in Associates.

Objective of IAS 28

The objective of IAS 28 (as amended in 2011) is to prescribe the accounting for investments in associates and to set out the requirements for the application of the equity method when accounting for investments in associates and joint ventures. [IAS 28(2011).1]

Scope of IAS 28

IAS 28 applies to all entities that are investors with joint control of, or significant influence over, an investee (associate or joint venture). [IAS 28(2011).2]

Key definitions

[IAS 28.3]

Associate An entity over which the investor has significant influence

Significant influence

The power to participate in the financial and operating policy decisions of the investee but is not control or joint control of those policies

Joint arrangement

An arrangement of which two or more parties have joint control

Joint controlThe contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control

Joint ventureA joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement

Joint venturer A party to a joint venture that has joint control of that joint venture

Equity method

A method of accounting whereby the investment is initially recognised at cost and adjusted thereafter for the post-acquisition change in the investor's share of the investee's net assets. The investor's profit or loss includes its share of the investee's profit or loss and the investor's other comprehensive income includes its share of the investee's other comprehensive income

Significant influence

Where an entity holds 20% or more of the voting power (directly or through subsidiaries) on an investee, it will be presumed the investor has significant influence unless it can be clearly demonstrated that this is not the case. If the holding is less than 20%, the entity will be presumed not to have significant influence unless such influence can be

clearly demonstrated. A substantial or majority ownership by another investor does not necessarily preclude an entity from having significant influence. [IAS 28(2011).5]

The existence of significant influence by an entity is usually evidenced in one or more of the following ways: [IAS 28(2011).6]

representation on the board of directors or equivalent governing body of the investee; participation in the policy-making process, including participation in decisions about dividends or other distributions; material transactions between the entity and the investee; interchange of managerial personnel; or provision of essential technical information

The existence and effect of potential voting rights that are currently exercisable or convertible, including potential voting rights held by other entities, are considered when assessing whether an entity has significant influence. In assessing whether potential voting rights contribute to significant influence, the entity examines all facts and circumstances that affect potential rights [IAS 28(2011).7, IAS 28(2011).8]

An entity loses significant influence over an investee when it loses the power to participate in the financial and operating policy decisions of that investee. The loss of significant influence can occur with or without a change in absolute or relative ownership levels. [IAS 28(2011).9]

The equity method of accounting

Basic principle. Under the equity method, on initial recognition the investment in an associate or a joint venture is recognised at cost, and the carrying amount is increased or decreased to recognise the investor's share of the profit or loss of the investee after the date of acquisition. [IAS 28(2011).10]

Distributions and other adjustments to carrying amount. The investor's share of the investee's profit or loss is recognised in the investor's profit or loss. Distributions received from an investee reduce the carrying amount of the investment. Adjustments to the carrying amount may also be necessary for changes in the investor's proportionate interest in the investee arising from changes in the investee's other comprehensive income (e.g. to account for changes arising from revaluations of property, plant and equipment and foreign currency translations.) [IAS 28(2011).10]

Potential voting rights. An entity's interest in an associate or a joint venture is determined solely on the basis of existing ownership interests and, generally, does not reflect the possible exercise or conversion of potential voting rights and other derivative instruments. [IAS 28(2011).12]

Interaction with IFRS 9. IFRS 9 Financial Instruments does not apply to interests in associates and joint ventures that are accounted for using the equity method. Instruments containing potential voting rights in an associate or a joint venture are accounted for in accordance with IFRS 9, unless they currently give access to the returns associated with an ownership interest in an associate or a joint venture. [IAS 28(2011).14]

Classification as non-current asset. An investment in an associate or a joint venture is generally classified as non-current asset, unless it is classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. [IAS 28(2011).15]

Application of the equity method of accounting

Basic principle. In its consolidated financial statements, an investor uses the equity method of accounting for investments in associates and joint ventures. [IAS 28(2011).16] Many of the procedures that are appropriate for the application of the equity method are similar to the consolidation procedures described in IFRS 10. Furthermore, the

concepts underlying the procedures used in accounting for the acquisition of a subsidiary are also adopted in accounting for the acquisition of an investment in an associate or a joint venture. [IAS 28.(2011).26]

Exemptions from applying the equity method. An entity is exempt from applying the equity method if the investment meets one of the following conditions:

The entity is a parent that is exempt from preparing consolidated financial statements under IFRS 10 Consolidated Financial Statementsor if all of the following four conditions are met (in which case the entity need not apply the equity method): [IAS 28(2011).17]

o the entity is a wholly-owned subsidiary, or is a partially-owned subsidiary of another entity and its other owners, including those not otherwise entitled to vote, have been informed about, and do not object to, the investor not applying the equity method

o the investor or joint venturer's debt or equity instruments are not traded in a public marketo the entity did not file, nor is it in the process of filing, its financial statements with a securities commission

or other regulatory organisation for the purpose of issuing any class of instruments in a public market, ando the ultimate or any intermediate parent of the entity produces consolidated financial statements available

for public use that comply with International Financial Reporting Standards. When an investment in an associate or a joint venture is held by, or is held indirectly through, an entity that is a

venture capital organisation, or a mutual fund, unit trust and similar entities including investment-linked insurance funds, the entity may elect to measure investments in those associates and joint ventures at fair value through profit or loss in accordance with IFRS 9. [IAS 28(2011).18] When an entity has an investment in an associate, a portion of which is held indirectly through a venture capital organisation, or a mutual fund, unit trust and similar entities including investment-linked insurance funds, the entity may elect to measure that portion of the investment in the associate at fair value through profit or loss in accordance with IFRS 9 regardless of whether the venture capital organisation, or the mutual fund, unit trust and similar entities including investment-linked insurance funds, has significant influence over that portion of the investment. If the entity makes that election, the entity shall apply the equity method to any remaining portion of its investment in an associate that is not held through a venture capital organisation, or a mutual fund, unit trust and similar entities including investment-linked insurance funds. [IAS 28(2011).19]

Classification as held for sale. When the investment, or portion of an investment, meets the criteria to be classified as held for sale, the portion so classified is accounted for in accordance with IFRS 5. Any remaining portion is accounted for using the equity method until the time of disposal, at which time the retained investment is accounted under IFRS 9, unless the retained interest continues to be an associate or joint venture. [IAS 28(2011).20]

Discontinuing the equity method. Use of the equity method should cease from the date that significant influence or joint control ceases: [IAS 28(2011).22]

If the investment becomes a subsidiary, the entity accounts for its investment in accordance with IFRS 3 Business Combinations and IFRS 10

If the retained interest is a financial asset, it is measured at fair value and subsequently accounted for under IFRS 9 Any amounts recognised in other comprehensive income in relation to the investment in the associate or joint

venture are accounted for on the same basis as if the investee had directly disposed of the related assets or liabilities (which may require reclassification to profit or loss)

If an investment in an associate becomes an investment in a joint venture (or vice versa), the entity continues to apply the equity method and does not remeasure the retained interest. [IAS 28(2011).24]

Changes in ownership interests. If an entity's interest in an associate or joint venture is reduced, but the equity method is continued to be applied, the entity reclassifies to profit or loss the proportion of the gain or loss previously recognised in other comprehensive income relative to that reduction in ownership interest. [IAS 28(2011).25]

Equity method procedures.

Transactions with associates or joint ventures. Profits and losses resulting from upstream (associate to investor, or joint venture to joint venturer) and downstream (investor to associate, or joint venturer to joint venture) transactions

are eliminated to the extent of the investor's interest in the associate or joint venture. However, unrealised losses are not eliminated to the extent that the transaction provides evidence of a reduction in the net realisable value or in the recoverable amount of the assets transferred. Contributions of non-monetary assets to an associate or joint venture in exchange for an equity interest in the associate or joint venture are also accounted for in accordance with these requirements. [IAS 28(2011).28-30]*

Date of financial statements. In applying the equity method, the investor or joint venturer should use the financial statements of the associate or joint venture as of the same date as the financial statements of the investor or joint venturer unless it is impracticable to do so. If it is impracticable, the most recent available financial statements of the associate or joint venture should be used, with adjustments made for the effects of any significant transactions or events occurring between the accounting period ends. However, the difference between the reporting date of the associate and that of the investor cannot be longer than three months. [IAS 28(2011).33, IAS 28(2011).34]

Accounting policies. If the associate or joint venture uses accounting policies that differ from those of the investor, the associate or joint venture's financial statements are adjusted to reflect the investor's accounting policies for the purpose of applying the equity method. [IAS 28(2011).35]

Losses in excess of investment. If an investor's or joint venturer's share of losses of an associate or joint venture equals or exceeds its interest in the associate or joint venture, the investor or joint venturer discontinues recognising its share of further losses. The interest in an associate or joint venture is the carrying amount of the investment in the associate or joint venture under the equity method together with any long-term interests that, in substance, form part of the investor or joint venturer's net investment in the associate or joint venture. After the investor or joint venturer's interest is reduced to zero, a liability is recognised only to the extent that the investor or joint venturer has incurred legal or constructive obligations or made payments on behalf of the associate. If the associate or joint venture subsequently reports profits, the investor or joint venturer resumes recognising its share of those profits only after its share of the profits equals the share of losses not recognised. [IAS 28(2011).38, IAS 28(2011).39]

*Note: The Sale or Contribution of Assets between an Investor and its Associate or Joint Venture amendments, effective 1 January 2016, added a requirement that gains or losses from downstream transactions involving assets that constitute a business between an entity and its associate or joint venture must be recognised in full in the investor's financial statements.

Impairment. After application of the equity method an entity applies IAS 39 Financial Instruments: Recognition and Measurement to determine whether it is necessary to recognise any additional impairment loss with respect to its net investment in the associate or joint venture. If impairment is indicated, the amount is calculated by reference to IAS 36 Impairment of Assets. The entire carrying amount of the investment is tested for impairment as a single asset, that is, goodwill is not tested separately. The recoverable amount of an investment in an associate is assessed for each individual associate or joint venture, unless the associate or joint venture does not generate cash flows independently. [IAS 28(2011).40, IAS 28(2011).42, IAS 28(2011).43]

Separate financial statements

An investment in an associate or a joint venture shall be accounted for in the entity's separate financial statements in accordance with IAS 27 Separate Financial Statements (as amended in 2011).

Disclosure

There are no disclosures specified in IAS 28. Instead, IFRS 12 Disclosure of Interests in Other Entities outlines the disclosures required for entities with joint control of, or significant influence over, an investee.

Applicability and early adoption

IAS 28 (2011) is applicable to annual reporting periods beginning on or after 1 January 2013. [IAS 28(2011).45]

An entity may apply IAS 28 (2011) to an earlier accounting period, but if doing so it must disclose the fact that is has early adopted the standard and also apply: [IAS 28(2011).45]

IFRS 10 Consolidated Financial Statements

IFRS 11 Joint Arrangements IFRS 12 Disclosure of Interests in Other Entities IAS 27 Separate Financial Statements (2011).

IAS 29 — Financial Reporting in Hyperinflationary Economies Share on email Share on facebook Share on twitter Share on linkedin More Sharing Services

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Overview

IAS 29 Financial Reporting in Hyperinflationary Economies applies where an entity's functional currency is that of a hyperinflationary economy. The standard does not prescribe when hyperinflation arises but requires the financial statements (and corresponding figures for previous periods) of an entity with a functional currency that is hyperinflationary to be restated for the changes in the general pricing power of the functional currency.

IAS 29 was issued in July 1989 and is operative for periods beginning on or after 1 January 1990.

History of IAS 29November 1987 Exposure Draft E31 Financial Reporting in Hyperinflationary Economies

July 1989 IAS 29 Financial Reporting in Hyperinflationary Economies

1 January 1990 Effective date of IAS 29 (1989)

1994 IAS 29 was reformatted

22 May 2008 IAS 29 amended for Annual Improvements to IFRSs 2007

1 January 2009 Effective date of the May 2008 revisions to IAS 29

Related Interpretations

IAS 21 superseded SIC-19 Reporting Currency – Measurement and Presentation of Financial Statements under IAS 21 and IAS 29

IAS 21 superseded SIC-30 Reporting Currency – Translation from Measurement Currency to Presentation Currency IFRIC 7 Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies

Amendments under consideration by the IASB

Research project — Financial reporting in high inflationary economies

Summary of IAS 29

Objective of IAS 29

The objective of IAS 29 is to establish specific standards for entities reporting in the currency of a hyperinflationary economy, so that the financial information provided is meaningful.

Restatement of financial statements

The basic principle in IAS 29 is that the financial statements of an entity that reports in the currency of a hyperinflationary economy should be stated in terms of the measuring unit current at the balance sheet date. Comparative figures for prior period(s) should be restated into the same current measuring unit. [IAS 29.8]

Restatements are made by applying a general price index. Items such as monetary items that are already stated at the measuring unit at the balance sheet date are not restated. Other items are restated based on the change in the general price index between the date those items were acquired or incurred and the balance sheet date.

A gain or loss on the net monetary position is included in net income. It should be disclosed separately. [IAS 29.9]

The restated amount of a non-monetary item is reduced, in accordance with appropriate IFRSs, when it exceeds its the recoverable amount. [IAS 29.19]

The Standard does not establish an absolute rate at which hyperinflation is deemed to arise - but allows judgement as to when restatement of financial statements becomes necessary. Characteristics of the economic environment of a country which indicate the existence of hyperinflation include: [IAS 29.3]

the general population prefers to keep its wealth in non-monetary assets or in a relatively stable foreign currency. Amounts of local currency held are immediately invested to maintain purchasing power;

the general population regards monetary amounts not in terms of the local currency but in terms of a relatively stable foreign currency. Prices may be quoted in that currency;

sales and purchases on credit take place at prices that compensate for the expected loss of purchasing power during the credit period, even if the period is short;

interest rates, wages, and prices are linked to a price index; and the cumulative inflation rate over three years approaches, or exceeds, 100%.

IAS 29 describes characteristics that may indicate that an economy is hyperinflationary. However, it concludes that it is a matter of judgement when restatement of financial statements becomes necessary.

When an economy ceases to be hyperinflationary and an entity discontinues the preparation and presentation of financial statements in accordance with IAS 29, it should treat the amounts expressed in the measuring unit current at the end of the previous reporting period as the basis for the carrying amounts in its subsequent financial statements. [IAS 29.38]

Disclosure

Gain or loss on monetary items [IAS 29.9] The fact that financial statements and other prior period data have been restated for changes in the general

purchasing power of the reporting currency [IAS 29.39] Whether the financial statements are based on an historical cost or current cost approach [IAS 29.39]

Identity and level of the price index at the balance sheet date and moves during the current and previous reporting period [IAS 29.39]

Which jurisdictions are hyperinflationary?

IAS 29 defines and provides general guidance for assessing whether a particular jurisdiction's economy is hyperinflationary. But the IASB does not identify specific jurisdictions. The International Practices Task Force (IPTF) of the AICPA's Centre for Audit Quality monitors the status of 'highly inflationary' countries. The Task Force's criteria for identifying such countries are similar to those for identifying 'hyperinflationary economies' under IAS 29. From time to time, the IPTF issues reports of its discussions with SEC staff on the IPTF's recommendations of which countries should be considered highly inflationary, and which countries are on the Task Force's inflation 'watch list'. The IPTF's meeting notes from the 19 November 2013 meeting state the following view of the Task Force:

Countries with three-year cumulative inflation rates exceeding 100%:

Belarus Islamic Republic of Iran South Sudan (although South Sudan only became independent of Sudan in July 2011 and data is not yet available to

calculate a three-year cumulative inflation rate, the three-year cumulative inflation rate is projected to be 129% by the end of 2013)

Venezuela Sudan

Countries where the three-year cumulative inflation rates had exceeded 100% in recent years:

Democratic Republic of Congo

Countries (a) with projected three-year cumulative inflation rates between 70% and 100%; (b) where the last known three-year cumulative inflation rates previously exceeded 100% and current actual inflation data has not been obtained; or (c) with a significant increase in inflation during the current period

Ethiopia

Other countries noted in the report:

Argentina - although no data has been observed to date that would support Argentina being considered highly-inflationary in 2013, the official data since 2008 shows considerably lower inflation rates than alternative data sources; the IPTF encourages additional disclosures by entities that have significant operations in Argentina

IAS 30 — Disclosures in the Financial Statements of Banks and Similar Financial Institutions Share on email Share on facebook Share on twitter Share on linkedin More Sharing Services

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History of IAS 30April 1987 Exposure Draft E29 Disclosures in Financial Statements of Banks

July 1989Exposure Draft E29 was modified and re-exposed as Exposure Draft E34 Disclosures in Financial Statements of Banks and Similar Financial Institutions

August 1990 IAS 30 Disclosures in Financial Statements of Banks and Similar Financial Institutions

1 January 1991 Effective date of IAS 30 (1990)

1994 IAS 30 was reformatted

December 1998 IAS 30 was amended by IAS 39 Financial Instruments: Recognition and Measurement, effective 1 January 2001

18 August 2005 IAS 30 is superseded by IFRS 7 Financial Instruments: Disclosures effective 1 January 2007

Related Interpretations

None

Amendments under consideration by the IASB

None

Summary of IAS 30

Objective of IAS 30

The objective of IAS 30 is to prescribe appropriate presentation and disclosure standards for banks and similar financial institutions (hereafter called 'banks'), which supplement the requirements of other Standards. The intention is to provide users with appropriate information to assist them in evaluating the financial position and performance of banks, and to enable them to obtain a better understanding of the special characteristics of the operations of banks.

Presentation and disclosure

A bank's income statement should group income and expenses by nature. [IAS 30.9]

A bank's income statement or notes should report the following specific amounts: [IAS 30.10]

interest income interest expense dividend income fee and commission income fee and commission expense net gains/losses from securities dealing net gains/losses from investment securities net gains/losses from foreign currency dealing other operating income loan losses general administrative expenses other operating expenses.

A bank's balance sheet should group assets and liabilities by nature and list them in liquidity sequence. [IAS 30.18] IAS 30.19 sets out the specific line items requiring disclosure.

IAS 30.13 and IAS 30.23 include guidelines for the limited circumstances in which income and expense items or asset and liability items are offset.

A bank must disclose the fair values of each class of its financial assets and financial liabilities as required by IAS 32 and IAS 39. [IAS 30.24]

Disclosures are also required about:

specific contingencies and commitments (including off-balance sheet items) requiring disclosure [IAS 30.26] specified disclosures for the maturity of assets and liabilities [IAS 30.30] concentrations of assets, liabilities and off-balance sheet items [IAS 30.40] losses on loans and advances [IAS 30.43] general banking risks [IAS 30.50] assets pledged as security [IAS 30.53].

IAS 31 — Interests In Joint Ventures Share on email Share on facebook Share on twitter Share on linkedin More Sharing Services

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Overview

IAS 31 Interests in Joint Ventures sets out the accounting for an entity's interests in various forms of joint ventures: jointly controlled operations, jointly controlled assets, and jointly controlled entities. The standard permits jointly controlled entities to be accounted for using either the equity method or by proportionate consolidation.

IAS 31 was reissued in December 2003, applies to annual periods beginning on or after 1 January 2005, and is superseded by IFRS 11 Joint Arrangements and IFRS 12 Disclosure of Interests in Other Entities with effect from annual periods beginning on or after 1 January 2013.

History of IAS 31December 1989 Exposure Draft E35 Financial Reporting of Interests in Joint Ventures

December 1998 IAS 31 was revised by IAS 39 effective 1 January 2001

18 December 2003 Revised version of IAS 31 issued by the IASB

1 January 2005 Effective date of IAS 31 (Revised 2003)

13 September 2007 Exposure Draft ED 9 Joint Arrangements issued. Proposes to replace IAS 31 with a new standard titled Joint Arrangements.

10 January 2008 Some significant revisions of IAS 31 were adopted as a result of the Business Combinations Phase II Project relating to loss of joint control

22 May 2008 IAS 31 amended for Annual Improvements to IFRSs 2007 for certain disclosures and reversals of impairment losses (equity method)

1 January 2009 Effective date of the May 2008 revisions to IAS 31

1 July 2009 Effective date of the January 2008 revisions to IAS 31

12 May 2011 IAS 31 is superseded by IFRS 11 Joint Arrangements and IFRS 12 Disclosure of Interests in Other Entities effective 1 January 2013

Related Interpretations

SIC-13 Jointly Controlled Entities – Non-Monetary Contributions by Venturers. Superseded by IFRS 11 Joint Arrangements effective 1 January 2013

IAS 32 — Financial Instruments: Presentation Share on email Share on facebook Share on twitter Share on linkedin More Sharing Services

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Overview

IAS 32 Financial Instruments: Presentation outlines the accounting requirements for the presentation of financial instruments, particularly as to the classification of such instruments into financial assets, financial liabilities and equity instruments. The standard also provide guidance on the classification of related interest, dividends and gains/losses, and when financial assets and financial liabilities can be offset.

IAS 32 was reissued in December 2003 and applies to annual periods beginning on or after 1 January 2005.

History of  IAS 32September 1991 Exposure Draft E40 Financial Instruments

January 1994 E40 was modified and re-exposed as Exposure Draft E48 Financial Instruments

June 1995The disclosure and presentation portion of E48 was adopted as IAS 32 Financial Instruments: Disclosure and Presentation

1 January 1996 Effective date of IAS 32 (1995)

December 1998 IAS 32 was revised by IAS 39, effective 1 January 2001

17 December 2003 Revised version of IAS 32 issued by the IASB

1 January 2005 Effective date of IAS 32 (2003)

18 August 2005Disclosure provisions of IAS 32 are replaced by IFRS 7 Financial Instruments: Disclosures effective 1 January 2007. Title of IAS 32 changed to Financial Instruments: Presentation

22 June 2006Exposure Draft of proposed amendments relating to Puttable Instruments and Obligations Arising on Liquidation

14 February 2008 IAS 32 amended for Puttable Instruments and Obligations Arising on Liquidation

1 January 2009 Effective date of amendments for puttable instruments and obligations arising on liquidation

6 August 2009 Exposure Draft Classification of Rights Issues proposing to amend IAS 32

8 October 2009 Amendment to IAS 32 about Classification of Rights Issues

1 February 2010 Effective date of the October 2009 amendment

16 December 2011 Offsetting Financial Assets and Financial Liabilities (Amendments to IAS 32) issued

17 May 2012Amendments resulting from Annual Improvements 2009-2011 Cycle (tax effect of equity distributions). Click for More Information

1 January 2013 Effective date of May 2012 amendments (Annual Improvements 2009-2011 Cycle)

1 January 2014 Effective date of December 2011 amendments

Related Interpretations

IAS 32 (2003) superseded SIC-5 Classification of Financial Instruments – Contingent Settlement Provisions IAS 32 (2003) superseded SIC-16 Share Capital – Reacquired Own Equity Instruments (Treasury Shares) IAS 32 (2003) superseded SIC-17 Equity – Costs of an Equity Transaction IFRIC 2 Members' Shares in Co-operative Entities and Similar Instruments

Amendments under consideration by the IASB

Financial Instruments with Characteristics of Equity (Liabilities and Equity)

Summary of IAS 32

Objective of IAS 32

The stated objective of IAS 32 is to establish principles for presenting financial instruments as liabilities or equity and for offsetting financial assets and liabilities. [IAS 32.1]

IAS 32 addresses this in a number of ways:

clarifying the classification of a financial instrument issued by an entity as a liability or as equity prescribing the accounting for treasury shares (an entity's own repurchased shares) prescribing strict conditions under which assets and liabilities may be offset in the balance sheet

IAS 32 is a companion to IAS 39 Financial Instruments: Recognition and Measurement and IFRS   9 Financial Instruments. IAS 39 deals with, among other things, initial recognition of financial assets and liabilities, measurement subsequent to initial recognition, impairment, derecognition, and hedge accounting. IAS 39 is progressively being replaced by IFRS 9 as the IASB completes the various phases of its financial instruments project.

Scope

IAS 32 applies in presenting and disclosing information about all types of financial instruments with the following exceptions: [IAS 32.4]

interests in subsidiaries, associates and joint ventures that are accounted for under IAS 27 Consolidated and Separate Financial Statements, IAS 28 Investments in Associates or IAS 31 Interests in Joint Ventures (or, for annual periods beginning on or after 1 January 2013, IFRS 10 Consolidated Financial Statements, IAS 27 Separate Financial Statements and IAS 28 Investments in Associates and Joint Ventures). However, IAS 32 applies to all derivatives on interests in subsidiaries, associates, or joint ventures.

employers' rights and obligations under employee benefit plans (see IAS 19 Employee Benefits) insurance contracts(see IFRS 4 Insurance Contracts). However, IAS 32 applies to derivatives that are embedded in

insurance contracts if they are required to be accounted separately by IAS 39 financial instruments that are within the scope of IFRS 4 because they contain a discretionary participation feature are

only exempt from applying paragraphs 15-32 and AG25-35 (analysing debt and equity components) but are subject to all other IAS 32 requirements

contracts and obligations under share-based payment transactions (see IFRS 2 Share-based Payment) with the following exceptions:

o this standard applies to contracts within the scope of IAS 32.8-10 (see below)o paragraphs 33-34 apply when accounting for treasury shares purchased, sold, issued or cancelled by

employee share option plans or similar arrangements

IAS 32 applies to those contracts to buy or sell a non-financial item that can be settled net in cash or another financial instrument, except for contracts that were entered into and continue to be held for the purpose of the receipt or delivery of a non-financial item in accordance with the entity's expected purchase, sale or usage requirements. [IAS 32.8]

Key definitions [IAS 32.11]

Financial instrument: a contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.

Financial asset: any asset that is:

cash an equity instrument of another entity a contractual right

o to receive cash or another financial asset from another entity; oro to exchange financial assets or financial liabilities with another entity under conditions that are potentially

favourable to the entity; or a contract that will or may be settled in the entity's own equity instruments and is:

o a non-derivative for which the entity is or may be obliged to receive a variable number of the entity's own equity instruments

o a derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the entity's own equity instruments. For this purpose the entity's own equity instruments do not include instruments that are themselves contracts for the future receipt or delivery of the entity's own equity instruments

o puttable instruments classified as equity or certain liabilities arising on liquidation classified by IAS 32 as equity instruments

Financial liability: any liability that is:

a contractual obligation: o to deliver cash or another financial asset to another entity; oro to exchange financial assets or financial liabilities with another entity under conditions that are potentially

unfavourable to the entity; or a contract that will or may be settled in the entity's own equity instruments and is

o a non-derivative for which the entity is or may be obliged to deliver a variable number of the entity's own equity instruments or

o a derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the entity's own equity instruments. For this purpose the entity's own equity instruments do not include: instruments that are themselves contracts for the future receipt or delivery of the entity's own equity instruments; puttable instruments classified as equity or certain liabilities arising on liquidation classified by IAS 32 as equity instruments

Equity instrument: Any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities.

Fair value: the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction.

The definition of financial instrument used in IAS 32 is the same as that in IAS 39.

Puttable instrument: a financial instrument that gives the holder the right to put the instrument back to the issuer for cash or another financial asset or is automatically put back to the issuer on occurrence of an uncertain future event or the death or retirement of the instrument holder.

Classification as liability or equity

The fundamental principle of IAS 32 is that a financial instrument should be classified as either a financial liability or an equity instrument according to the substance of the contract, not its legal form, and the definitions of financial liability and equity instrument. Two exceptions from this principle are certain puttable instruments meeting specific criteria and certain obligations arising on liquidation (see below). The entity must make the decision at the time the instrument is initially recognised. The classification is not subsequently changed based on changed circumstances. [IAS 32.15]

A financial instrument is an equity instrument only if (a) the instrument includes no contractual obligation to deliver cash or another financial asset to another entity and (b) if the instrument will or may be settled in the issuer's own equity instruments, it is either:

a non-derivative that includes no contractual obligation for the issuer to deliver a variable number of its own equity instruments; or

a derivative that will be settled only by the issuer exchanging a fixed amount of cash or another financial asset for a fixed number of its own equity instruments. [IAS 32.16]

Illustration – preference shares

If an entity issues preference (preferred) shares that pay a fixed rate of dividend and that have a mandatory redemption feature at a future date, the substance is that they are a contractual obligation to deliver cash and, therefore, should be recognised as a liability. [IAS 32.18(a)] In contrast, preference shares that do not have a fixed maturity, and where the issuer does not have a contractual obligation to make any payment are equity. In this example even though both instruments are legally termed preference shares they have different contractual terms and one is a financial liability while the other is equity.

Illustration – issuance of fixed monetary amount of equity instruments

A contractual right or obligation to receive or deliver a number of its own shares or other equity instruments that varies so that the fair value of the entity's own equity instruments to be received or delivered equals the fixed monetary amount of the contractual right or obligation is a financial liability. [IAS 32.20]

Illustration – one party has a choice over how an instrument is settled

When a derivative financial instrument gives one party a choice over how it is settled (for instance, the issuer or the holder can choose settlement net in cash or by exchanging shares for cash), it is a financial asset or a financial liability unless all of the settlement alternatives would result in it being an equity instrument. [IAS 32.26]

Contingent settlement provisions

If, as a result of contingent settlement provisions, the issuer does not have an unconditional right to avoid settlement by delivery of cash or other financial instrument (or otherwise to settle in a way that it would be a financial liability) the instrument is a financial liability of the issuer, unless:

the contingent settlement provision is not genuine or the issuer can only be required to settle the obligation in the event of the issuer's liquidation or the instrument has all the features and meets the conditions of IAS 32.16A and 16B for puttable instruments [IAS

32.25]

Puttable instruments and obligations arising on liquidation

In February 2008, the IASB amended IAS 32 and IAS 1 Presentation of Financial Statements with respect to the balance sheet classification of puttable financial instruments and obligations arising only on liquidation. As a result of the amendments, some financial instruments that currently meet the definition of a financial liability will be classified as equity because they represent the residual interest in the net assets of the entity. [IAS 32.16A-D]

Classifications of rights issues

In October 2009, the IASB issued an amendment to IAS 32 on the classification of rights issues. For rights issues offered for a fixed amount of foreign currency current practice appears to require such issues to be accounted for as derivative liabilities. The amendment states that if such rights are issued pro rata to an entity's all existing shareholders in the same class for a fixed amount of currency, they should be classified as equity regardless of the currency in which the exercise price is denominated.

Compound financial instruments

Some financial instruments – sometimes called compound instruments – have both a liability and an equity component from the issuer's perspective. In that case, IAS 32 requires that the component parts be accounted for and presented separately according to their substance based on the definitions of liability and equity. The split is made at issuance and not revised for subsequent changes in market interest rates, share prices, or other event that changes the likelihood that the conversion option will be exercised. [IAS 32.29-30]

To illustrate, a convertible bond contains two components. One is a financial liability, namely the issuer's contractual obligation to pay cash, and the other is an equity instrument, namely the holder's option to convert into common shares. Another example is debt issued with detachable share purchase warrants.

When the initial carrying amount of a compound financial instrument is required to be allocated to its equity and liability components, the equity component is assigned the residual amount after deducting from the fair value of the instrument as a whole the amount separately determined for the liability component. [IAS 32.32]

Interest, dividends, gains, and losses relating to an instrument classified as a liability should be reported in profit or loss. This means that dividend payments on preferred shares classified as liabilities are treated as expenses. On the other hand, distributions (such as dividends) to holders of a financial instrument classified as equity should be charged directly against equity, not against earnings. [IAS 32.35]

Transaction costs of an equity transaction are deducted from equity. Transaction costs related to an issue of a compound financial instrument are allocated to the liability and equity components in proportion to the allocation of proceeds.

Treasury shares

The cost of an entity's own equity instruments that it has reacquired ('treasury shares') is deducted from equity. Gain or loss is not recognised on the purchase, sale, issue, or cancellation of treasury shares. Treasury shares may be acquired and held by the entity or by other members of the consolidated group. Consideration paid or received is recognised directly in equity. [IAS 32.33]

Offsetting

IAS 32 also prescribes rules for the offsetting of financial assets and financial liabilities. It specifies that a financial asset and a financial liability should be offset and the net amount reported when, and only when, an entity: [IAS 32.42]

has a legally enforceable right to set off the amounts; and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously. [IAS 32.48]

Costs of issuing or reacquiring equity instruments

Costs of issuing or reacquiring equity instruments (other than in a business combination) are accounted for as a deduction from equity, net of any related income tax benefit. [IAS 32.35]

Disclosures

Financial instruments disclosures are in IFRS 7 Financial Instruments: Disclosures, and no longer in IAS 32.

The disclosures relating to treasury shares are in IAS 1 Presentation of Financial Statements and IAS 24 Related Parties for share repurchases from related parties. [IAS 32.34 and 39]

IAS 33 — Earnings Per Share Share on email Share on facebook Share on twitter Share on linkedin More Sharing Services

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Overview

IAS 33 Earnings Per Share sets out how to calculate both basic earnings per share (EPS) and diluted EPS. The calculation of Basic EPS is based on the weighted average number of ordinary shares outstanding during the period, whereas diluted EPS also includes dilutive potential ordinary shares (such as options and convertible instruments) if they meet certain criteria.

IAS 33 was reissued in December 2003 and applies to annual periods beginning on or after 1 January 2005.

History of IAS 33January 1996 Exposure Draft E33 Earnings Per Share

February 1997 IAS 33 Earnings Per Share

1 January 1999 Effective date of IAS 33 (1997)

18 December 2003 Revised version of IAS 33 issued by the IASB

1 January 2005 Effective date of IAS 33 (Revised 2003)

7 August 2008 IASB proposes to amend IAS 33. Click for Press Release (PDF 48k).

1 January 2009 Effective date of consequential amendments arising from IAS 1 (2007)

Related Interpretations

IAS 33 (2003) superseded SIC-24 Earnings Per Share – Financial Instruments and Other Contracts that May Be Settled in Shares

Amendments under consideration by the IASB

Performance Reporting Earnings Per Share

Summary of IAS 33

Objective of IAS 33

The objective of IAS 33 is to prescribe principles for determining and presenting earnings per share (EPS) amounts to improve performance comparisons between different entities in the same reporting period and between different reporting periods for the same entity. [IAS 33.1]

Scope

IAS 33 applies to entities whose securities are publicly traded or that are in the process of issuing securities to the public. [IAS 33.2] Other entities that choose to present EPS information must also comply with IAS 33. [IAS 33.3]

If both parent and consolidated statements are presented in a single report, EPS is required only for the consolidated statements. [IAS 33.4]

Key definitions [IAS 33.5]

Ordinary share: also known as a common share or common stock. An equity instrument that is subordinate to all other classes of equity instruments.

Potential ordinary share: a financial instrument or other contract that may entitle its holder to ordinary shares.

 

Common examples of potential ordinary shares

convertible debt convertible preferred shares share warrants share options share rights employee stock purchase plans contractual rights to purchase shares contingent issuance contracts or agreements (such as those arising in business combination)

 

Dilution: a reduction in earnings per share or an increase in loss per share resulting from the assumption that convertible instruments are converted, that options or warrants are exercised, or that ordinary shares are issued upon the satisfaction of specified conditions.

Antidilution: an increase in earnings per share or a reduction in loss per share resulting from the assumption that convertible instruments are converted, that options or warrants are exercised, or that ordinary shares are issued upon the satisfaction of specified conditions.

Requirement to present EPS

An entity whose securities are publicly traded (or that is in process of public issuance) must present, on the face of the statement of comprehensive income, basic and diluted EPS for: [IAS 33.66]

profit or loss from continuing operations attributable to the ordinary equity holders of the parent entity; and profit or loss attributable to the ordinary equity holders of the parent entity for the period for each class of ordinary

shares that has a different right to share in profit for the period.

If an entity presents the components of profit or loss in a separate income statement, it presents EPS only in that separate statement. [IAS 33.4A]

Basic and diluted EPS must be presented with equal prominence for all periods presented. [IAS 33.66]

Basic and diluted EPS must be presented even if the amounts are negative (that is, a loss per share). [IAS 33.69]

If an entity reports a discontinued operation, basic and diluted amounts per share must be disclosed for the discontinued operation either on the face of the of comprehensive income (or separate income statement if presented) or in the notes to the financial statements. [IAS 33.68 and 68A]

Basic EPS

Basic EPS is calculated by dividing profit or loss attributable to ordinary equity holders of the parent entity (the numerator) by the weighted average number of ordinary shares outstanding (the denominator) during the period. [IAS 33.10]

The earnings numerators (profit or loss from continuing operations and net profit or loss) used for the calculation should be after deducting all expenses including taxes, minority interests, and preference dividends. [IAS 33.12]

The denominator (number of shares) is calculated by adjusting the shares in issue at the beginning of the period by the number of shares bought back or issued during the period, multiplied by a time-weighting factor. IAS 33 includes guidance on appropriate recognition dates for shares issued in various circumstances. [IAS 33.20-21]

Contingently issuable shares are included in the basic EPS denominator when the contingency has been met. [IAS 33.24]

Diluted EPS

Diluted EPS is calculated by adjusting the earnings and number of shares for the effects of dilutive options and other dilutive potential ordinary shares. [IAS 33.31] The effects of anti-dilutive potential ordinary shares are ignored in calculating diluted EPS. [IAS 33.41]

 

Guidance on calculating dilution

Convertible securities. The numerator should be adjusted for the after-tax effects of dividends and interest charged in relation to dilutive potential ordinary shares and for any other changes in income that would result from the conversion of the potential ordinary shares. [IAS 33.33] The denominator should include shares that would be issued on the conversion. [IAS 33.36]

Options and warrants. In calculating diluted EPS, assume the exercise of outstanding dilutive options and warrants. The assumed proceeds from exercise should be regarded as having been used to repurchase ordinary shares at the average market price during the period. The difference between the number of ordinary shares assumed issued on exercise and the number of ordinary shares assumed repurchased shall be treated as an issue of ordinary shares for no consideration. [IAS 33.45]

Contingently issuable shares. Contingently issuable ordinary shares are treated as outstanding and included in the calculation of both basic and diluted EPS if the conditions have been met. If the conditions have not been met, the number of contingently issuable shares included in the diluted EPS calculation is based on the number of shares that would be issuable if the end of the period were the end of the contingency period. Restatement is not permitted if the conditions are not met when the contingency period expires. [IAS 33.52]

Contracts that may be settled in ordinary shares or cash. Presume that the contract will be settled in ordinary shares, and include the resulting potential ordinary shares in diluted EPS if the effect is dilutive. [IAS 33.58]

 

Retrospective adjustments

The calculation of basic and diluted EPS for all periods presented is adjusted retrospectively when the number of ordinary or potential ordinary shares outstanding increases as a result of a capitalisation, bonus issue, or share split, or decreases as a result of a reverse share split. If such changes occur after the balance sheet date but before the financial statements are authorised for issue, the EPS calculations for those and any prior period financial statements presented are based on the new number of shares. Disclosure is required. [IAS 33.64]

Basic and diluted EPS are also adjusted for the effects of errors and adjustments resulting from changes in accounting policies, accounted for retrospectively. [IAS 33.64]

Diluted EPS for prior periods should not be adjusted for changes in the assumptions used or for the conversion of potential ordinary shares into ordinary shares outstanding. [IAS 33.65]

Disclosure

If EPS is presented, the following disclosures are required: [IAS 33.70]

the amounts used as the numerators in calculating basic and diluted EPS, and a reconciliation of those amounts to profit or loss attributable to the parent entity for the period

the weighted average number of ordinary shares used as the denominator in calculating basic and diluted EPS, and a reconciliation of these denominators to each other

instruments (including contingently issuable shares) that could potentially dilute basic EPS in the future, but were not included in the calculation of diluted EPS because they are antidilutive for the period(s) presented

a description of those ordinary share transactions or potential ordinary share transactions that occur after the balance sheet date and that would have changed significantly the number of ordinary shares or potential ordinary shares outstanding at the end of the period if those transactions had occurred before the end of the reporting period. Examples include issues and redemptions of ordinary shares issued for cash, warrants and options, conversions, and exercises [IAS 34.71]

An entity is permitted to disclose amounts per share other than profit or loss from continuing operations, discontinued operations, and net profit or loss earnings per share. Guidance for calculating and presenting such amounts is included in IAS 33.73 and 73A.

IAS 34 — Interim Financial Reporting Share on email Share on facebook Share on twitter Share on linkedin More Sharing Services

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Overview

IAS 34 Interim Financial Reporting applies when an entity prepares an interim financial report, without mandating when an entity should prepare such a report. Permitting less information to be reported than in annual financial statements (on the basis of providing an update to those financial statements), the standard outlines the recognition, measurement and disclosure requirements for interim reports.

IAS 34 was issued in June 1998 and is operative for periods beginning on or after 1 January 1999.

History of IAS 34Date Development Comments

August 1997 Exposure Draft E57 Interim Financial Reporting published

June 1999 IAS 34 Interim Financial Reporting issuedOperative for financial statements covering periods beginning on or after 1 January 1999

6 May 2010 Amended by Improvements to IFRSs 2010 (significant transactions and events)

Effective for annual periods beginning on or after 1 January 2011

17 May 2012 Amended by Annual Improvements 2009-2011 Cycle (segment information)

Effective for annual periods beginning on or after 1 January 2013

25 September 2014

Amended by Improvements to IFRSs 2014 (disclosure of information 'elsewhere in the interim financial report')

Effective for annual periods beginning on or after 1 January 2016

Related Interpretations

IFRIC 10 Interim Financial Reporting and Impairment

Amendments under consideration

None

Summary of IAS 34Deloitte's publication Interim Financial Reporting: A Guide to IAS 34 (2009 edition) provides an overview of IAS 34, application guidance and examples, a model interim financial report, and an IAS 34 compliance checklist. Contents:

1. Introduction and scope 2. Content of an interim financial report 3. Condensed or complete interim financial statements 4. Selected explanatory notes 5. Accounting policies for interim reporting 6. General principles for recognition and measurement 7. Applying the recognition and measurement principles

8. Impairment of assets 9. Measuring interim income tax expense 10. Earnings per share 11. First-time adoption of IFRSs Model interim financial report IAS 34 compliance checklist

Click to Download the Deloitte Guide to IAS 34 (PDF 1,205k, March 2009, 76 pages).

Objective of IAS 34

The objective of IAS 34 is to prescribe the minimum content of an interim financial report and to prescribe the principles for recognition and measurement in financial statements presented for an interim period.

Key definitions

Interim period: a financial reporting period shorter than a full financial year (most typically a quarter or half-year). [IAS 34.4]

Interim financial report: a financial report that contains either a complete or condensed set of financial statements for an interim period. [IAS 34.4]

Matters left to local regulators

IAS 34 specifies the content of an interim financial report that is described as conforming to International Financial Reporting Standards. However, IAS 34 does not mandate:

which entities should publish interim financial reports, how frequently, or how soon after the end of an interim period.

Such matters will be decided by national governments, securities regulators, stock exchanges, and accountancy bodies. [IAS 34.1]

However, the Standard encourages publicly-traded entities to provide interim financial reports that conform to the recognition, measurement, and disclosure principles set out in IAS 34, at least as of the end of the first half of their financial year, such reports to be made available not later than 60 days after the end of the interim period. [IAS 34.1]

Minimum content of an interim financial report

The minimum components specified for an interim financial report are: [IAS 34.8]

a condensed balance sheet (statement of financial position) either (a) a condensed statement of comprehensive income or (b) a condensed statement of comprehensive income

and a condensed income statement a condensed statement of changes in equity a condensed statement of cash flows selected explanatory notes

If a complete set of financial statements is published in the interim report, those financial statements should be in full compliance with IFRSs. [IAS 34.9]

If the financial statements are condensed, they should include, at a minimum, each of the headings and sub-totals included in the most recent annual financial statements and the explanatory notes required by IAS 34. Additional line-items or notes should be included if their omission would make the interim financial information misleading. [IAS 34.10]

If the annual financial statements were consolidated (group) statements, the interim statements should be group statements as well. [IAS 34.14]

The periods to be covered by the interim financial statements are as follows: [IAS 34.20]

balance sheet (statement of financial position) as of the end of the current interim period and a comparative balance sheet as of the end of the immediately preceding financial year

statement of comprehensive income (and income statement, if presented) for the current interim period and cumulatively for the current financial year to date, with comparative statements for the comparable interim periods (current and year-to-date) of the immediately preceding financial year

statement of changes in equity cumulatively for the current financial year to date, with a comparative statement for the comparable year-to-date period of the immediately preceding financial year

statement of cash flows cumulatively for the current financial year to date, with a comparative statement for the comparable year-to-date period of the immediately preceding financial year

If the company's business is highly seasonal, IAS 34 encourages disclosure of financial information for the latest 12 months, and comparative information for the prior 12-month period, in addition to the interim period financial statements. [IAS 34.21]

Note disclosures

The explanatory notes required are designed to provide an explanation of events and transactions that are significant to an understanding of the changes in financial position and performance of the entity since the last annual reporting date. IAS 34 states a presumption that anyone who reads an entity's interim report will also have access to its most recent annual report. Consequently, IAS 34 avoids repeating annual disclosures in interim condensed reports. [IAS 34.15]

 

Examples of specific disclosure requirements of IAS 34

Examples of events and transactions for which disclosures are required if they are significant [IAS 34.15A-15B]

write-down of inventories recognition or reversal of an impairment loss reversal of provision for the costs of restructuring acquisitions and disposals of property, plant and equipment commitments for the purchase of property, plant and equipment litigation settlements corrections of prior period errors changes in business or economic circumstances affecting the fair value of financial assets and liabilities unremedied loan defaults and breaches of loan agreements transfers between levels of the 'fair value hierarchy' or changes in the classification of financial assets changes in contingent liabilities and contingent assets.

Examples of other disclosures required [IAS 34.16A]

changes in accounting policies

explanation of any seasonality or cyclicality of interim operations unusual items affecting assets, liabilities, equity, net income or cash flows changes in estimates issues, repurchases and repayment of debt and equity securities dividends paid particular segment information (where IFRS 8 Operating Segments applies to the entity) events after the end of the reporting period changes in the composition of the entity, such as business combinations, obtaining or losing control of subsidiaries,

restructurings and discontinued operations disclosures about the fair value of financial instruments

 

Accounting policies

The same accounting policies should be applied for interim reporting as are applied in the entity's annual financial statements, except for accounting policy changes made after the date of the most recent annual financial statements that are to be reflected in the next annual financial statements. [IAS 34.28]

A key provision of IAS 34 is that an entity should use the same accounting policy throughout a single financial year. If a decision is made to change a policy mid-year, the change is implemented retrospectively, and previously reported interim data is restated. [IAS 34.43]

Measurement

Measurements for interim reporting purposes should be made on a year-to-date basis, so that the frequency of the entity's reporting does not affect the measurement of its annual results. [IAS 34.28]

Several important measurement points:

Revenues that are received seasonally, cyclically or occasionally within a financial year should not be anticipated or deferred as of the interim date, if anticipation or deferral would not be appropriate at the end of the financial year. [IAS 34.37]

Costs that are incurred unevenly during a financial year should be anticipated or deferred for interim reporting purposes if, and only if, it is also appropriate to anticipate or defer that type of cost at the end of the financial year. [IAS 34.39]

Income tax expense should be recognised based on the best estimate of the weighted average annual effective income tax rate expected for the full financial year. [IAS 34 Appendix B12]

An appendix to IAS 34 provides guidance for applying the basic recognition and measurement principles at interim dates to various types of asset, liability, income, and expense.

Materiality

In deciding how to recognise, measure, classify, or disclose an item for interim financial reporting purposes, materiality is to be assessed in relation to the interim period financial data, not forecast annual data. [IAS 34.23]

Disclosure in annual financial statements

If an estimate of an amount reported in an interim period is changed significantly during the financial interim period in the financial year but a separate financial report is not published for that period, the nature and amount of that change must be disclosed in the notes to the annual financial statements. [IAS 34.26]

IAS 36 — Impairment of Assets Share on email Share on facebook Share on twitter Share on linkedin More Sharing Services

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IAS 36 Impairment of Assets seeks to ensure that an entity's assets are not carried at more than their recoverable amount (i.e. the higher of fair value less costs of disposal and value in use). With the exception of goodwill and certain intangible assets for which an annual impairment test is required, entities are required to conduct impairment tests where there is an indication of impairment of an asset, and the test may be conducted for a 'cash-generating unit' where an asset does not generate cash inflows that are largely independent of those from other assets.

IAS 36 was reissued in March 2004 and applies to goodwill and intangible assets acquired in business combinations for which the agreement date is on or after 31 March 2004, and for all other assets prospectively from the beginning of the first annual period beginning on or after 31 March 2004.

History of IAS 36Date Development Comments

May 1997 Exposure Draft E55 Impairment of Assets

June 1998 IAS 36 Impairment of Assets Operative for financial statements covering periods beginning on or after 1 July 1999

31 March 2004 IAS 36 Impairment of Assets revised

Applies to goodwill and intangible assets acquired in business combinations for which the agreement date is on or after 31 March 2004, and for all other assets prospectively from the beginning of the first annual period beginning on or after 31 March 2004

22 May 2008 Amended by Annual Improvements to IFRSs 2007 (disclosure of estimates used to determine a recoverable amount)

Effective for annual periods beginning on or after 1 January 2009

16 April 2009

Amended by Annual Improvements to IFRSs 2009 (units of accounting for goodwill impairment testing using segments under IFRS 8 before aggregation)

Effective for annual periods beginning on or after 1 January 2010

29 May 2013 Amended by Recoverable Amount Disclosures for Non-Financial Assets (clarification of disclosures required)

Effective for annual periods beginning on or after 1 January 2014

Related Interpretations

None

Amendments under consideration by the IASB

IFRS 13 — Unit of account Research project — Discount rates

Summary of IAS 36

Objective of IAS 36

To ensure that assets are carried at no more than their recoverable amount, and to define how recoverable amount is determined.

Scope

IAS 36 applies to all assets except: [IAS 36.2]

inventories (see IAS 2) assets arising from construction contracts (see IAS 11) deferred tax assets (see IAS 12) assets arising from employee benefits (see IAS 19) financial assets (see IAS 39) investment property carried at fair value (see IAS 40) agricultural assets carried at fair value (see IAS 41) insurance contract assets (see IFRS 4) non-current assets held for sale (see IFRS 5)

Therefore, IAS 36 applies to (among other assets):

land buildings machinery and equipment investment property carried at cost intangible assets goodwill investments in subsidiaries, associates, and joint ventures carried at cost assets carried at revalued amounts under IAS 16 and IAS 38

Key definitions [IAS 36.6]

Impairment loss: the amount by which the carrying amount of an asset or cash-generating unit exceeds its recoverable amount

Carrying amount: the amount at which an asset is recognised in the balance sheet after deducting accumulated depreciation and accumulated impairment losses

Recoverable amount: the higher of an asset's fair value less costs of disposal* (sometimes called net selling price) and its value in use

* Prior to consequential amendments made by IFRS 13 Fair Value Measurement, this was referred to as 'fair value less costs to sell'.

Fair value: the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (see IFRS   13 Fair Value Measurement)

Value in use: the present value of the future cash flows expected to be derived from an asset or cash-generating unit

Identifying an asset that may be impaired

At the end of each reporting period, an entity is required to assess whether there is any indication that an asset may be impaired (i.e. its carrying amount may be higher than its recoverable amount). IAS 36 has a list of external and internal indicators of impairment. If there is an indication that an asset may be impaired, then the asset's recoverable amount must be calculated. [IAS 36.9]

The recoverable amounts of the following types of intangible assets are measured annually whether or not there is any indication that it may be impaired. In some cases, the most recent detailed calculation of recoverable amount made in a preceding period may be used in the impairment test for that asset in the current period: [IAS 36.10]

an intangible asset with an indefinite useful life an intangible asset not yet available for use goodwill acquired in a business combination

Indications of impairment [IAS 36.12]

External sources:

market value declines negative changes in technology, markets, economy, or laws increases in market interest rates net assets of the company higher than market capitalisation

Internal sources:

obsolescence or physical damage asset is idle, part of a restructuring or held for disposal worse economic performance than expected for investments in subsidiaries, joint ventures or associates, the carrying amount is higher than the carrying amount

of the investee's assets, or a dividend exceeds the total comprehensive income of the investee

These lists are not intended to be exhaustive. [IAS 36.13] Further, an indication that an asset may be impaired may indicate that the asset's useful life, depreciation method, or residual value may need to be reviewed and adjusted. [IAS 36.17]

Determining recoverable amount

If fair value less costs of disposal or value in use is more than carrying amount, it is not necessary to calculate the other amount. The asset is not impaired. [IAS 36.19]

If fair value less costs of disposal cannot be determined, then recoverable amount is value in use. [IAS 36.20] For assets to be disposed of, recoverable amount is fair value less costs of disposal. [IAS 36.21]

Fair value less costs of disposal

Fair value is determined in accordance with IFRS 13 Fair Value Measurement Costs of disposal are the direct added costs only (not existing costs or overhead). [IAS 36.28]

Value in use

The calculation of value in use should reflect the following elements: [IAS 36.30]

an estimate of the future cash flows the entity expects to derive from the asset expectations about possible variations in the amount or timing of those future cash flows the time value of money, represented by the current market risk-free rate of interest the price for bearing the uncertainty inherent in the asset other factors, such as illiquidity, that market participants would reflect in pricing the future cash flows the entity

expects to derive from the asset

Cash flow projections should be based on reasonable and supportable assumptions, the most recent budgets and forecasts, and extrapolation for periods beyond budgeted projections. [IAS 36.33] IAS 36 presumes that budgets and forecasts should not go beyond five years; for periods after five years, extrapolate from the earlier budgets. [IAS 36.35] Management should assess the reasonableness of its assumptions by examining the causes of differences between past cash flow projections and actual cash flows. [IAS 36.34]

Cash flow projections should relate to the asset in its current condition – future restructurings to which the entity is not committed and expenditures to improve or enhance the asset's performance should not be anticipated. [IAS 36.44]

Estimates of future cash flows should not include cash inflows or outflows from financing activities, or income tax receipts or payments. [IAS 36.50]

Discount rate

In measuring value in use, the discount rate used should be the pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the asset. [IAS 36.55]

The discount rate should not reflect risks for which future cash flows have been adjusted and should equal the rate of return that investors would require if they were to choose an investment that would generate cash flows equivalent to those expected from the asset. [IAS 36.56]

For impairment of an individual asset or portfolio of assets, the discount rate is the rate the entity would pay in a current market transaction to borrow money to buy that specific asset or portfolio.

If a market-determined asset-specific rate is not available, a surrogate must be used that reflects the time value of money over the asset's life as well as country risk, currency risk, price risk, and cash flow risk. The following would normally be considered: [IAS 36.57]

the entity's own weighted average cost of capital the entity's incremental borrowing rate other market borrowing rates.

Recognition of an impairment loss

An impairment loss is recognised whenever recoverable amount is below carrying amount. [IAS 36.59] The impairment loss is recognised as an expense (unless it relates to a revalued asset where the impairment loss is

treated as a revaluation decrease). [IAS 36.60] Adjust depreciation for future periods. [IAS 36.63]

Cash-generating units

Recoverable amount should be determined for the individual asset, if possible. [IAS 36.66]

If it is not possible to determine the recoverable amount (fair value less costs of disposal and value in use) for the individual asset, then determine recoverable amount for the asset's cash-generating unit (CGU). [IAS 36.66] The

CGU is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. [IAS 36.6]

Impairment of goodwill

Goodwill should be tested for impairment annually. [IAS 36.96]

To test for impairment, goodwill must be allocated to each of the acquirer's cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units or groups of units. Each unit or group of units to which the goodwill is so allocated shall: [IAS 36.80]

represent the lowest level within the entity at which the goodwill is monitored for internal management purposes; and

not be larger than an operating segment determined in accordance with IFRS 8 Operating Segments.

A cash-generating unit to which goodwill has been allocated shall be tested for impairment at least annually by comparing the carrying amount of the unit, including the goodwill, with the recoverable amount of the unit: [IAS 36.90]

If the recoverable amount of the unit exceeds the carrying amount of the unit, the unit and the goodwill allocated to that unit is not impaired

If the carrying amount of the unit exceeds the recoverable amount of the unit, the entity must recognise an impairment loss.

The impairment loss is allocated to reduce the carrying amount of the assets of the unit (group of units) in the following order: [IAS 36.104]

first, reduce the carrying amount of any goodwill allocated to the cash-generating unit (group of units); and then, reduce the carrying amounts of the other assets of the unit (group of units) pro rata on the basis.

The carrying amount of an asset should not be reduced below the highest of: [IAS 36.105]

its fair value less costs of disposal (if measurable) its value in use (if measurable) zero.

If the preceding rule is applied, further allocation of the impairment loss is made pro rata to the other assets of the unit (group of units).

Reversal of an impairment loss

Same approach as for the identification of impaired assets: assess at each balance sheet date whether there is an indication that an impairment loss may have decreased. If so, calculate recoverable amount. [IAS 36.110]

No reversal for unwinding of discount. [IAS 36.116] The increased carrying amount due to reversal should not be more than what the depreciated historical cost would

have been if the impairment had not been recognised. [IAS 36.117] Reversal of an impairment loss is recognised in the profit or loss unless it relates to a revalued asset [IAS 36.119] Adjust depreciation for future periods. [IAS 36.121] Reversal of an impairment loss for goodwill is prohibited. [IAS 36.124]

Disclosure

Disclosure by class of assets: [IAS 36.126]

impairment losses recognised in profit or loss impairment losses reversed in profit or loss which line item(s) of the statement of comprehensive income impairment losses on revalued assets recognised in other comprehensive income impairment losses on revalued assets reversed in other comprehensive income

Disclosure by reportable segment: [IAS 36.129]

impairment losses recognised impairment losses reversed

Other disclosures:

If an individual impairment loss (reversal) is material disclose: [IAS 36.130]

events and circumstances resulting in the impairment loss amount of the loss or reversal individual asset: nature and segment to which it relates cash generating unit: description, amount of impairment loss (reversal) by class of assets and segment if recoverable amount is fair value less costs of disposal, the level of the fair value hierarchy (from IFRS 13 Fair Value

Measurement) within which the fair value measurement is categorised, the valuation techniques used to measure fair value less costs of disposal and the key assumptions used in the measurement of fair value measurements categorised within 'Level 2' and 'Level 3' of the fair value hierarchy*

if recoverable amount has been determined on the basis of value in use, or on the basis of fair value less costs of disposal using a present value technique*, disclose the discount rate

* Amendments introduced by Recoverable Amount Disclosures for Non-Financial Assets, effective for annual periods beginning on or after 1 January 2014.

If impairment losses recognised (reversed) are material in aggregate to the financial statements as a whole, disclose: [IAS 36.131]

main classes of assets affected main events and circumstances

Disclose detailed information about the estimates used to measure recoverable amounts of cash generating units containing goodwill or intangible assets with indefinite useful lives. [IAS 36.134-35]

IAS 37 — Provisions, Contingent Liabilities and Contingent Assets Share on email Share on facebook Share on twitter Share on linkedin More Sharing Services

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Overview

IAS 37 Provisions, Contingent Liabilities and Contingent Assets outlines the accounting for provisions (liabilities of uncertain timing or amount), together with contingent assets (possible assets) and contingent liabilities (possible obligations and present obligations that are not probable or not reliably measurable). Provisions are measured at the best estimate (including risks and uncertainties) of the expenditure required to settle the present obligation, and reflects the present value of expenditures required to settle the obligation where the time value of money is material.

IAS 37 was issued in September 1998 and is operative for periods beginning on or after 1 July 1999.

History of IAS 37Date Development Comments

August 1997 Exposure Draft E59 Provisions, Contingent Liabilities and Contingent Assets published

September 1998 IAS 37 Provisions, Contingent Liabilities and Contingent Assets issued

Operative for annual financial statements covering periods beginning on or after 1 July 1999

30 June 2005 Exposure Draft Amendments to IAS 37 Provisions, Contingent Liabilities and Contingent Assets and IAS 19 Employee Benefits published

Comment deadline 28 October 2005 (proposals were not finalised, instead being reconsidered as a longer term research project)

Related Interpretations

IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities IFRIC 5 Rights to Interests Arising from Decommissioning, Restoration and Environmental Funds IFRIC 6 Liabilities Arising from Participating in a Specific Market – Waste Electrical and Electronic Equipment IFRIC 17 Distributions of Non-cash Assets to Owners IFRIC 21 Levies

Amendments under consideration by the IASB

Research project — Non-financial liabilities Research project — Discount rates

Summary of IAS 37

Objective

The objective of IAS 37 is to ensure that appropriate recognition criteria and measurement bases are applied to provisions, contingent liabilities and contingent assets and that sufficient information is disclosed in the notes to the financial statements to enable users to understand their nature, timing and amount. The key principle established by the Standard is that a provision should be recognised only when there is a liability i.e. a present obligation resulting from past events. The Standard thus aims to ensure that only genuine obligations are dealt with in the financial statements – planned future expenditure, even where authorised by the board of directors or equivalent governing body, is excluded from recognition.

Scope

IAS 37 excludes obligations and contingencies arising from: [IAS 37.1-6]

financial instruments that are in the scope of IAS 39 Financial Instruments: Recognition and Measurement (or IFRS 9 Financial Instruments)

non-onerous executory contracts insurance contracts (see IFRS 4 Insurance Contracts), but IAS 37 does apply to other provisions, contingent liabilities

and contingent assets of an insurer items covered by another IFRS. For example, IAS 11 Construction Contracts applies to obligations arising under such

contracts; IAS 12 Income Taxes applies to obligations for current or deferred income taxes; IAS 17 Leases applies to lease obligations; and IAS 19 Employee Benefits applies to pension and other employee benefit obligations.

Key definitions [IAS 37.10]

Provision: a liability of uncertain timing or amount.

Liability:

present obligation as a result of past events settlement is expected to result in an outflow of resources (payment)

Contingent liability:

a possible obligation depending on whether some uncertain future event occurs, or a present obligation but payment is not probable or the amount cannot be measured reliably

Contingent asset:

a possible asset that arises from past events, and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events

not wholly within the control of the entity.

Recognition of a provision

An entity must recognise a provision if, and only if: [IAS 37.14]

a present obligation (legal or constructive) has arisen as a result of a past event (the obligating event), payment is probable ('more likely than not'), and the amount can be estimated reliably.

An obligating event is an event that creates a legal or constructive obligation and, therefore, results in an entity having no realistic alternative but to settle the obligation. [IAS 37.10]

A constructive obligation arises if past practice creates a valid expectation on the part of a third party, for example, a retail store that has a long-standing policy of allowing customers to return merchandise within, say, a 30-day period. [IAS 37.10]

A possible obligation (a contingent liability) is disclosed but not accrued. However, disclosure is not required if payment is remote. [IAS 37.86]

In rare cases, for example in a lawsuit, it may not be clear whether an entity has a present obligation. In those cases, a past event is deemed to give rise to a present obligation if, taking account of all available evidence, it is more likely than not that a present obligation exists at the balance sheet date. A provision should be recognised for that present obligation if the other recognition criteria described above are met. If it is more likely than not that no present obligation exists, the entity should disclose a contingent liability, unless the possibility of an outflow of resources is remote. [IAS 37.15]

Measurement of provisions

The amount recognised as a provision should be the best estimate of the expenditure required to settle the present obligation at the balance sheet date, that is, the amount that an entity would rationally pay to settle the obligation at the balance sheet date or to transfer it to a third party. [IAS 37.36] This means:

Provisions for one-off events (restructuring, environmental clean-up, settlement of a lawsuit) are measured at the most likely amount. [IAS 37.40]

Provisions for large populations of events (warranties, customer refunds) are measured at a probability-weighted expected value. [IAS 37.39]

Both measurements are at discounted present value using a pre-tax discount rate that reflects the current market assessments of the time value of money and the risks specific to the liability. [IAS 37.45 and 37.47]

In reaching its best estimate, the entity should take into account the risks and uncertainties that surround the underlying events. [IAS 37.42]

If some or all of the expenditure required to settle a provision is expected to be reimbursed by another party, the reimbursement should be recognised as a separate asset, and not as a reduction of the required provision, when, and only when, it is virtually certain that reimbursement will be received if the entity settles the obligation. The amount recognised should not exceed the amount of the provision. [IAS 37.53]

In measuring a provision consider future events as follows:

forecast reasonable changes in applying existing technology [IAS 37.49] ignore possible gains on sale of assets [IAS 37.51] consider changes in legislation only if virtually certain to be enacted [IAS 37.50]

Remeasurement of provisions [IAS 37.59]

Review and adjust provisions at each balance sheet date If an outflow no longer probable, provision is reversed.

Some examples of provisions

Circumstance Recognise a provision?

Restructuring by sale of an operation Only when the entity is committed to a sale, i.e. there is a binding sale agreement [IAS 37.78]

Restructuring by closure or reorganisation

Only when a detailed form plan is in place and the entity has started to implement the plan, or announced its main features to those affected. A Board decision is insufficient [IAS 37.72, Appendix C, Examples 5A & 5B]

Warranty When an obligating event occurs (sale of product with a warranty and probable warranty claims will be made) [Appendix C, Example 1]

Land contamination

A provision is recognised as contamination occurs for any legal obligations of clean up, or for constructive obligations if the company's published policy is to clean up even if there is no legal requirement to do so (past event is the contamination and public expectation created by the company's policy) [Appendix C, Examples 2B]

Customer refundsRecognise a provision if the entity's established policy is to give refunds (past event is the sale of the product together with the customer's expectation, at time of purchase, that a refund would be available) [Appendix C, Example 4]

Offshore oil rig must be removed and sea bed restored

Recognise a provision for removal costs arising from the construction of the the oil rig as it is constructed, and add to the cost of the asset. Obligations arising from the production of oil are recognised as the production occurs [Appendix C, Example 3]

Abandoned leasehold, four years to run, no re-letting

A provision is recognised for the unavoidable lease payments [Appendix C, Example 8]

possible

CPA firm must staff training for recent changes in tax law

No provision is recognised (there is no obligation to provide the training, recognise a liability if and when the retraining occurs) [Appendix C, Example 7]

Major overhaul or repairs No provision is recognised (no obligation) [Appendix C, Example 11]

Onerous (loss-making) contract Recognise a provision [IAS 37.66]

Future operating losses No provision is recognised (no liability) [IAS 37.63]

Restructurings

A restructuring is: [IAS 37.70]

sale or termination of a line of business closure of business locations changes in management structure fundamental reorganisations.

Restructuring provisions should be recognised as follows: [IAS 37.72]

Sale of operation: recognise a provision only after a binding sale agreement [IAS 37.78] Closure or reorganisation: recognise a provision only after a detailed formal plan is adopted and has started being

implemented, or announced to those affected. A board decision of itself is insufficient. Future operating losses: provisions are not recognised for future operating losses, even in a restructuring Restructuring provision on acquisition: recognise a provision only if there is an obligation at acquisition date [IFRS

3.11]

Restructuring provisions should include only direct expenditures necessarily entailed by the restructuring, not costs that associated with the ongoing activities of the entity. [IAS 37.80]

What is the debit entry?

When a provision (liability) is recognised, the debit entry for a provision is not always an expense. Sometimes the provision may form part of the cost of the asset. Examples: included in the cost of inventories, or an obligation for environmental cleanup when a new mine is opened or an offshore oil rig is installed. [IAS 37.8]

Use of provisions

Provisions should only be used for the purpose for which they were originally recognised. They should be reviewed at each balance sheet date and adjusted to reflect the current best estimate. If it is no longer probable that an outflow of resources will be required to settle the obligation, the provision should be reversed. [IAS 37.61]

Contingent liabilities

Since there is common ground as regards liabilities that are uncertain, IAS 37 also deals with contingencies. It requires that entities should not recognise contingent liabilities – but should disclose them, unless the possibility of an outflow of economic resources is remote. [IAS 37.86]

Contingent assets

Contingent assets should not be recognised – but should be disclosed where an inflow of economic benefits is probable. When the realisation of income is virtually certain, then the related asset is not a contingent asset and its recognition is appropriate. [IAS 37.31-35]

Disclosures

Reconciliation for each class of provision: [IAS 37.84]

opening balance additions used (amounts charged against the provision) unused amounts reversed unwinding of the discount, or changes in discount rate closing balance

A prior year reconciliation is not required. [IAS 37.84]

For each class of provision, a brief description of: [IAS 37.85]

nature timing uncertainties assumptions reimbursement, if any.

IAS 38 — Intangible Assets Share on email Share on facebook Share on twitter Share on linkedin More Sharing Services

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Overview

IAS 38 Intangible Assets outlines the accounting requirements for intangible assets, which are non-monetary assets which are without physical substance and identifiable (either being separable or arising from contractual or other legal rights). Intangible assets meeting the relevant recognition criteria are initially measured at cost, subsequently measured at cost or using the revaluation model, and amortised on a systematic basis over their useful lives (unless the asset has an indefinite useful life, in which case it is not amortised).

IAS 38 was revised in March 2004 and applies to intangible assets acquired in business combinations occurring on or after 31 March 2004, or otherwise to other intangible assets for annual periods beginning on or after 31 March 2004.

History of IAS 38Date Development Comments

February 1977Exposure Draft E9 Accounting for Research and Development Activities

July 1978IAS 9 (1978) Accounting for Research and Development Activities issued

Effective 1 January 1980

August 1991Exposure Draft E37 Research and Development Costs published

December 1993IAS 9 (1993) Research and Development Costs issued

Operative for annual financial statements covering periods beginning on or after 1 January 1995

June 1995 Exposure Draft E50 Intangible Assets published

August 1997E50 was modified and re-exposed as Exposure Draft E59 Intangible Assets

September 1998 IAS 38 Intangible Assets issuedOperative for annual financial statements covering periods beginning on or after 1 July 1998

31 March 2004 IAS 38 Intangible Assets issued

Applies to intangible assets acquired in business combinations occurring on or after 31 March 2004, or otherwise to other intangible assets for annual periods beginning on or after 31 March 2004

22 May 2008 Amended by Improvements to IFRSs (advertising and promotional activities, units of production method of amortisation)

Effective for annual periods beginning on or after 1 January 2009

16 April 2009 Amended by Improvements to IFRSs (measurement of intangible assets in business combinations)

Effective for annual periods beginning on or after 1 July 2009

12 December 2013

Amended by Annual Improvements to IFRSs 2010–2012 Cycle (proportionate restatement of accumulated depreciation under the revaluation method)

Effective for annual periods beginning on or after 1 July 2014

12 May 2014 Amended by Clarification of Acceptable Methods of Depreciation and Amortisation (Amendments to IAS 16 and IAS 38)

Effective for annual periods beginning on or after 1 January 2016

Related Interpretations

IFRIC 12 Service Concession Arrangements IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine IAS 16 supersedes SIC-6 Costs of Modifying Existing Software SIC-32 Intangible Assets – Website Costs

Amendments under consideration by the IASB

Research project — Rate-regulated activities Research project — Intangible assets

Summary of IAS 38

Objective

The objective of IAS 38 is to prescribe the accounting treatment for intangible assets that are not dealt with specifically in another IFRS. The Standard requires an entity to recognise an intangible asset if, and only if, certain criteria are met. The Standard also specifies how to measure the carrying amount of intangible assets and requires certain disclosures regarding intangible assets. [IAS 38.1]

Scope

IAS 38 applies to all intangible assets other than: [IAS 38.2-3]

financial assets (see IAS 32 Financial Instruments: Presentation) exploration and evaluation assets (see IFRS 6 Exploration for and Evaluation of Mineral Resources) expenditure on the development and extraction of minerals, oil, natural gas, and similar resources intangible assets arising from insurance contracts issued by insurance companies intangible assets covered by another IFRS, such as intangibles held for sale (IFRS 5 Non-current Assets Held for Sale

and Discontinued Operations), deferred tax assets (IAS 12 Income Taxes), lease assets (IAS 17 Leases), assets arising from employee benefits (IAS 19 Employee Benefits (2011)), and goodwill (IFRS 3 Business Combinations).

Key definitions

Intangible asset: an identifiable non-monetary asset without physical substance. An asset is a resource that is controlled by the entity as a result of past events (for example, purchase or self-creation) and from which future economic benefits (inflows of cash or other assets) are expected. [IAS 38.8] Thus, the three critical attributes of an intangible asset are:

identifiability control (power to obtain benefits from the asset) future economic benefits (such as revenues or reduced future costs)

Identifiability: an intangible asset is identifiable when it: [IAS 38.12]

is separable (capable of being separated and sold, transferred, licensed, rented, or exchanged, either individually or together with a related contract) or

arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations.

Examples of intangible assets

patented technology, computer software, databases and trade secrets trademarks, trade dress, newspaper mastheads, internet domains video and audiovisual material (e.g. motion pictures, television programmes) customer lists mortgage servicing rights licensing, royalty and standstill agreements import quotas

franchise agreements customer and supplier relationships (including customer lists) marketing rights

Intangibles can be acquired:

by separate purchase as part of a business combination by a government grant by exchange of assets by self-creation (internal generation)

Recognition

Recognition criteria. IAS 38 requires an entity to recognise an intangible asset, whether purchased or self-created (at cost) if, and only if: [IAS 38.21]

it is probable that the future economic benefits that are attributable to the asset will flow to the entity; and the cost of the asset can be measured reliably.

This requirement applies whether an intangible asset is acquired externally or generated internally. IAS 38 includes additional recognition criteria for internally generated intangible assets (see below).

The probability of future economic benefits must be based on reasonable and supportable assumptions about conditions that will exist over the life of the asset. [IAS 38.22] The probability recognition criterion is always considered to be satisfied for intangible assets that are acquired separately or in a business combination. [IAS 38.33]

If recognition criteria not met. If an intangible item does not meet both the definition of and the criteria for recognition as an intangible asset, IAS 38 requires the expenditure on this item to be recognised as an expense when it is incurred. [IAS 38.68]

Business combinations. There is a presumption that the fair value (and therefore the cost) of an intangible asset acquired in a business combination can be measured reliably. [IAS 38.35] An expenditure (included in the cost of acquisition) on an intangible item that does not meet both the definition of and recognition criteria for an intangible asset should form part of the amount attributed to the goodwill recognised at the acquisition date.

Reinstatement. The Standard also prohibits an entity from subsequently reinstating as an intangible asset, at a later date, an expenditure that was originally charged to expense. [IAS 38.71]

Initial recognition: research and development costs

Charge all research cost to expense. [IAS 38.54] Development costs are capitalised only after technical and commercial feasibility of the asset for sale or use have

been established. This means that the entity must intend and be able to complete the intangible asset and either use it or sell it and be able to demonstrate how the asset will generate future economic benefits. [IAS 38.57]

If an entity cannot distinguish the research phase of an internal project to create an intangible asset from the development phase, the entity treats the expenditure for that project as if it were incurred in the research phase only.

Initial recognition: in-process research and development acquired in a business combination

A research and development project acquired in a business combination is recognised as an asset at cost, even if a component is research. Subsequent expenditure on that project is accounted for as any other research and development cost (expensed except to the extent that the expenditure satisfies the criteria in IAS 38 for recognising such expenditure as an intangible asset). [IAS 38.34]

Initial recognition: internally generated brands, mastheads, titles, lists

Brands, mastheads, publishing titles, customer lists and items similar in substance that are internally generated should not be recognised as assets. [IAS 38.63]

Initial recognition: computer software

Purchased: capitalise Operating system for hardware: include in hardware cost Internally developed (whether for use or sale): charge to expense until technological feasibility, probable future

benefits, intent and ability to use or sell the software, resources to complete the software, and ability to measure cost.

Amortisation: over useful life, based on pattern of benefits (straight-line is the default).

Initial recognition: certain other defined types of costs

The following items must be charged to expense when incurred:

internally generated goodwill [IAS 38.48] start-up, pre-opening, and pre-operating costs [IAS 38.69] training cost [IAS 38.69] advertising and promotional cost, including mail order catalogues [IAS 38.69] relocation costs [IAS 38.69]

For this purpose, 'when incurred' means when the entity receives the related goods or services. If the entity has made a prepayment for the above items, that prepayment is recognised as an asset until the entity receives the related goods or services. [IAS 38.70]

Initial measurement

Intangible assets are initially measured at cost. [IAS 38.24]

Measurement subsequent to acquisition: cost model and revaluation models allowed

An entity must choose either the cost model or the revaluation model for each class of intangible asset. [IAS 38.72]

Cost model. After initial recognition intangible assets should be carried at cost less accumulated amortisation and impairment losses. [IAS 38.74]

Revaluation model. Intangible assets may be carried at a revalued amount (based on fair value) less any subsequent amortisation and impairment losses only if fair value can be determined by reference to an active market. [IAS 38.75] Such active markets are expected to be uncommon for intangible assets. [IAS 38.78] Examples where they might exist:

production quotas fishing licences taxi licences

Under the revaluation model, revaluation increases are recognised in other comprehensive income and accumulated in the "revaluation surplus" within equity except to the extent that it reverses a revaluation decrease previously recognised in profit and loss. If the revalued intangible has a finite life and is, therefore, being amortised (see below) the revalued amount is amortised. [IAS 38.85]

Classification of intangible assets based on useful life

Intangible assets are classified as: [IAS 38.88]

Indefinite life: no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the entity.

Finite life: a limited period of benefit to the entity.

Measurement subsequent to acquisition: intangible assets with finite lives

The cost less residual value of an intangible asset with a finite useful life should be amortised on a systematic basis over that life: [IAS 38.97]

The amortisation method should reflect the pattern of benefits. If the pattern cannot be determined reliably, amortise by the straight line method. The amortisation charge is recognised in profit or loss unless another IFRS requires that it be included in the cost of

another asset. The amortisation period should be reviewed at least annually. [IAS 38.104]

Expected future reductions in selling prices could be indicative of a higher rate of consumption of the future economic benefits embodied in an asset. [IAS 18.92]

The standard contains a rebuttable presumption that a revenue-based amortisation method for intangible assets is inappropriate. However, there are limited circumstances when the presumption can be overcome:

The intangible asset is expressed as a measure of revenue; and it can be demonstrated that revenue and the consumption of economic benefits of the intangible asset are highly

correlated. [IAS 38.98A]

Note: The guidance on expected future reductions in selling prices and the clarification regarding the revenue-based depreciation method were introduced by Clarification of Acceptable Methods of Depreciation and Amortisation, which applies to annual periods beginning on or after 1 January 2016.

 

Examples where revenue based amortisation may be appropriate

IAS 38 notes that in the circumstance in which the predominant limiting factor that is inherent in an intangible asset is the achievement of a revenue threshold, the revenue to be generated can be an appropriate basis for amortisation of the asset. The standard provides the following examples where revenue to be generated might be an appropriate basis for amortisation: [IAS 38.98C]

A concession to explore and extract gold from a gold mine which is limited to a fixed amount of revenue generated from the extraction of gold

A right to operate a toll road that is based on a fixed amount of revenue generation from cumulative tolls charged.

The asset should also be assessed for impairment in accordance with IAS 36. [IAS 38.111]

Measurement subsequent to acquisition: intangible assets with indefinite useful lives

An intangible asset with an indefinite useful life should not be amortised. [IAS 38.107]

Its useful life should be reviewed each reporting period to determine whether events and circumstances continue to support an indefinite useful life assessment for that asset. If they do not, the change in the useful life assessment from indefinite to finite should be accounted for as a change in an accounting estimate. [IAS 38.109]

The asset should also be assessed for impairment in accordance with IAS 36. [IAS 38.111]

Subsequent expenditure

Due to the nature of intangible assets, subsequent expenditure will only rarely meet the criteria for being recognised in the carrying amount of an asset. [IAS 38.20] Subsequent expenditure on brands, mastheads, publishing titles, customer lists and similar items must always be recognised in profit or loss as incurred. [IAS 38.63]

Disclosure

For each class of intangible asset, disclose: [IAS 38.118 and 38.122]

useful life or amortisation rate amortisation method gross carrying amount accumulated amortisation and impairment losses line items in the income statement in which amortisation is included reconciliation of the carrying amount at the beginning and the end of the period showing:

o additions (business combinations separately)o assets held for saleo retirements and other disposalso revaluationso impairmentso reversals of impairmentso amortisationo foreign exchange differenceso other changes

basis for determining that an intangible has an indefinite life description and carrying amount of individually material intangible assets certain special disclosures about intangible assets acquired by way of government grants information about intangible assets whose title is restricted contractual commitments to acquire intangible assets

Additional disclosures are required about:

intangible assets carried at revalued amounts [IAS 38.124] the amount of research and development expenditure recognised as an expense in the current period [IAS 38.126]

IAS 39 — Financial Instruments: Recognition and Measurement Share on email Share on facebook Share on twitter Share on linkedin More Sharing Services

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Overview

IAS 39 Financial Instruments: Recognition and Measurement outlines the requirements for the recognition and measurement of financial assets, financial liabilities, and some contracts to buy or sell non-financial items. Financial instruments are initially recognised when an entity becomes a party to the contractual provisions of the instrument, and are classified into various categories depending upon the type of instrument, which then determines the subsequent measurement of the instrument (typically amortised cost or fair value). Special rules apply to embedded derivatives and hedging instruments.

IAS 39 was reissued in December 2003, applies to annual periods beginning on or after 1 January 2005, and will be largely replaced by IFRS 9 Financial Instruments for annual periods beginning on or after 1 January 2018.

History of IAS 39Date Development Comments

October 1984 Exposure Draft E26 Accounting for Investments

March 1986 IAS 25 Accounting for Investments

Operative for financial statements covering periods beginning on or after 1 January 1987

September 1991 Exposure Draft E40 Financial Instruments

January 1994 E40 was modified and re-exposed as Exposure Draft E48 Financial Instruments

June 1995 The disclosure and presentation portion of E48 was adopted as IAS 32

March 1997 Discussion Paper Accounting for Financial Assets and Financial Liabilities issued

June 1998 Exposure Draft E62 Financial Instruments: Recognition and Measurement issuedComment deadline 30 September 1998

December 1998 IAS 39 Financial Instruments: Recognition and Measurement (1998)Effective date 1 January 2001

April 2000 Withdrawal of IAS 25 following the approval of IAS 40 Investment Property

Effective for financial statements covering periods beginning on or after 1 January 2001

October 2000 Limited revisions to IAS 39Effective date 1 January 2001

17 December 2003 IAS 39 Financial Instruments: Recognition and Measurement (2004) issued Effective for annual periods beginning on or

after 1 January 2005

31 March 2004 IAS 39 revised to reflect macro hedgingEffective for annual periods beginning on or after 1 January 2005

17 December 2004 Amendment issued to IAS 39 for transition and initial recognition of profit or loss

14 April 2005Amendment issued to IAS 39 for cash flow hedges of forecast intragroup transactions

Effective for annual periods beginning on or after 1 January 2006

15 June 2005 Amendment to IAS 39 for fair value optionEffective for annual periods beginning on or after 1 January 2006

18 August 2005 Amendment to IAS 39 for financial guarantee contractsEffective for annual periods beginning on or after 1 January 2006

22 May 2008 IAS 39 amended for Annual Improvements to IFRSs 2007Effective for annual periods beginning on or after 1 January 2009

30 July 2008 Amendment to IAS 39 for eligible hedged itemsEffective for annual periods beginning on or after 1 July 2009

13 October 2008 Amendment to IAS 39 for reclassifications of financial assets Effective 1 July 2008

12 March 2009Amendment to IAS 39 for embedded derivatives on reclassifications of financial assets

Effective for annual periods beginning on or after 1 July 2009

16 April 2009 IAS 39 amended for Annual Improvements to IFRSs 2009Effective for annual periods beginning on or after 1 January 2010

12 November 2009IFRS 9 Financial Instruments issued, replacing the classification and measurement of financial assets provisions of IAS 39

Original effective date 1 January 2013, later deferred and subsequently removed*

28 October 2010IFRS 9 Financial Instruments reissued, incorporating new requirements on accounting for financial liabilities and carrying over from IAS 39 the requirements for derecognition of financial assets and financial liabilities

Original effective date 1 January 2013, later deferred and subsequently removed*

27 June 2013 Amended by Novation of Derivatives and Continuation of Hedge Accounting Effective for annual periods beginning on or after 1 January 2014 (earlier application

permitted)

19 November 2013

IFRS 9 Financial Instruments (Hedge Accounting and amendments to IFRS 9, IFRS 7 and IAS 39) issued, permitting an entity to elect to continue to apply the hedge accounting requirements in IAS 39 for a fair value hedge of the interest rate exposure of a portion of a portfolio of financial assets or financial liabilities when IFRS 9 is applied, and to extend the fair value option to certain contracts that meet the 'own use' scope exception

Applies when IFRS 9 is applied*

24 July 2014IFRS 9 Financial Instruments issued, replacing IAS 39 requirements for classification and measurement, impairment, hedge accounting and derecognition

Effective for annual periods beginning on or after 1 January 2018#

* IFRS 9 (2014) supersedes IFRS 9 (2009), IFRS 9 (2010) and IFRS 9 (2013), but these standards remain available for application if the relevant date of initial application is before 1 February 2015.

# When an entity first applies IFRS 9, it may choose as its accounting policy choice to continue to apply the hedge accounting requirements of IAS 39 instead of the requirements of Chapter 6 of IFRS 9. The IASB currently is undertaking a project on macro hedge accounting which is expected to eventually replace these sections of IAS 39.

Related Interpretations

IFRIC 16 Hedge of a Net Investment in a Foreign Operation IFRIC 12 Service Concession Arrangements IFRIC 9 Reassessment of Embedded Derivatives IAS 39 (2003) superseded SIC-33 Consolidation and Equity Method – Potential Voting Rights and Allocation of

Ownership Interest

Amendments under consideration by the IASB

Financial instruments — Macro hedge accounting

Summary of IAS 39

Deloitte guidance on IFRSs for financial instruments

iGAAP 2012: Financial Instruments

Deloitte (United Kingdom) has developed iGAAP 2012: Financial Instruments – IFRS 9 and related Standards (Volume B) and iGAAP 2012: Financial Instruments – IAS 39 and related Standards (Volume C), which have been published by LexisNexis. These publications are the authoritative guides for financial instruments accounting under IFRSs. These two titles go beyond and behind the technical requirements, unearthing common practices and problems, and providing views, interpretations, clear explanations and examples. They enable the reader to gain a sound understanding of the standards and an appreciation of their practicalities.The iGAAP 2012 Financial Instruments books can be purchased through www.lexisnexis.co.uk/deloitte.

Scope

Scope exclusions

IAS 39 applies to all types of financial instruments except for the following, which are scoped out of IAS 39: [IAS 39.2]

interests in subsidiaries, associates, and joint ventures accounted for under IAS 27 Consolidated and Separate Financial Statements, IAS 28 Investments in Associates, or IAS 31 Interests in Joint Ventures (or, for periods beginning on or after 1 January 2013, IFRS 10 Consolidated Financial Statements, IAS 27 Separate Financial Statements or IAS 28 Investments in Associates and Joint Ventures); however IAS 39 applies in cases where under those standards such interests are to be accounted for under IAS 39. The standard also applies to most derivatives on an interest in a subsidiary, associate, or joint venture

employers' rights and obligations under employee benefit plans to which IAS 19 Employee Benefits applies forward contracts between an acquirer and selling shareholder to buy or sell an acquiree that will result in a business

combination at a future acquisition date rights and obligations under insurance contracts, except IAS 39 does apply to financial instruments that take the form

of an insurance (or reinsurance) contract but that principally involve the transfer of financial risks and derivatives embedded in insurance contracts

financial instruments that meet the definition of own equity under IAS 32 Financial Instruments: Presentation financial instruments, contracts and obligations under share-based payment transactions to which IFRS 2 Share-based

Payment applies rights to reimbursement payments to which IAS 37 Provisions, Contingent Liabilities and Contingent Assets applies

Leases

IAS 39 applies to lease receivables and payables only in limited respects: [IAS 39.2(b)]

IAS 39 applies to lease receivables with respect to the derecognition and impairment provisions IAS 39 applies to lease payables with respect to the derecognition provisions IAS 39 applies to derivatives embedded in leases.

Financial guarantees

IAS 39 applies to financial guarantee contracts issued. However, if an issuer of financial guarantee contracts has previously asserted explicitly that it regards such contracts as insurance contracts and has used accounting applicable to insurance contracts, the issuer may elect to apply either IAS 39 or IFRS 4 Insurance Contracts to such financial guarantee contracts. The issuer may make that election contract by contract, but the election for each contract is irrevocable.

Accounting by the holder is excluded from the scope of IAS 39 and IFRS 4 (unless the contract is a reinsurance contract). Therefore, paragraphs 10-12 of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors apply. Those paragraphs specify criteria to use in developing an accounting policy if no IFRS applies specifically to an item.

Loan commitments

Loan commitments are outside the scope of IAS 39 if they cannot be settled net in cash or another financial instrument, they are not designated as financial liabilities at fair value through profit or loss, and the entity does not have a past practice of selling the loans that resulted from the commitment shortly after origination. An issuer of a commitment to provide a loan at a below-market interest rate is required initially to recognise the commitment at its fair value; subsequently, the issuer will remeasure it at the higher of (a) the amount recognised under IAS 37 and (b) the amount initially recognised less, where appropriate, cumulative amortisation recognised in accordance with IAS 18. An issuer of loan commitments must apply IAS 37 to other loan commitments that are not within the scope of IAS 39 (that is, those made at market or above). Loan commitments are subject to the derecognition provisions of IAS 39. [IAS 39.4]

Contracts to buy or sell financial items

Contracts to buy or sell financial items are always within the scope of IAS 39 (unless one of the other exceptions applies).

Contracts to buy or sell non-financial items

Contracts to buy or sell non-financial items are within the scope of IAS 39 if they can be settled net in cash or another financial asset and are not entered into and held for the purpose of the receipt or delivery of a non-financial item in accordance with the entity's expected purchase, sale, or usage requirements. Contracts to buy or sell non-financial items are inside the scope if net settlement occurs. The following situations constitute net settlement: [IAS 39.5-6]

the terms of the contract permit either counterparty to settle net there is a past practice of net settling similar contracts there is a past practice, for similar contracts, of taking delivery of the underlying and selling it within a short period

after delivery to generate a profit from short-term fluctuations in price, or from a dealer's margin, or the non-financial item is readily convertible to cash

Weather derivatives

Although contracts requiring payment based on climatic, geological, or other physical variable were generally excluded from the original version of IAS 39, they were added to the scope of the revised IAS 39 in December 2003 if they are not in the scope of IFRS 4. [IAS 39.AG1]

Definitions

IAS 39 incorporates the definitions of the following items from IAS 32 Financial Instruments: Presentation: [IAS 39.8]

financial instrument financial asset financial liability equity instrument.

Note: Where an entity applies IFRS 9 Financial Instruments prior to its mandatory application date (1 January 2015), definitions of the following terms are also incorporated from IFRS 9: derecognition, derivative, fair value, financial guarantee contract. The definition of those terms outlined below (as relevant) are those from IAS 39.

Common examples of financial instruments within the scope of IAS 39

cash demand and time deposits commercial paper accounts, notes, and loans receivable and payable debt and equity securities. These are financial instruments from the perspectives of both the holder and the issuer.

This category includes investments in subsidiaries, associates, and joint ventures asset backed securities such as collateralised mortgage obligations, repurchase agreements, and securitised packages

of receivables derivatives, including options, rights, warrants, futures contracts, forward contracts, and swaps.

A derivative is a financial instrument:

Whose value changes in response to the change in an underlying variable such as an interest rate, commodity or security price, or index;

That requires no initial investment, or one that is smaller than would be required for a contract with similar response to changes in market factors; and

That is settled at a future date. [IAS 39.9]

Examples of derivatives

Forwards: Contracts to purchase or sell a specific quantity of a financial instrument, a commodity, or a foreign currency at a specified price determined at the outset, with delivery or settlement at a specified future date. Settlement is at maturity by actual delivery of the item specified in the contract, or by a net cash settlement.

Interest rate swaps and forward rate agreements: Contracts to exchange cash flows as of a specified date or a series of specified dates based on a notional amount and fixed and floating rates.

Futures: Contracts similar to forwards but with the following differences: futures are generic exchange-traded, whereas forwards are individually tailored. Futures are generally settled through an offsetting (reversing) trade, whereas forwards are generally settled by delivery of the underlying item or cash settlement.

Options: Contracts that give the purchaser the right, but not the obligation, to buy (call option) or sell (put option) a specified quantity of a particular financial instrument, commodity, or foreign currency, at a specified price (strike price), during or at a specified period of time. These can be individually written or exchange-traded. The purchaser of the option pays the seller (writer) of the option a fee (premium) to compensate the seller for the risk of payments under the option.

Caps and floors: These are contracts sometimes referred to as interest rate options. An interest rate cap will compensate the purchaser of the cap if interest rates rise above a predetermined rate (strike rate) while an interest rate floor will compensate the purchaser if rates fall below a predetermined rate.

Embedded derivatives

Some contracts that themselves are not financial instruments may nonetheless have financial instruments embedded in them. For example, a contract to purchase a commodity at a fixed price for delivery at a future date has embedded in it a derivative that is indexed to the price of the commodity.

An embedded derivative is a feature within a contract, such that the cash flows associated with that feature behave in a similar fashion to a stand-alone derivative. In the same way that derivatives must be accounted for at fair value on the balance sheet with changes recognised in the income statement, so must some embedded derivatives. IAS 39 requires that an embedded derivative be separated from its host contract and accounted for as a derivative when: [IAS 39.11]

the economic risks and characteristics of the embedded derivative are not closely related to those of the host contract

a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative, and

the entire instrument is not measured at fair value with changes in fair value recognised in the income statement

If an embedded derivative is separated, the host contract is accounted for under the appropriate standard (for instance, under IAS 39 if the host is a financial instrument). Appendix A to IAS 39 provides examples of embedded derivatives that are closely related to their hosts, and of those that are not.

Examples of embedded derivatives that are not closely related to their hosts (and therefore must be separately accounted for) include:

the equity conversion option in debt convertible to ordinary shares (from the perspective of the holder only) [IAS 39.AG30(f)]

commodity indexed interest or principal payments in host debt contracts[IAS 39.AG30(e)] cap and floor options in host debt contracts that are in-the-money when the instrument was issued [IAS 39.AG33(b)] leveraged inflation adjustments to lease payments [IAS 39.AG33(f)] currency derivatives in purchase or sale contracts for non-financial items where the foreign currency is not that of

either counterparty to the contract, is not the currency in which the related good or service is routinely denominated in commercial transactions around the world, and is not the currency that is commonly used in such contracts in the economic environment in which the transaction takes place. [IAS 39.AG33(d)]

If IAS 39 requires that an embedded derivative be separated from its host contract, but the entity is unable to measure the embedded derivative separately, the entire combined contract must be designated as a financial asset as at fair value through profit or loss). [IAS 39.12]

Classification as liability or equity

Since IAS 39 does not address accounting for equity instruments issued by the reporting enterprise but it does deal with accounting for financial liabilities, classification of an instrument as liability or as equity is critical. IAS 32 Financial Instruments: Presentation addresses the classification question.

Classification of financial assets

IAS 39 requires financial assets to be classified in one of the following categories: [IAS 39.45]

Financial assets at fair value through profit or loss Available-for-sale financial assets Loans and receivables Held-to-maturity investments

Those categories are used to determine how a particular financial asset is recognised and measured in the financial statements.

Financial assets at fair value through profit or loss. This category has two subcategories:

Designated. The first includes any financial asset that is designated on initial recognition as one to be measured at fair value with fair value changes in profit or loss.

Held for trading. The second category includes financial assets that are held for trading. All derivatives (except those designated hedging instruments) and financial assets acquired or held for the purpose of selling in the short term or for which there is a recent pattern of short-term profit taking are held for trading. [IAS 39.9]

Available-for-sale financial assets (AFS) are any non-derivative financial assets designated on initial recognition as available for sale or any other instruments that are not classified as as (a) loans and receivables, (b) held-to-maturity investments or (c) financial assets at fair value through profit or loss. [IAS 39.9] AFS assets are measured at fair value in the balance sheet. Fair value changes on AFS assets are recognised directly in equity, through the statement of changes in equity, except for interest on AFS assets (which is recognised in income on an effective yield basis), impairment losses and (for interest-bearing AFS debt instruments) foreign exchange gains or losses. The cumulative gain or loss that was recognised in equity is recognised in profit or loss when an available-for-sale financial asset is derecognised. [IAS 39.55(b)]

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than held for trading or designated on initial recognition as assets at fair value through profit or loss or as available-for-sale. Loans and receivables for which the holder may not recover substantially all of its initial investment, other than because of credit deterioration, should be classified as available-for-sale.[IAS 39.9] Loans and receivables are measured at amortised cost. [IAS 39.46(a)]

Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments that an entity intends and is able to hold to maturity and that do not meet the definition of loans and receivables and are not designated on initial recognition as assets at fair value through profit or loss or as available for sale. Held-to-maturity investments are measured at amortised cost. If an entity sells a held-to-maturity investment other than in insignificant amounts or as a consequence of a non-recurring, isolated event beyond its control that could not be reasonably anticipated, all of its other held-to-maturity investments must be reclassified as available-for-sale for the current and next two financial reporting years. [IAS 39.9] Held-to-maturity investments are measured at amortised cost. [IAS 39.46(b)]

Classification of financial liabilities

IAS 39 recognises two classes of financial liabilities: [IAS 39.47]

Financial liabilities at fair value through profit or loss Other financial liabilities measured at amortised cost using the effective interest method

The category of financial liability at fair value through profit or loss has two subcategories:

Designated. a financial liability that is designated by the entity as a liability at fair value through profit or loss upon initial recognition

Held for trading. a financial liability classified as held for trading, such as an obligation for securities borrowed in a short sale, which have to be returned in the future

Initial recognition

IAS 39 requires recognition of a financial asset or a financial liability when, and only when, the entity becomes a party to the contractual provisions of the instrument, subject to the following provisions in respect of regular way purchases. [IAS 39.14]

Regular way purchases or sales of a financial asset. A regular way purchase or sale of financial assets is recognised and derecognised using either trade date or settlement date accounting. [IAS 39.38] The method used is to be applied consistently for all purchases and sales of financial assets that belong to the same category of financial asset as defined in IAS 39 (note that for this purpose assets held for trading form a different category from assets designated at fair value through profit or loss). The choice of method is an accounting policy. [IAS 39.38]

IAS 39 requires that all financial assets and all financial liabilities be recognised on the balance sheet. That includes all derivatives. Historically, in many parts of the world, derivatives have not been recognised on company balance sheets. The argument has been that at the time the derivative contract was entered into, there was no amount of cash or other assets paid. Zero cost justified non-recognition, notwithstanding that as time passes and the value of the underlying variable (rate, price, or index) changes, the derivative has a positive (asset) or negative (liability) value.

Initial measurement

Initially, financial assets and liabilities should be measured at fair value (including transaction costs, for assets and liabilities not measured at fair value through profit or loss). [IAS 39.43]

Measurement subsequent to initial recognition

Subsequently, financial assets and liabilities (including derivatives) should be measured at fair value, with the following exceptions: [IAS 39.46-47]

Loans and receivables, held-to-maturity investments, and non-derivative financial liabilities should be measured at amortised cost using the effective interest method.

Investments in equity instruments with no reliable fair value measurement (and derivatives indexed to such equity instruments) should be measured at cost.

Financial assets and liabilities that are designated as a hedged item or hedging instrument are subject to measurement under the hedge accounting requirements of the IAS 39.

Financial liabilities that arise when a transfer of a financial asset does not qualify for derecognition, or that are accounted for using the continuing-involvement method, are subject to particular measurement requirements.

Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction. [IAS 39.9] IAS 39 provides a hierarchy to be used in determining the fair value for a financial instrument: [IAS 39 Appendix A, paragraphs AG69-82]

Quoted market prices in an active market are the best evidence of fair value and should be used, where they exist, to measure the financial instrument.

If a market for a financial instrument is not active, an entity establishes fair value by using a valuation technique that makes maximum use of market inputs and includes recent arm's length market transactions, reference to the current fair value of another instrument that is substantially the same, discounted cash flow analysis, and option pricing models. An acceptable valuation technique incorporates all factors that market participants would consider in setting a price and is consistent with accepted economic methodologies for pricing financial instruments.

If there is no active market for an equity instrument and the range of reasonable fair values is significant and these estimates cannot be made reliably, then an entity must measure the equity instrument at cost less impairment.

Amortised cost is calculated using the effective interest method. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument to the net carrying amount of the financial asset or liability. Financial assets that are not carried at fair value though profit and loss are subject to an impairment test. If expected life cannot be determined reliably, then the contractual life is used.

IAS 39 fair value option

IAS 39 permits entities to designate, at the time of acquisition or issuance, any financial asset or financial liability to be measured at fair value, with value changes recognised in profit or loss. This option is available even if the financial asset or financial liability would ordinarily, by its nature, be measured at amortised cost – but only if fair value can be reliably measured.

In June 2005 the IASB issued its amendment to IAS 39 to restrict the use of the option to designate any financial asset or any financial liability to be measured at fair value through profit and loss (the fair value option). The revisions limit the use of the option to those financial instruments that meet certain conditions: [IAS 39.9]

the fair value option designation eliminates or significantly reduces an accounting mismatch, or a group of financial assets, financial liabilities or both is managed and its performance is evaluated on a fair value

basis by entity's management.

Once an instrument is put in the fair-value-through-profit-and-loss category, it cannot be reclassified out with some exceptions. [IAS 39.50] In October 2008, the IASB issued amendments to IAS 39. The amendments permit reclassification of some financial instruments out of the fair-value-through-profit-or-loss category (FVTPL) and out of the available-for-sale category – for more detail see IAS 39.50(c). In the event of reclassification, additional disclosures are required under IFRS 7 Financial Instruments: Disclosures. In March 2009 the IASB clarified that reclassifications of financial assets under the October 2008 amendments (see above): on reclassification of a financial asset out of the 'fair value through profit or loss' category, all embedded derivatives have to be (re)assessed and, if necessary, separately accounted for in financial statements.

IAS 39 available for sale option for loans and receivables

IAS 39 permits entities to designate, at the time of acquisition, any loan or receivable as available for sale, in which case it is measured at fair value with changes in fair value recognised in equity.

Impairment

A financial asset or group of assets is impaired, and impairment losses are recognised, only if there is objective evidence as a result of one or more events that occurred after the initial recognition of the asset. An entity is required to assess at each balance sheet date whether there is any objective evidence of impairment. If any such evidence exists, the entity is required to do a detailed impairment calculation to determine whether an impairment loss should be recognised. [IAS 39.58] The amount of the loss is measured as the difference between the asset's carrying amount and the present value of estimated cash flows discounted at the financial asset's original effective interest rate. [IAS 39.63]

Assets that are individually assessed and for which no impairment exists are grouped with financial assets with similar credit risk statistics and collectively assessed for impairment. [IAS 39.64]

If, in a subsequent period, the amount of the impairment loss relating to a financial asset carried at amortised cost or a debt instrument carried as available-for-sale decreases due to an event occurring after the impairment was originally recognised, the previously recognised impairment loss is reversed through profit or loss. Impairments relating to investments in available-for-sale equity instruments are not reversed through profit or loss. [IAS 39.65]

Financial guarantees

A financial guarantee contract is a contract that requires the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due. [IAS 39.9]

Under IAS 39 as amended, financial guarantee contracts are recognised:

initially at fair value. If the financial guarantee contract was issued in a stand-alone arm's length transaction to an unrelated party, its fair value at inception is likely to equal the consideration received, unless there is evidence to the contrary.

subsequently at the higher of (i) the amount determined in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets and (ii) the amount initially recognised less, when appropriate, cumulative amortisation recognised in accordance with IAS 18 Revenue. (If specified criteria are met, the issuer may use the fair value option in IAS 39. Furthermore, different requirements continue to apply in the specialised context of a 'failed' derecognition transaction.)

Some credit-related guarantees do not, as a precondition for payment, require that the holder is exposed to, and has incurred a loss on, the failure of the debtor to make payments on the guaranteed asset when due. An example of such a guarantee is a credit derivative that requires payments in response to changes in a specified credit rating or credit index. These are derivatives and they must be measured at fair value under IAS 39.

Derecognition of a financial asset

The basic premise for the derecognition model in IAS 39 is to determine whether the asset under consideration for derecognition is: [IAS 39.16]

an asset in its entirety or specifically identified cash flows from an asset or a fully proportionate share of the cash flows from an asset or a fully proportionate share of specifically identified cash flows from a financial asset

Once the asset under consideration for derecognition has been determined, an assessment is made as to whether the asset has been transferred, and if so, whether the transfer of that asset is subsequently eligible for derecognition.

An asset is transferred if either the entity has transferred the contractual rights to receive the cash flows, or the entity has retained the contractual rights to receive the cash flows from the asset, but has assumed a contractual obligation to pass those cash flows on under an arrangement that meets the following three conditions: [IAS 39.17-19]

the entity has no obligation to pay amounts to the eventual recipient unless it collects equivalent amounts on the original asset

the entity is prohibited from selling or pledging the original asset (other than as security to the eventual recipient), the entity has an obligation to remit those cash flows without material delay

Once an entity has determined that the asset has been transferred, it then determines whether or not it has transferred substantially all of the risks and rewards of ownership of the asset. If substantially all the risks and rewards have been transferred, the asset is derecognised. If substantially all the risks and rewards have been retained, derecognition of the asset is precluded. [IAS 39.20]

If the entity has neither retained nor transferred substantially all of the risks and rewards of the asset, then the entity must assess whether it has relinquished control of the asset or not. If the entity does not control the asset then derecognition is appropriate; however if the entity has retained control of the asset, then the entity continues to recognise the asset to the extent to which it has a continuing involvement in the asset. [IAS 39.30]

These various derecognition steps are summarised in the decision tree in AG36.

Derecognition of a financial liability

A financial liability should be removed from the balance sheet when, and only when, it is extinguished, that is, when the obligation specified in the contract is either discharged or cancelled or expires. [IAS 39.39] Where there has been an exchange between an existing borrower and lender of debt instruments with substantially different terms, or there has been a substantial modification of the terms of an existing financial liability, this transaction is accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability. A gain or loss from extinguishment of the original financial liability is recognised in profit or loss. [IAS 39.40-41]

Hedge accounting

IAS 39 permits hedge accounting under certain circumstances provided that the hedging relationship is: [IAS 39.88]

formally designated and documented, including the entity's risk management objective and strategy for undertaking the hedge, identification of the hedging instrument, the hedged item, the nature of the risk being hedged, and how the entity will assess the hedging instrument's effectiveness and

expected to be highly effective in achieving offsetting changes in fair value or cash flows attributable to the hedged risk as designated and documented, and effectiveness can be reliably measured and

assessed on an ongoing basis and determined to have been highly effective

Hedging instruments

Hedging instrument is an instrument whose fair value or cash flows are expected to offset changes in the fair value or cash flows of a designated hedged item. [IAS 39.9]

All derivative contracts with an external counterparty may be designated as hedging instruments except for some written options. A non-derivative financial asset or liability may not be designated as a hedging instrument except as a hedge of foreign currency risk. [IAS 39.72]

For hedge accounting purposes, only instruments that involve a party external to the reporting entity can be designated as a hedging instrument. This applies to intragroup transactions as well (with the exception of certain

foreign currency hedges of forecast intragroup transactions – see below). However, they may qualify for hedge accounting in individual financial statements. [IAS 39.73]

Hedged items

Hedged item is an item that exposes the entity to risk of changes in fair value or future cash flows and is designated as being hedged. [IAS 39.9]

A hedged item can be: [IAS 39.78-82]

a single recognised asset or liability, firm commitment, highly probable transaction or a net investment in a foreign operation

a group of assets, liabilities, firm commitments, highly probable forecast transactions or net investments in foreign operations with similar risk characteristics

a held-to-maturity investment for foreign currency or credit risk (but not for interest risk or prepayment risk) a portion of the cash flows or fair value of a financial asset or financial liability or a non-financial item for foreign currency risk only for all risks of the entire item in a portfolio hedge of interest rate risk (Macro Hedge) only, a portion of the portfolio of financial assets or financial

liabilities that share the risk being hedged

In April 2005, the IASB amended IAS 39 to permit the foreign currency risk of a highly probable intragroup forecast transaction to qualify as the hedged item in a cash flow hedge in consolidated financial statements – provided that the transaction is denominated in a currency other than the functional currency of the entity entering into that transaction and the foreign currency risk will affect consolidated financial statements. [IAS 39.80]

In 30 July 2008, the IASB amended IAS 39 to clarify two hedge accounting issues:

inflation in a financial hedged item a one-sided risk in a hedged item.

Effectiveness

IAS 39 requires hedge effectiveness to be assessed both prospectively and retrospectively. To qualify for hedge accounting at the inception of a hedge and, at a minimum, at each reporting date, the changes in the fair value or cash flows of the hedged item attributable to the hedged risk must be expected to be highly effective in offsetting the changes in the fair value or cash flows of the hedging instrument on a prospective basis, and on a retrospective basis where actual results are within a range of 80% to 125%.

All hedge ineffectiveness is recognised immediately in profit or loss (including ineffectiveness within the 80% to 125% window).

Categories of hedges

A fair value hedge is a hedge of the exposure to changes in fair value of a recognised asset or liability or a previously unrecognised firm commitment or an identified portion of such an asset, liability or firm commitment, that is attributable to a particular risk and could affect profit or loss. [IAS 39.86(a)] The gain or loss from the change in fair value of the hedging instrument is recognised immediately in profit or loss. At the same time the carrying amount of the hedged item is adjusted for the corresponding gain or loss with respect to the hedged risk, which is also recognised immediately in net profit or loss. [IAS 39.89]

A cash flow hedge is a hedge of the exposure to variability in cash flows that (i) is attributable to a particular risk associated with a recognised asset or liability (such as all or some future interest payments on variable rate debt) or a highly probable forecast transaction and (ii) could affect profit or loss. [IAS 39.86(b)] The portion of the gain or loss

on the hedging instrument that is determined to be an effective hedge is recognised in other comprehensive income. [IAS 39.95]

If a hedge of a forecast transaction subsequently results in the recognition of a financial asset or a financial liability, any gain or loss on the hedging instrument that was previously recognised directly in equity is 'recycled' into profit or loss in the same period(s) in which the financial asset or liability affects profit or loss. [IAS 39.97]

If a hedge of a forecast transaction subsequently results in the recognition of a non-financial asset or non-financial liability, then the entity has an accounting policy option that must be applied to all such hedges of forecast transactions: [IAS 39.98]

Same accounting as for recognition of a financial asset or financial liability – any gain or loss on the hedging instrument that was previously recognised in other comprehensive income is 'recycled' into profit or loss in the same period(s) in which the non-financial asset or liability affects profit or loss.

'Basis adjustment' of the acquired non-financial asset or liability – the gain or loss on the hedging instrument that was previously recognised in other comprehensive income is removed from equity and is included in the initial cost or other carrying amount of the acquired non-financial asset or liability.

A hedge of a net investment in a foreign operation as defined in IAS 21 The Effects of Changes in Foreign Exchange Rates is accounted for similarly to a cash flow hedge. [IAS 39.102]

A hedge of the foreign currency risk of a firm commitment may be accounted for as a fair value hedge or as a cash flow hedge.

Discontinuation of hedge accounting

Hedge accounting must be discontinued prospectively if: [IAS 39.91 and 39.101]

the hedging instrument expires or is sold, terminated, or exercised the hedge no longer meets the hedge accounting criteria – for example it is no longer effective for cash flow hedges the forecast transaction is no longer expected to occur, or the entity revokes the hedge designation

In June 2013, the IASB amended IAS 39 to make it clear that there is no need to discontinue hedge accounting if a hedging derivative is novated, provided certain criteria are met. [IAS 39.91 and IAS 39.101]

For the purpose of measuring the carrying amount of the hedged item when fair value hedge accounting ceases, a revised effective interest rate is calculated. [IAS 39.BC35A]

If hedge accounting ceases for a cash flow hedge relationship because the forecast transaction is no longer expected to occur, gains and losses deferred in other comprehensive income must be taken to profit or loss immediately. If the transaction is still expected to occur and the hedge relationship ceases, the amounts accumulated in equity will be retained in equity until the hedged item affects profit or loss. [IAS 39.101(c)]

If a hedged financial instrument that is measured at amortised cost has been adjusted for the gain or loss attributable to the hedged risk in a fair value hedge, this adjustment is amortised to profit or loss based on a recalculated effective interest rate on this date such that the adjustment is fully amortised by the maturity of the instrument. Amortisation may begin as soon as an adjustment exists and must begin no later than when the hedged item ceases to be adjusted for changes in its fair value attributable to the risks being hedged.

Disclosure

In 2003 all disclosures about financial instruments were moved to IAS 32, so IAS 32 was renamed Financial Instruments: Disclosure and Presentation. In 2005, the IASB issued IFRS 7 Financial Instruments: Disclosures to replace the disclosure portions of IAS 32 effective 1 January 2007. IFRS 7 also superseded IAS 30 Disclosures in the Financial Statements of Banks and Similar Financial Institutions.

IAS 40 — Investment Property Share on email Share on facebook Share on twitter Share on linkedin More Sharing Services

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Overview

IAS 40 Investment Property applies to the accounting for property (land and/or buildings) held to earn rentals or for capital appreciation (or both). Investment properties are initially measured at cost and, with some exceptions. may be subsequently measured using a cost model or fair value model, with changes in the fair value under the fair value model being recognised in profit or loss.

IAS 40 was reissued in December 2003 and applies to annual periods beginning on or after 1 January 2005.

History of IAS 40Date Development Comments

October 1984 Exposure Draft E26 Accounting for Investments published

March 1986 IAS 25 Accounting for Investments issued Operative for financial statements covering periods beginning on or after 1 January 1987

July 1999 Exposure Draft E64 Investment Property published Comment deadline 31 October 1999

April 2000 IAS 40 Investment Property (2000) issued(Supersedes IAS 25 with respect to investment property)

Operative for annual financial statements covering periods beginning on or after 1 January 2001

May 2002 Exposure Draft Improvements to International Accounting Standards (2000) published Comment deadline 16 September 2002

18 December 2003 IAS 40 Investment Property (2003) issued Effective for annual periods beginning on or after 1 January 2005

22 May 2008 Amended by Annual Improvements to IFRSs 2007 (include property under construction or development for future use within scope)

Effective for annual periods beginning on or after 1 January 2009

12 December 2013 Amended by Annual Improvements to IFRSs 2011–2013 Cycle (interrelationship between IFRS 3 and IAS 40)

Effective for annual periods beginning on or after 1 July 2014

Related Interpretations

None

Summary of IAS 40

Definition of investment property

Investment property is property (land or a building or part of a building or both) held (by the owner or by the lessee under a finance lease) to earn rentals or for capital appreciation or both. [IAS 40.5]

Examples of investment property: [IAS 40.8]

land held for long-term capital appreciation land held for a currently undetermined future use building leased out under an operating lease vacant building held to be leased out under an operating lease property that is being constructed or developed for future use as investment property

The following are not investment property and, therefore, are outside the scope of IAS 40: [IAS 40.5 and 40.9]

property held for use in the production or supply of goods or services or for administrative purposes property held for sale in the ordinary course of business or in the process of construction of development for such

sale (IAS 2 Inventories) property being constructed or developed on behalf of third parties (IAS 11 Construction Contracts) owner-occupied property (IAS 16 Property, Plant and Equipment), including property held for future use as owner-

occupied property, property held for future development and subsequent use as owner-occupied property, property occupied by employees and owner-occupied property awaiting disposal

property leased to another entity under a finance lease

In May 2008, as part of its Annual improvements project, the IASB expanded the scope of IAS 40 to include property under construction or development for future use as an investment property. Such property previously fell within the scope of IAS 16.

Other classification issues

Property held under an operating lease. A property interest that is held by a lessee under an operating lease may be classified and accounted for as investment property provided that: [IAS 40.6]

the rest of the definition of investment property is met the operating lease is accounted for as if it were a finance lease in accordance with IAS 17 Leases the lessee uses the fair value model set out in this Standard for the asset recognised

An entity may make the foregoing classification on a property-by-property basis.

Partial own use. If the owner uses part of the property for its own use, and part to earn rentals or for capital appreciation, and the portions can be sold or leased out separately, they are accounted for separately. Therefore the part that is rented out is investment property. If the portions cannot be sold or leased out separately, the property is investment property only if the owner-occupied portion is insignificant. [IAS 40.10]

Ancillary services. If the entity provides ancillary services to the occupants of a property held by the entity, the appropriateness of classification as investment property is determined by the significance of the services provided. If those services are a relatively insignificant component of the arrangement as a whole (for instance, the building

owner supplies security and maintenance services to the lessees), then the entity may treat the property as investment property. Where the services provided are more significant (such as in the case of an owner-managed hotel), the property should be classified as owner-occupied. [IAS 40.13]

Intracompany rentals. Property rented to a parent, subsidiary, or fellow subsidiary is not investment property in consolidated financial statements that include both the lessor and the lessee, because the property is owner-occupied from the perspective of the group. However, such property could qualify as investment property in the separate financial statements of the lessor, if the definition of investment property is otherwise met. [IAS 40.15]

Recognition

Investment property should be recognised as an asset when it is probable that the future economic benefits that are associated with the property will flow to the entity, and the cost of the property can be reliably measured. [IAS 40.16]

Initial measurement

Investment property is initially measured at cost, including transaction costs. Such cost should not include start-up costs, abnormal waste, or initial operating losses incurred before the investment property achieves the planned level of occupancy. [IAS 40.20 and 40.23]

Measurement subsequent to initial recognition

IAS 40 permits entities to choose between: [IAS 40.30]

a fair value model, and a cost model.

One method must be adopted for all of an entity's investment property. Change is permitted only if this results in a more appropriate presentation. IAS 40 notes that this is highly unlikely for a change from a fair value model to a cost model.

Fair value model

Investment property is remeasured at fair value, which is the amount for which the property could be exchanged between knowledgeable, willing parties in an arm's length transaction. [IAS 40.5] Gains or losses arising from changes in the fair value of investment property must be included in net profit or loss for the period in which it arises. [IAS 40.35]

Fair value should reflect the actual market state and circumstances as of the balance sheet date. [IAS 40.38] The best evidence of fair value is normally given by current prices on an active market for similar property in the same location and condition and subject to similar lease and other contracts. [IAS 40.45] In the absence of such information, the entity may consider current prices for properties of a different nature or subject to different conditions, recent prices on less active markets with adjustments to reflect changes in economic conditions, and discounted cash flow projections based on reliable estimates of future cash flows. [IAS 40.46]

There is a rebuttable presumption that the entity will be able to determine the fair value of an investment property reliably on a continuing basis. However: [IAS 40.53]

If an entity determines that the fair value of an investment property under construction is not reliably determinable but expects the fair value of the property to be reliably determinable when construction is complete, it measures that investment property under construction at cost until either its fair value becomes reliably determinable or construction is completed.

If an entity determines that the fair value of an investment property (other than an investment property under construction) is not reliably determinable on a continuing basis, the entity shall measure that investment property using the cost model in IAS 16. The residual value of the investment property shall be assumed to be zero. The entity shall apply IAS 16 until disposal of the investment property.

Where a property has previously been measured at fair value, it should continue to be measured at fair value until disposal, even if comparable market transactions become less frequent or market prices become less readily available. [IAS 40.55]

Cost model

After initial recognition, investment property is accounted for in accordance with the cost model as set out in IAS 16 Property, Plant and Equipment – cost less accumulated depreciation and less accumulated impairment losses. [IAS 40.56]

Transfers to or from investment property classification

Transfers to, or from, investment property should only be made when there is a change in use, evidenced by one or more of the following: [IAS 40.57]

commencement of owner-occupation (transfer from investment property to owner-occupied property) commencement of development with a view to sale (transfer from investment property to inventories) end of owner-occupation (transfer from owner-occupied property to investment property) commencement of an operating lease to another party (transfer from inventories to investment property) end of construction or development (transfer from property in the course of construction/development to

investment property

When an entity decides to sell an investment property without development, the property is not reclassified as investment property but is dealt with as investment property until it is disposed of. [IAS 40.58]

The following rules apply for accounting for transfers between categories:

for a transfer from investment property carried at fair value to owner-occupied property or inventories, the fair value at the change of use is the 'cost' of the property under its new classification [IAS 40.60]

for a transfer from owner-occupied property to investment property carried at fair value, IAS 16 should be applied up to the date of reclassification. Any difference arising between the carrying amount under IAS 16 at that date and the fair value is dealt with as a revaluation under IAS 16 [IAS 40.61]

for a transfer from inventories to investment property at fair value, any difference between the fair value at the date of transfer and it previous carrying amount should be recognised in profit or loss [IAS 40.63]

when an entity completes construction/development of an investment property that will be carried at fair value, any difference between the fair value at the date of transfer and the previous carrying amount should be recognised in profit or loss. [IAS 40.65]

When an entity uses the cost model for investment property, transfers between categories do not change the carrying amount of the property transferred, and they do not change the cost of the property for measurement or disclosure purposes.

Disposal

An investment property should be derecognised on disposal or when the investment property is permanently withdrawn from use and no future economic benefits are expected from its disposal. The gain or loss on disposal should be calculated as the difference between the net disposal proceeds and the carrying amount of the asset and should be recognised as income or expense in the income statement. [IAS 40.66 and 40.69] Compensation from third parties is recognised when it becomes receivable. [IAS 40.72]

Disclosure

Both Fair Value Model and Cost Model [IAS 40.75]

whether the fair value or the cost model is used if the fair value model is used, whether property interests held under operating leases are classified and accounted

for as investment property if classification is difficult, the criteria to distinguish investment property from owner-occupied property and from

property held for sale the methods and significant assumptions applied in determining the fair value of investment property the extent to which the fair value of investment property is based on a valuation by a qualified independent valuer; if

there has been no such valuation, that fact must be disclosed the amounts recognised in profit or loss for:

o rental income from investment propertyo direct operating expenses (including repairs and maintenance) arising from investment property that

generated rental income during the periodo direct operating expenses (including repairs and maintenance) arising from investment property that did

not generate rental income during the periodo the cumulative change in fair value recognised in profit or loss on a sale from a pool of assets in which the

cost model is used into a pool in which the fair value model is used restrictions on the realisability of investment property or the remittance of income and proceeds of disposal contractual obligations to purchase, construct, or develop investment property or for repairs, maintenance or

enhancements

Additional Disclosures for the Fair Value Model [IAS 40.76]

a reconciliation between the carrying amounts of investment property at the beginning and end of the period, showing additions, disposals, fair value adjustments, net foreign exchange differences, transfers to and from inventories and owner-occupied property, and other changes [IAS 40.76]

significant adjustments to an outside valuation (if any) [IAS 40.77] if an entity that otherwise uses the fair value model measures an item of investment property using the cost model,

certain additional disclosures are required [IAS 40.78]

Additional Disclosures for the Cost Model [IAS 40.79]

the depreciation methods used the useful lives or the depreciation rates used the gross carrying amount and the accumulated depreciation (aggregated with accumulated impairment losses) at the

beginning and end of the period a reconciliation of the carrying amount of investment property at the beginning and end of the period, showing

additions, disposals, depreciation, impairment recognised or reversed, foreign exchange differences, transfers to and from inventories and owner-occupied property, and other changes

the fair value of investment property. If the fair value of an item of investment property cannot be measured reliably, additional disclosures are required, including, if possible, the range of estimates within which fair value is highly likely to lie

IAS 41 — Agriculture Share on email Share on facebook Share on twitter Share on linkedin More Sharing Services

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Overview

IAS 41 Agriculture sets out the accounting for agricultural activity – the transformation of biological assets (living plants and animals) into agricultural produce (harvested product of the entity's biological assets). The standard generally requires biological assets to be measured at fair value less costs to sell.

IAS 41 was originally issued in December 2000 and first applied to annual periods beginning on or after 1 January 2003.

History of IAS 41Date Development Comments

December 1999 Exposure Draft E65 Agriculture Comment deadline 31 January 2000

December 2000 IAS 41 Agriculture issued Operative for annual financial statements covering periods beginning on or after 1 January 2003

22 May 2008 Amended by Improvements to IFRSs (discount rates)

Effective for annual periods beginning on or after 1 January 2009

30 June 2014 Amended by Agriculture: Bearer Plants (Amendments to IAS 16 and IAS 41)

Effective for annual periods beginning on or after 1 January 2016

Related Interpretations

None

Amendments under consideration by the IASB

None

Summary of IAS 41

Objective

The objective of IAS 41 is to establish standards of accounting for agricultural activity – the management of the biological transformation of biological assets (living plants and animals) into agricultural produce (harvested product of the entity's biological assets).

Scope

IAS 41 applies to biological assets with the exception of bearer plants, agricultural produce at the point of harvest, and government grants related to these biological assets. It does not apply to land related to agricultural activity, intangible assets related to agricultural activity, government grants related to bearer plants, and bearer plants. However, it does apply to produce growing on bearer plants.

Note: Bearer plants were excluded from the scope of IAS 41 by Agriculture: Bearer Plants (Amendments to IAS 16 and IAS 41), which applies to annual periods beginning on or after 1 January 2016.

Key definitions

[IAS 41.5]

Biological asset A living animal or plant

Bearer plant*

A living plant that:

1. is used in the production or supply of agricultural produce2. is expected to bear produce for more than one period, and3. has a remote likelihood of being sold as agricultural produce, except for incidental scrap sales.

Agricultural produce The harvested product from biological assets

Costs to sell The incremental costs directly attributable to the disposal of an asset, excluding finance costs and income taxes

* Definition included by Agriculture: Bearer Plants (Amendments to IAS 16 and IAS 41), which applies to annual periods beginning on or after 1 January 2016.

Initial recognition

An entity recognises a biological asset or agriculture produce only when the entity controls the asset as a result of past events, it is probable that future economic benefits will flow to the entity, and the fair value or cost of the asset can be measured reliably. [IAS 41.10]

Measurement

Biological assets within the scope of IAS 41 are measured on initial recognition and at subsequent reporting dates at fair value less estimated costs to sell, unless fair value cannot be reliably measured. [IAS 41.12]

Agricultural produce is measured at fair value less estimated costs to sell at the point of harvest. [IAS 41.13] Because harvested produce is a marketable commodity, there is no 'measurement reliability' exception for produce.

The gain on initial recognition of biological assets at fair value less costs to sell, and changes in fair value less costs to sell of biological assets during a period, are included in profit or loss. [IAS 41.26]

A gain on initial recognition (e.g. as a result of harvesting) of agricultural produce at fair value less costs to sell are included in profit or loss for the period in which it arises. [IAS 41.28]

All costs related to biological assets that are measured at fair value are recognised as expenses when incurred, other than costs to purchase biological assets.

IAS 41 presumes that fair value can be reliably measured for most biological assets. However, that presumption can be rebutted for a biological asset that, at the time it is initially recognised, does not have a quoted market price in an active market and for which alternative fair value measurements are determined to be clearly unreliable. In such a case, the asset is measured at cost less accumulated depreciation and impairment losses. But the entity must still measure all of its other biological assets at fair value less costs to sell. If circumstances change and fair value becomes reliably measurable, a switch to fair value less costs to sell is required. [IAS 41.30]

Guidance on the determination of fair value is available in IFRS   13 Fair Value Measurement.  IFRS 13 also requires disclosures about fair value measurements.

Other issues

The change in fair value of biological assets is part physical change (growth, etc) and part unit price change. Separate disclosure of the two components is encouraged, not required. [IAS 41.51]

Agricultural produce is measured at fair value less costs to sell at harvest, and this measurement is considered the cost of the produce at that time (for the purposes of IAS 2 Inventories or any other applicable standard). [IAS 41.13]

Agricultural land is accounted for under IAS 16 Property, Plant and Equipment. However, biological assets (other than bearer plants) that are physically attached to land are measured as biological assets separate from the land.  In some cases, the determination of the fair value less costs to sell of the biological asset can be based on the fair value of the combined asset (land, improvements and biological assets). [IAS 41.25]

Intangible assets relating to agricultural activity (for example, milk quotas) are accounted for under IAS   38 Intangible Assets.

Government grants

Unconditional government grants received in respect of biological assets measured at fair value less costs to sell are recognised in profit or loss when the grant becomes receivable. [IAS 41.34]

If such a grant is conditional (including where the grant requires an entity not to engage in certain agricultural activity), the entity recognises the grant in profit or loss only when the conditions have been met. [IAS 41.35]

Disclosure

Disclosure requirements in IAS 41 include:

aggregate gain or loss from the initial recognition of biological assets and agricultural produce and the change in fair value less costs to sell during the period* [IAS 41.40]

description of an entity's biological assets, by broad group [IAS 41.41] description of the nature of an entity's activities with each group of biological assets and non-financial measures or

estimates of physical quantities of output during the period and assets on hand at the end of the period [IAS 41.46] information about biological assets whose title is restricted or that are pledged as security [IAS 41.49] commitments for development or acquisition of biological assets [IAS 41.49] financial risk management strategies [IAS 41.49] reconciliation of changes in the carrying amount of biological assets, showing separately changes in value, purchases,

sales, harvesting, business combinations, and foreign exchange differences* [IAS 41.50]

* Separate and/or additional disclosures are required where biological assets are measured at cost less accumulated depreciation [IAS 41.55]

Disclosure of a quantified description of each group of biological assets, distinguishing between consumable and bearer assets or between mature and immature assets, is encouraged but not required. [IAS 41.43]

If fair value cannot be measured reliably, additional required disclosures include: [IAS 41.54]

description of the assets an explanation of why fair value cannot be reliably measured if possible, a range within which fair value is highly likely to lie depreciation method useful lives or depreciation rates gross carrying amount and the accumulated depreciation, beginning and ending.

If the fair value of biological assets previously measured at cost subsequently becomes available, certain additional disclosures are required. [IAS 41.56]

Disclosures relating to government grants include the nature and extent of grants, unfulfilled conditions, and significant decreases expected in the level of grants. [IAS 41.57]

International Financial Reporting Standards

 

Note: The table below lists the most recent version(s) of each pronouncement and the date each version was originally issued. Click through to our page for each pronouncement for a full history.

Title  Date issued  Effective

Date IFRS 1 — First-time Adoption of International Financial Reporting Standards 24 Nov 2008 01 Jul 2009

IFRS 2 — Share-based Payment 19 Feb 2004 01 Jan 2005

IFRS 3 — Business Combinations 10 Jan 2008 01 Jul 2009

IFRS 4 — Insurance Contracts 31 Mar 2004 01 Jan 2005

IFRS 5 — Non-current Assets Held for Sale and Discontinued Operations 31 Mar 2004 01 Jan 2005

IFRS 6 — Exploration for and Evaluation of Mineral Resources 09 Dec 2004 01 Jan 2006

IFRS 7 — Financial Instruments: Disclosures 18 Aug 2005 01 Jan 2007

IFRS 8 — Operating Segments 30 Nov 2006 01 Jan 2009

IFRS 9 — Financial Instruments 24 Jul 2014 01 Jan 2018

IFRS 10 — Consolidated Financial Statements 12 May 2011 01 Jan 2013

IFRS 11 — Joint Arrangements 12 May 2011 01 Jan 2013

IFRS 12 — Disclosure of Interests in Other Entities 12 May 2011 01 Jan 2013

IFRS 13 — Fair Value Measurement 12 May 2011 01 Jan 2013

IFRS 14 — Regulatory Deferral Accounts 30 Jan 2014 01 Jan 2016

IFRS 15 — Revenue from Contracts with Customers 28 May 2014 01 Jan 2017

IFRS 1 — First-time Adoption of International Financial Reporting Standards Share on email Share on facebook Share on twitter Share on linkedin More Sharing Services

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Overview

IFRS 1 First-time Adoption of International Financial Reporting Standards sets out the procedures that an entity must follow when it adopts IFRSs for the first time as the basis for preparing its general purpose financial statements. The IFRS grants limited exemptions from the general requirement to comply with each IFRS effective at the end of its first IFRS reporting period.

A restructured version of IFRS 1 was issued in November 2008 and applies if an entity's first IFRS financial statements are for a period beginning on or after 1 July 2009.

History of IFRS 1Date Development Comments

September 2001 Project added to IASB agenda History of the project

31 July 2002 Exposure Draft ED 1 First-time Application of IFRSs published Comment deadline 31 October 2002

June 2003 IFRS 1 First-time Adoption of IFRSs issued Effective for the first IFRS financial statements for a period beginning on or after 1 January 2004

30 June 2005

Amended by Amendments to IFRS 1 First-time Adoption of International Financial Reporting Standards and IFRS 6 Exploration for and Evaluation of Mineral Resources (more information)

A minor amendment to clarify that the exemption in relation to IFRS 6 applies to the recognition and measurement requirements of IFRS 6, as well as the disclosure requirements.

22 May 2008 Amended by Amendments to IFRS 1 and IAS 27 — Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate

Effective for annual periods beginning on or after 1 January 2009

24 November 2008 Restructured version of IFRS 1 issued Effective if an entity's first IFRS financial statements are for a period beginning on or after 1 July 2009

23 July 2009 Amended by Additional Exemptions for First-time Adopters (Amendments to IFRS 1) (oil and gas assets, leases). Click for more information.

Effective for annual periods beginning on or after 1 January 2010

29 January 2010 Amended by Limited Exemption from Comparative IFRS 7 Disclosures for First-time Adopters (Amendment to IFRS 1). Click for more information

Effective for or annual periods beginning on or after 1 July 2010

6 May 2010 Amended by Improvements to IFRSs (accounting policies changes, revaluation basis as deemed cost, rate regulation)

Effective for annual periods beginning on or after 1 July 2011

20 December 2010 Amended by Severe Hyperinflation and Removal of Fixed Dates for First-time Adopters (Amendment to IFRS 1). Click for more information

Effective for annual periods beginning onor after 1 July 2011

13 March 2012 Amended by Government Loans (Amendments to IFRS 1). Click for more information

Effective for annual periods beginning on or after 1 January 2013

17 May 2012 Amended by Annual Improvements 2009-2011 Cycle (repeat application, borrowing costs). Click for more information

Effective for annual periods beginning on or after 1 January 2013

12 December 2013 Amended by Annual Improvements to IFRSs 2011–2013 Cycle (meaning of effective IFRSs). Click for more information

Amendment to basis for conclusions only

Note: The above summary does not include details of consequential amendments made as the result of other projects.

Related Interpretations

IFRS 1 supersedes SIC-8 First-time Application of IASs as the Primary Basis of Accounting

Amendments under consideration

None noted

Deloitte Guide to IFRS 1 (November 2009)In November 2009, Deloitte's IFRS Global Office published a revised Guide to IFRS 1 First-time Adoption of International Financial Reporting Standards. The guide was first published in 2004 with the aim of providing first-time adopters with helpful insights for the application of IFRS 1. This second edition has the same objective. We have updated the content to reflect the lessons learned from the first major wave of IFRS adoption in 2005, as well as for the changes to IFRS 1 since 2004. We have structured the guide to provide users with an accessible reference manual:

An executive summary explains the most important features of IFRS 1; Section 2 provides an overview of the requirements of the Standard; Sections 3 and 4 cover the specific exceptions and exemptions from IFRS 1's general principle of

retrospective application of IFRSs, focusing on key implementation issues; Section 5 addresses other components of financial statements where implementation issues frequently

arise in practice; Section 6 sets out Q&As dealing with specific fact patterns that users may encounter in practice; and Section 7 discusses some of the practical implementation decisions faced by first-time adopters.

Click to Download Deloitte's Guide to IFRS 1 (PDF 435k)

Summary of IFRS 1

Objective

IFRS 1 First-time Adoption of International Financial Reporting Standards sets out the procedures that an entity must follow when it adopts IFRSs for the first time as the basis for preparing its general purpose financial statements.

Note: An entity that conducts rate-regulated activities and has recognised amounts in its previous GAAP financial statements that meet the definition of 'regulatory deferral account balances' (sometimes referred to 'regulatory assets' and 'regulatory

liabilities') can optionally apply IFRS 14 Regulatory Deferral Accounts in addition to IFRS 1. An entity that elects to apply IFRS 14 in its first IFRS financial statements must continue to apply it in subsequent financial statements.

Definition of first-time adoption

A first-time adopter is an entity that, for the first time, makes an explicit and unreserved statement that its general purpose financial statements comply with IFRSs. [IFRS 1.3]

An entity may be a first-time adopter if, in the preceding year, it prepared IFRS financial statements for internal management use, as long as those IFRS financial statements were not made available to owners or external parties such as investors or creditors. If a set of IFRS financial statements was, for any reason, made available to owners or external parties in the preceding year, then the entity will already be considered to be on IFRSs, and IFRS 1 does not apply. [IFRS 1.3]

An entity can also be a first-time adopter if, in the preceding year, its financial statements: [IFRS 1.3]

asserted compliance with some but not all IFRSs, or included only a reconciliation of selected figures from previous GAAP to IFRSs. (Previous GAAP means the GAAP that

an entity followed immediately before adopting to IFRSs.)

However, an entity is not a first-time adopter if, in the preceding year, its financial statements asserted:

Compliance with IFRSs even if the auditor's report contained a qualification with respect to conformity with IFRSs. Compliance with both previous GAAP and IFRSs.

An entity that applied IFRSs in a previous reporting period, but whose most recent previous annual financial statements did not contain an explicit and unreserved statement of compliance with IFRSs can choose to:

apply the requirements of IFRS 1 (including the various permitted exemptions to full retrospective application), or retrospectively apply IFRSs in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors,

as if it never stopped applying IFRSs. [IFRS 1.4A]

Overview for an entity that adopts IFRSs for the first time in its annual financial statements for the year ended 31 December 2014

Accounting policies

Select accounting policies based on IFRSs effective at 31 December 2014.

IFRS reporting periods

Prepare at least 2014 and 2013 financial statements and the opening balance sheet (as of 1 January 2012 or beginning of the first period for which full comparative financial statements are presented, if earlier) by applying the IFRSs effective at 31 December 2014. [IFRS 1.7]

Since IAS 1 requires that at least one year of comparative prior period financial information be presented, the opening balance sheet will be 1 January 2012 if not earlier. This would mean that an entity's first financial statements should include at least: [IFRS 1.21]

o three statements of financial positiono two statements of profit or loss and other comprehensive incomeo two separate statements of profit or loss (if presented)o two statements of cash flowso two statements of changes in equity, and

o related notes, including comparative information If a 31 December 2014 adopter reports selected financial data (but not full financial statements) on an IFRS basis for

periods prior to 2013, in addition to full financial statements for 2014 and 2013, that does not change the fact that its opening IFRS balance sheet is as of 1 January 2012.

Adjustments required to move from previous GAAP to IFRSs at the time of first-time adoption

Derecognition of some previous GAAP assets and liabilities

The entity should eliminate previous-GAAP assets and liabilities from the opening balance sheet if they do not qualify for recognition under IFRSs. [IFRS 1.10(b)] For example:

IAS 38 does not permit recognition of expenditure on any of the following as an intangible asset: o researcho start-up, pre-operating, and pre-opening costso trainingo advertising and promotiono moving and relocation

If the entity's previous GAAP had recognised these as assets, they are eliminated in the opening IFRS balance sheet

If the entity's previous GAAP had allowed accrual of liabilities for "general reserves", restructurings, future operating losses, or major overhauls that do not meet the conditions for recognition as a provision under IAS 37, these are eliminated in the opening IFRS balance sheet

If the entity's previous GAAP had allowed recognition of contingent assets as defined in IAS 37.10, these are eliminated in the opening IFRS balance sheet

Recognition of some assets and liabilities not recognised under previous GAAP

Conversely, the entity should recognise all assets and liabilities that are required to be recognised by IFRS even if they were never recognised under previous GAAP. [IFRS 1.10(a)] For example:

IAS 39 requires recognition of all derivative financial assets and liabilities, including embedded derivatives. These were not recognised under many local GAAPs.

IAS 19 requires an employer to recognise a liability when an employee has provided service in exchange for benefits to be paid in the future. These are not just post-employment benefits (e.g., pension plans) but also obligations for medical and life insurance, vacations, termination benefits, and deferred compensation. In the case of 'over-funded' defined benefit plans, this would be a plan asset.

IAS 37 requires recognition of provisions as liabilities. Examples could include an entity's obligations for restructurings, onerous contracts, decommissioning, remediation, site restoration, warranties, guarantees, and litigation.

Deferred tax assets and liabilities would be recognised in conformity with IAS 12.

Reclassification

The entity should reclassify previous-GAAP opening balance sheet items into the appropriate IFRS classification. [IFRS 1.10(c)] Examples:

IAS 10 does not permit classifying dividends declared or proposed after the balance sheet date as a liability at the balance sheet date. If such liability was recognised under previous GAAP it would be reversed in the opening IFRS balance sheet.

If the entity's previous GAAP had allowed treasury stock (an entity's own shares that it had purchased) to be reported as an asset, it would be reclassified as a component of equity under IFRS.

Items classified as identifiable intangible assets in a business combination accounted for under the previous GAAP may be required to be reclassified as goodwill under IFRS 3 because they do not meet the definition of an intangible asset under IAS 38. The converse may also be true in some cases.

IAS 32 has principles for classifying items as financial liabilities or equity. Thus mandatorily redeemable preferred shares that may have been classified as equity under previous GAAP would be reclassified as liabilities in the opening IFRS balance sheet.Note that IFRS 1 makes an exception from the "split-accounting" provisions of IAS 32. If the liability component of a compound financial instrument is no longer outstanding at the date of the opening IFRS balance sheet, the entity is not required to reclassify out of retained earnings and into other equity the original equity component of the compound instrument.

The reclassification principle would apply for the purpose of defining reportable segments under IFRS 8. Some offsetting (netting) of assets and liabilities or of income and expense items that had been acceptable under

previous GAAP may no longer be acceptable under IFRS.

Measurement

The general measurement principle – there are several significant exceptions noted below – is to apply effective IFRSs in measuring all recognised assets and liabilities. [IFRS 1.10(d)]

How to recognise adjustments required to move from previous GAAP to IFRSs

Adjustments required to move from previous GAAP to IFRSs at the date of transition should be recognised directly in retained earnings or, if appropriate, another category of equity at the date of transition to IFRSs. [IFRS 1.11]

Estimates

In preparing IFRS estimates at the date of transition to IFRSs retrospectively, the entity must use the inputs and assumptions that had been used to determine previous GAAP estimates as of that date (after adjustments to reflect any differences in accounting policies). The entity is not permitted to use information that became available only after the previous GAAP estimates were made except to correct an error. [IFRS 1.14]

Changes to disclosures

For many entities, new areas of disclosure will be added that were not requirements under the previous GAAP (perhaps segment information, earnings per share, discontinuing operations, contingencies and fair values of all financial instruments) and disclosures that had been required under previous GAAP will be broadened (perhaps related party disclosures).

Disclosure of selected financial data for periods before the first IFRS statement of financial position (balance sheet)

If a first-time adopter wants to disclose selected financial information for periods before the date of the opening IFRS balance sheet, it is not required to conform that information to IFRS. Conforming that earlier selected financial information to IFRSs is optional.[IFRS 1.22]

If the entity elects to present the earlier selected financial information based on its previous GAAP rather than IFRS, it must prominently label that earlier information as not complying with IFRS and, further, it must disclose the nature of the main adjustments that would make that information comply with IFRS. This latter disclosure is narrative and not necessarily quantified.[IFRS 1.22]

Disclosures in the financial statements of a first-time adopter

IFRS 1 requires disclosures that explain how the transition from previous GAAP to IFRS affected the entity's reported financial position, financial performance and cash flows. [IFRS 1.23] This includes:

1. reconciliations of equity reported under previous GAAP to equity under IFRS both (a) at the date of transition to IFRSs and (b) the end of the last annual period reported under the previous GAAP. [IFRS 1.24(a)] (For an entity adopting IFRSs for the first time in its 31 December 2014 financial statements, the reconciliations would be as of 1 January 2012 and 31 December 2013.)

2. reconciliations of total comprehensive income for the last annual period reported under the previous GAAP to total comprehensive income under IFRSs for the same period [IFRS 1.24(b)]

3. explanation of material adjustments that were made, in adopting IFRSs for the first time, to the statement of financial position, statement of comprehensive income and statement of cash flows (the latter if presented under previous GAAP) [IFRS 1.25]

4. if errors in previous GAAP financial statements were discovered in the course of transition to IFRSs, those must be separately disclosed [IFRS 1.26]

5. if the entity recognised or reversed any impairment losses in preparing its opening IFRS balance sheet, these must be disclosed [IFRS 1.24(c)]

6. appropriate explanations if the entity has elected to apply any of the specific recognition and measurement exemptions permitted under IFRS 1 – for instance, if it used fair values as deemed cost

Disclosures in interim financial reports

If an entity is going to adopt IFRSs for the first time in its annual financial statements for the year ended 31 December 2014, certain disclosure are required in its interim financial statements prior to the 31 December 2014 statements, but only if those interim financial statements purport to comply with IAS 34 Interim Financial Reporting. Explanatory information and a reconciliation are required in the interim report that immediately precedes the first set of IFRS annual financial statements. The information includes reconciliations between IFRS and previous GAAP. [IFRS 1.32]

Exceptions to the retrospective application of other IFRSs

Prior to 1 January 2010, there were three exceptions to the general principle of retrospective application. On 23 July 2009, IFRS 1 was amended, effective 1 January 2010, to add two additional exceptions with the goal of further simplifying the transition to IFRSs for first-time adopters. The five exceptions are: [IFRS 1.Appendix B]

IAS 39 – Derecognition of financial instruments

A first-time adopter shall apply the derecognition requirements in IAS 39 prospectively for transactions occurring on or after 1 January 2004. However, the entity may apply the derecognition requirements retrospectively provided that the needed information was obtained at the time of initially accounting for those transactions. [IFRS 1.B2-3]

IAS 39 – Hedge accounting

The general rule is that the entity shall not reflect in its opening IFRS balance sheet (statement of financial position) a hedging relationship of a type that does not qualify for hedge accounting in accordance with IAS 39. However, if an entity designated a net position as a hedged item in accordance with previous GAAP, it may designate an individual item within that net position as a hedged item in accordance with IFRS, provided that it does so no later than the date of transition to IFRSs. [IFRS 1.B5]

Note: Modified requirements apply when an entity applies IFRS 9 Financial Instruments (2013).

IAS 27 – Non-controlling interest

IFRS 1.B7 lists specific requirements of IFRS 10 Consolidated Financial Statements that shall be applied prospectively.

Full-cost oil and gas assets

Entities using the full cost method may elect exemption from retrospective application of IFRSs for oil and gas assets. Entities electing this exemption will use the carrying amount under its old GAAP as the deemed cost of its oil and gas assets at the date of first-time adoption of IFRSs.

Determining whether an arrangement contains a lease

If a first-time adopter with a leasing contract made the same type of determination of whether an arrangement contained a lease in accordance with previous GAAP as that required by IFRIC 4 Determining whether an Arrangement Contains a Lease, but at a date other than that required by IFRIC 4, the amendments exempt the entity from having to apply IFRIC 4 when it adopts IFRSs.

Optional exemptions from the basic measurement principle in IFRS 1

There are some further optional exemptions to the general restatement and measurement principles set out above. The following exceptions are individually optional. They relate to:

business combinations [IFRS 1.Appendix C] and a number of others [IFRS 1.Appendix D]:

o share-based payment transactionso insurance contractso fair value, previous carrying amount, or revaluation as deemed costo leaseso cumulative translation differenceso investments in subsidiaries, jointly controlled entities, associates and joint ventureso assets and liabilities of subsidiaries, associated and joint ventureso compound financial instrumentso designation of previously recognised financial instrumentso fair value measurement of financial assets or financial liabilities at initial recognitiono decommissioning liabilities included in the cost of property, plant and equipmento financial assets or intangible assets accounted for in accordance with IFRIC 12 Service Concession

Arrangementso borrowing costso transfers of assets from customerso extinguishing financial liabilities with equity instrumentso severe hyperinflationo joint arrangementso stripping costs in the production phase of a surface mine

Some, but not all, of them are described below.

Business combinations that occurred before opening balance sheet date

IFRS 1 includes Appendix C explaining how a first-time adopter should account for business combinations that occurred prior to transition to IFRS.

An entity may keep the original previous GAAP 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, or how goodwill was initially determined (do not adjust the purchase price allocation on acquisition)

However, should it wish to do so, an entity can elect to restate all business combinations starting from a date it selects prior to the opening balance sheet date.

In all cases, the entity must make an initial IAS 36 impairment test of any remaining goodwill in the opening IFRS balance sheet, after reclassifying, as appropriate, previous GAAP intangibles to goodwill.

The exemption for business combinations also applies to acquisitions of investments in associates, interests in joint ventures and interests in a joint operation when the operation constitutes a business.

Deemed cost

Assets carried at cost (e.g. property, plant and equipment) may be measured at their fair value at the date of transition to IFRSs. Fair value becomes the 'deemed cost' going forward under the IFRS cost model. Deemed cost is an amount used as a surrogate for cost or depreciated cost at a given date. [IFRS 1.D6]

If, before the date of its first IFRS balance sheet, the entity had revalued any of these assets under its previous GAAP either to fair value or to a price-index-adjusted cost, that previous GAAP revalued amount at the date of the revaluation can become the deemed cost of the asset under IFRS. [IFRS 1.D6]

If, before the date of its first IFRS balance sheet, the entity had made a one-time revaluation of assets or liabilities to fair value because of a privatisation or initial public offering, and the revalued amount became deemed cost under the previous GAAP, that amount would continue to be deemed cost after the initial adoption of IFRS. [IFRS 1.D8]

This option applies to intangible assets only if an active market exists. [IFRS 1.D7]

If the carrying amount of property, plant and equipment or intangible assets that are used in rate-regulated activities includes amounts under previous GAAP that do not qualify for capitalisation in accordance with IFRSs, a first-time adopter may elect to use the previous GAAP carrying amount of such items as deemed cost on the initial adoption of IFRSs. [IFRS 1.D8B]

Eligible entities subject to rate-regulation may also optionally apply IFRS   14 Regulatory Deferral Accounts on transition to IFRSs, and in subsequent financial statements.

IAS 19 – Employee benefits: actuarial gains and losses

An entity may elect to recognise all cumulative actuarial gains and losses for all defined benefit plans at the opening IFRS balance sheet date (that is, reset any corridor recognised under previous GAAP to zero), even if it elects to use the IAS 19 corridor approach for actuarial gains and losses that arise after first-time adoption of IFRS. If a first-time adopter uses this exemption, it shall apply it to all plans. [IFRS 1.D10]

Note: This exemption is not available where IAS 19 Employee Benefits (2011) is applied. IAS 19 (2011) is effective for annual reporting periods beginning on or after 1 January 2013.

IAS 21 – Accumulated translation reserves

An entity may elect to recognise all translation adjustments arising on the translation of the financial statements of foreign entities in accumulated profits or losses at the opening IFRS balance sheet date (that is, reset the translation reserve included in equity under previous GAAP to zero). If the entity elects this exemption, the gain or loss on subsequent disposal of the foreign entity will be adjusted only by those accumulated translation adjustments arising after the opening IFRS balance sheet date. [IFRS 1.D13]

IAS 27 – Investments in separate financial statements

In May 2008, the IASB amended the standard to change the way the cost of an investment in the separate financial statements is measured on first-time adoption of IFRSs. The amendments to IFRS 1:

allow first-time adopters to use a 'deemed cost' of either fair value or the carrying amount under previous accounting practice to measure the initial cost of investments in subsidiaries, jointly controlled entities and associates in the separate financial statements

remove the definition of the cost method from IAS 27 and add a requirement to present dividends as income in the separate financial statements of the investor

require that, when a new parent is formed in a reorganisation, the new parent must measure the cost of its investment in the previous parent at the carrying amount of its share of the equity items of the previous parent at the date of the reorganisation

Assets and liabilities of subsidiaries, associates and joint ventures: different IFRS adoption dates of investor and investee

If a subsidiary becomes a first-time adopter later than its parent, IFRS 1 permits a choice between two measurement bases in the subsidiary's separate financial statements. In this case, a subsidiary should measure its assets and liabilities as either: [IFRS 1.D16]

the carrying amount that would be included in the parent's consolidated financial statements, based on the parent's date of transition to IFRSs, if no adjustments were made for consolidation procedures and for the effects of the business combination in which the parent acquired the subsidiary or

the carrying amounts required by IFRS 1 based on the subsidiary's date of transition to IFRSs

A similar election is available to an associate or joint venture that becomes a first-time adopter later than an entity that has significant influence or joint control over it. [IFRS 1.D16]

If a parent becomes a first-time adopter later than its subsidiary, the parent should in its consolidated financial statements, measure the assets and liabilities of the subsidiary at the same carrying amount as in the separate financial statements of the subsidiary, after adjusting for consolidation adjustments and for the effects of the business combination in which the parent acquired the subsidiary. The same approach applies in the case of associates and joint ventures. [IFRS 1.D17]

July 2009: Two Amendments to IFRS 1

On 23 July 2009, the IASB amended IFRS 1 to:

exempt entities using the full cost method from retrospective application of IFRSs for oil and gas assets. exempt entities with existing leasing contracts from reassessing the classification of those contracts in accordance

with IFRIC 4 Determining whether an Arrangement contains a Lease when the application of their national accounting requirements produced the same result.

Click for IASB Press Release (PDF 104k).

November 2009: Proposed Limited Scope Exemption for IFRS 7 Disclosures

On 26 November 2009, the IASB issued an exposure draft (ED) proposing to amend IFRS 1 to state that an entity need not provide the comparative prior-period information required by the March 2009 amendments to IFRS 7 Improving Disclosures about Financial Instruments for first-time adopters adopting before 1 January 2010. As a result, IFRS 1, Appendix E, paragraph E1 will be amended as follows:

E1 A first-time adopter may apply the transitional provisions in paragraph 44G of IFRS 7 to the extent that the entity's first IFRS reporting period starts earlier than 1 January 2010.

The proposed limited exemption from comparative IFRS 7 disclosures for first-time adopters is consistent with the exemption permitted for early adopters of the March 2009 amendments to IFRS 7. Deadline for comments on the ED is 29 December 2009. Click for IASB Press Release (PDF 101k).

January 2010: IASB amends IFRS 1 to provide IFRS 7 disclosure exemption

On 28 January 2010, the IASB amended IFRS 1 to exempt first-time adopters of IFRSs from providing the additional disclosures introduced in March 2009 by Improving Disclosures about Financial Instruments (Amendments to IFRS 7). The amendment gives first-time adopters the same transition provisions that Amendments to IFRS 7 provides to current IFRS preparers. The amendment is effective on 1 July 2010, with earlier application permitted. Click for IASB Press Release (PDF 100k).

December 2010: Two Amendments to IFRS 1

On 20 December, the IASB amended IFRS 1 to:

provide relief for first-time adopters of IFRSs from having to reconstruct transactions that occurred before their date of transition to IFRSs.

provide guidance for entities emerging from severe hyperinflation either to resume presenting IFRS financial statements or to present IFRS financial statements for the first time.

Click for IASB Press Release (PDF 33k).

IFRS 2 — Share-based Payment Share on email Share on facebook Share on twitter Share on linkedin More Sharing Services

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Overview

IFRS 2 Share-based Payment requires an entity to recognise share-based payment transactions (such as granted shares, share options, or share appreciation rights) in its financial statements, including transactions with employees or other parties to be settled in cash, other assets, or equity instruments of the entity. Specific requirements are included for equity-settled and cash-settled share-based payment transactions, as well as those where the entity or supplier has a choice of cash or equity instruments.

IFRS 2 was originally issued in February 2004 and first applied to annual periods beginning on or after 1 January 2005.

History of IFRS 2Date Development Comments

July 2000G4+1 Discussion Paper Accounting for Share-Based Payments published

Comment deadline 31 October 2000

July 2001 Project added to IASB agenda History of the project

20 September 2001 IASB invites comments on G4+1 Discussion Paper Accounting Comment deadline 15 December 2001

for Share-Based Payments

7 November 2002 Exposure Draft ED 2 Share-Based Payment published Comment deadline 7 March 2003

19 February 2004 IFRS 2 Share-based Payment issuedEffective for annual periods beginning on or after 1 January 2005

2 February 2006 Exposure Draft Vesting Conditions and Cancellations published Comment deadline 2 June 2006

17 January 2008 Amended by Vesting Conditions and Cancellations (Amendments to IFRS 2)

Effective for annual periods beginning on or after 1 January 2009

16 April 2009 Amended by Improvements to IFRSs (scope of IFRS 2 and revised IFRS 3)

Effective for annual periods beginning on or after 1 July 2009

18 June 2009 Amended by Group Cash-settled Share-based Payment Transactions

Effective for annual periods beginning on or after 1 January 2010

12 December 2013 Amended by Annual Improvements to IFRSs 2010–2012 Cycle (definition of vesting condition)

Effective for annual periods beginning on or after 1 July 2014

Related Interpretations

None

Amendments under consideration

IFRS 2 — Clarifications of classification and measurement of share based payment transactions Research project — Share-based payments

Summary of IFRS 2In June 2007, the Deloitte IFRS Global Office published an updated version of our IAS Plus Guide to IFRS 2 Share-based Payment 2007 (PDF 748k, 128 pages). The guide not only explains the detailed provisions of IFRS 2 but also deals with its application in many practical situations. Because of the complexity and variety of share-based payment awards in practice, it is not always possible to be definitive as to what is the 'right' answer. However, in this guide Deloitte shares with you our approach to finding solutions that we believe are in accordance with the objective of the Standard.

Special edition of our IAS Plus newsletter

You will find a four-page summary of IFRS 2 in a special edition of our IAS Plus newsletter (PDF 49k).

Definition of share-based payment

A share-based payment is a transaction in which the entity receives goods or services either as consideration for its equity instruments or by incurring liabilities for amounts based on the price of the entity's shares or other equity instruments of the entity. The accounting requirements for the share-based payment depend on how the transaction will be settled, that is, by the issuance of (a) equity, (b) cash, or (c) equity or cash.

Scope

The concept of share-based payments is broader than employee share options. IFRS 2 encompasses the issuance of shares, or rights to shares, in return for services and goods. Examples of items included in the scope of IFRS 2 are share appreciation rights, employee share purchase plans, employee share ownership plans, share option plans and plans where the issuance of shares (or rights to shares) may depend on market or non-market related conditions.

IFRS 2 applies to all entities. There is no exemption for private or smaller entities. Furthermore, subsidiaries using their parent's or fellow subsidiary's equity as consideration for goods or services are within the scope of the Standard.

There are two exemptions to the general scope principle:

First, the issuance of shares in a business combination should be accounted for under IFRS 3 Business Combinations. However, care should be taken to distinguish share-based payments related to the acquisition from those related to continuing employee services

Second, IFRS 2 does not address share-based payments within the scope of paragraphs 8-10 of IAS 32 Financial Instruments: Presentation, or paragraphs 5-7 of IAS 39 Financial Instruments: Recognition and Measurement. Therefore, IAS 32 and IAS 39 should be applied for commodity-based derivative contracts that may be settled in shares or rights to shares.

IFRS 2 does not apply to share-based payment transactions other than for the acquisition of goods and services. Share dividends, the purchase of treasury shares, and the issuance of additional shares are therefore outside its scope.

Recognition and measurement

The issuance of shares or rights to shares requires an increase in a component of equity. IFRS 2 requires the offsetting debit entry to be expensed when the payment for goods or services does not represent an asset. The expense should be recognised as the goods or services are consumed. For example, the issuance of shares or rights to shares to purchase inventory would be presented as an increase in inventory and would be expensed only once the inventory is sold or impaired.

The issuance of fully vested shares, or rights to shares, is presumed to relate to past service, requiring the full amount of the grant-date fair value to be expensed immediately. The issuance of shares to employees with, say, a three-year vesting period is considered to relate to services over the vesting period. Therefore, the fair value of the share-based payment, determined at the grant date, should be expensed over the vesting period.

As a general principle, the total expense related to equity-settled share-based payments will equal the multiple of the total instruments that vest and the grant-date fair value of those instruments. In short, there is truing up to reflect what happens during the vesting period. However, if the equity-settled share-based payment has a market related performance condition, the expense would still be recognised if all other vesting conditions are met. The following example provides an illustration of a typical equity-settled share-based payment.

Illustration – Recognition of employee share option grant

Company grants a total of 100 share options to 10 members of its executive management team (10 options each) on 1 January 20X5. These options vest at the end of a three-year period. The company has determined that each option has a fair value at the date of grant equal to 15. The company expects that all 100 options will vest and therefore records the following entry at 30 June 20X5 - the end of its first six-month interim reporting period.

Dr. Share option expense 250

Cr. Equity 250

[(100 × 15) ÷ 6 periods] = 250 per period

If all 100 shares vest, the above entry would be made at the end of each 6-month reporting period. However, if one member of the executive management team leaves during the second half of 20X6, therefore forfeiting the entire amount of 10 options, the following entry at 31 December 20X6 would be made:

Dr. Share option expense 150

Cr. Equity 150

[(90 × 15) ÷ 6 periods = 225 per period. [225 × 4] – [250+250+250] = 150

Measurement guidance

Depending on the type of share-based payment, fair value may be determined by the value of the shares or rights to shares given up, or by the value of the goods or services received:

General fair value measurement principle. In principle, transactions in which goods or services are received as consideration for equity instruments of the entity should be measured at the fair value of the goods or services received. Only if the fair value of the goods or services cannot be measured reliably would the fair value of the equity instruments granted be used.

Measuring employee share options. For transactions with employees and others providing similar services, the entity is required to measure the fair value of the equity instruments granted, because it is typically not possible to estimate reliably the fair value of employee services received.

When to measure fair value - options. For transactions measured at the fair value of the equity instruments granted (such as transactions with employees), fair value should be estimated at grant date.

When to measure fair value - goods and services. For transactions measured at the fair value of the goods or services received, fair value should be estimated at the date of receipt of those goods or services.

Measurement guidance. For goods or services measured by reference to the fair value of the equity instruments granted, IFRS 2 specifies that, in general, vesting conditions are not taken into account when estimating the fair value of the shares or options at the relevant measurement date (as specified above). Instead, vesting conditions are taken into account by adjusting the number of equity instruments included in the measurement of the transaction amount so that, ultimately, the amount recognised for goods or services received as consideration for the equity instruments granted is based on the number of equity instruments that eventually vest.

More measurement guidance. IFRS 2 requires the fair value of equity instruments granted to be based on market prices, if available, and to take into account the terms and conditions upon which those equity instruments were granted. In the absence of market prices, fair value is estimated using a valuation technique to estimate what the price of those equity instruments would have been on the measurement date in an arm's length transaction between knowledgeable, willing parties. The standard does not specify which particular model should be used.

If fair value cannot be reliably measured. IFRS 2 requires the share-based payment transaction to be measured at fair value for both listed and unlisted entities. IFRS 2 permits the use of intrinsic value (that is, fair value of the shares less exercise price) in those "rare cases" in which the fair value of the equity instruments cannot be reliably measured. However this is not simply measured at the date of grant. An entity would have to remeasure intrinsic value at each reporting date until final settlement.

Performance conditions. IFRS 2 makes a distinction between the handling of market based performance conditions from non-market performance conditions. Market conditions are those related to the market price of an entity's equity, such as achieving a specified share price or a specified target based on a comparison of the entity's share price with an index of share prices of other entities. Market based performance conditions are included in the grant-date fair value measurement (similarly, non-vesting conditions are taken into account in the measurement). However, the fair value of the equity instruments is not adjusted to take into consideration non-market based performance features - these are instead taken into account by adjusting the number of equity instruments included in the measurement of the share-based payment transaction, and are adjusted each period until such time as the equity instruments vest.

Note: Annual Improvements to IFRSs 2010–2012 Cycle amends the definitions of 'vesting condition' and 'market condition' and adds definitions for 'performance condition' and 'service condition' (which were previously part of the definition of 'vesting condition'). The amendments are effective for annual periods beginning on or after 1 July 2014.

Modifications, cancellations, and settlements

The determination of whether a change in terms and conditions has an effect on the amount recognised depends on whether the fair value of the new instruments is greater than the fair value of the original instruments (both determined at the modification date).

Modification of the terms on which equity instruments were granted may have an effect on the expense that will be recorded. IFRS 2 clarifies that the guidance on modifications also applies to instruments modified after their vesting date. If the fair value of the new instruments is more than the fair value of the old instruments (e.g. by reduction of the exercise price or issuance of additional instruments), the incremental amount is recognised over the remaining vesting period in a manner similar to the original amount. If the modification occurs after the vesting period, the incremental amount is recognised immediately. If the fair value of the new instruments is less than the fair value of the old instruments, the original fair value of the equity instruments granted should be expensed as if the modification never occurred.

The cancellation or settlement of equity instruments is accounted for as an acceleration of the vesting period and therefore any amount unrecognised that would otherwise have been charged should be recognised immediately. Any payments made with the cancellation or settlement (up to the fair value of the equity instruments) should be accounted for as the repurchase of an equity interest. Any payment in excess of the fair value of the equity instruments granted is recognised as an expense

New equity instruments granted may be identified as a replacement of cancelled equity instruments. In those cases, the replacement equity instruments are accounted for as a modification. The fair value of the replacement equity instruments is determined at grant date, while the fair value of the cancelled instruments is determined at the date of cancellation, less any cash payments on cancellation that is accounted for as a deduction from equity.

Disclosure

Required disclosures include:

the nature and extent of share-based payment arrangements that existed during the period how the fair value of the goods or services received, or the fair value of the equity instruments granted, during the

period was determined the effect of share-based payment transactions on the entity's profit or loss for the period and on its financial

position.

Effective date

IFRS 2 is effective for annual periods beginning on or after 1 January 2005. Earlier application is encouraged.

Transition

All equity-settled share-based payments granted after 7 November 2002, that are not yet vested at the effective date of IFRS 2 shall be accounted for using the provisions of IFRS 2. Entities are allowed and encouraged, but not required, to apply this IFRS to other grants of equity instruments if (and only if) the entity has previously disclosed publicly the fair value of those equity instruments determined in accordance with IFRS 2.

The comparative information presented in accordance with IAS 1 shall be restated for all grants of equity instruments to which the requirements of IFRS 2 are applied. The adjustment to reflect this change is presented in the opening balance of retained earnings for the earliest period presented.

IFRS 2 amends paragraph 13 of IFRS 1 First-time Adoption of International Financial Reporting Standards to add an exemption for share-based payment transactions. Similar to entities already applying IFRS, first-time adopters will have to apply IFRS 2 for share-based payment transactions on or after 7 November 2002. Additionally, a first-time adopter is not required to apply IFRS 2 to share-based payments granted after 7 November 2002 that vested before the later of (a) the date of transition to IFRS and (b) 1 January 2005. A first-time adopter may elect to apply IFRS 2 earlier only if it has publicly disclosed the fair value of the share-based payments determined at the measurement date in accordance with IFRS 2.

Differences with FASB Statement 123 Revised 2004

In December 2004, the US FASB published FASB Statement 123 (revised 2004) Share-Based Payment. Statement 123(R) requires that the compensation cost relating to share-based payment transactions be recognised in financial statements. Click for FASB Press Release (PDF 17k). Deloitte (USA) has published a special issue of its Heads Up newsletter summarising the key concepts of FASB Statement No. 123(R). Click to download the Heads Up Newsletter (PDF 292k). While Statement 123(R) is largely consistent with IFRS 2, some differences remain, as described in a Q&A document FASB issued along with the new Statement:

Q22. Is the Statement convergent with International Financial Reporting Standards?

The Statement is largely convergent with International Financial Reporting Standard (IFRS) 2, Share-based Payment. The Statement and IFRS 2 have the potential to differ in only a few areas. The more significant areas are briefly described below.

IFRS 2 requires the use of the modified grant-date method for share-based payment arrangements with nonemployees. In contrast, Issue 96-18 requires that grants of share options and other equity instruments to nonemployees be measured at the earlier of (1) the date at which a commitment for performance by the counterparty to earn the equity instruments is reached or (2) the date at which the counterparty's performance is complete.

IFRS 2 contains more stringent criteria for determining whether an employee share purchase plan is compensatory or not. As a result, some employee share purchase plans for which IFRS 2 requires recognition of compensation cost will not be considered to give rise to compensation cost under the Statement.

IFRS 2 applies the same measurement requirements to employee share options regardless of whether the issuer is a public or a nonpublic entity. The Statement requires that a nonpublic entity account for its options and similar equity instruments based on their fair value unless it is not practicable to estimate the expected volatility of the entity's share price. In that situation, the entity is required to measure its equity share options and similar instruments at a value using the historical volatility of an appropriate industry sector index.

In tax jurisdictions such as the United States, where the time value of share options generally is not deductible for tax purposes, IFRS 2 requires that no deferred tax asset be recognized for the compensation cost related to the time value component of the fair value of an award. A deferred tax asset is recognized only if and when the share options have intrinsic value that could be deductible for tax purposes. Therefore, an entity that grants an at-the-money share option to an employee in exchange for services will not recognize tax effects until that award is in-the-money. In contrast, the Statement requires recognition of a deferred tax asset based on the grant-date fair value of the award. The effects of subsequent decreases in the share price (or lack of an increase) are not reflected in accounting for the deferred tax asset until the related compensation cost is recognized for tax purposes. The effects of subsequent increases that generate excess tax benefits are recognized when they affect taxes payable.

The Statement requires a portfolio approach in determining excess tax benefits of equity awards in paid-in capital available to offset write-offs of deferred tax assets, whereas IFRS 2 requires an individual instrument approach. Thus, some write-offs of deferred tax assets that will be recognized in paid-in capital under the Statement will be recognized in determining net income under IFRS 2.

Differences between the Statement and IFRS 2 may be further reduced in the future when the IASB and FASB consider whether to undertake additional work to further converge their respective accounting standards on share-

based payment.

March 2005: SEC Staff Accounting Bulletin 107

On 29 March 2005, the staff of the US Securities and Exchange Commission issued Staff Accounting Bulletin 107 dealing with valuations and other accounting issues for share-based payment arrangements by public companies under FASB Statement 123R Share-Based Payment. For public companies, valuations under Statement 123R are similar to those under IFRS 2 Share-based Payment. SAB 107 provides guidance related to share-based payment transactions with nonemployees, the transition from nonpublic to public entity status, valuation methods (including assumptions such as expected volatility and expected term), the accounting for certain redeemable financial instruments issued under share-based payment arrangements, the classification of compensation expense, non-GAAP financial measures, first-time adoption of Statement 123R in an interim period, capitalisation of compensation cost related to share-based payment arrangements, accounting for the income tax effects of share-based payment arrangements on adoption of Statement 123R, the modification of employee share options prior to adoption of Statement 123R, and disclosures in Management's Discussion and Analysis (MD&A) subsequent to adoption of Statement 123R. One of the interpretations in SAB 107 is whether there are differences between Statement 123R and IFRS 2 that would result in a reconciling item:

Question: Does the staff believe there are differences in the measurement provisions for share-based payment arrangements with employees under International Accounting Standards Board International Financial Reporting Standard 2, Share-based Payment ('IFRS 2') and Statement 123R that would result in a reconciling item under Item 17 or 18 of Form 20-F?

Interpretive Response: The staff believes that application of the guidance provided by IFRS 2 regarding the measurement of employee share options would generally result in a fair value measurement that is consistent with the fair value objective stated in Statement 123R. Accordingly, the staff believes that application of Statement 123R's measurement guidance would not generally result in a reconciling item required to be reported under Item 17 or 18 of Form 20-F for a foreign private issuer that has complied with the provisions of IFRS 2 for share-based payment transactions with employees. However, the staff reminds foreign private issuers that there are certain differences between the guidance in IFRS 2 and Statement 123R that may result in reconciling items. [Footnotes omitted]

Click to download:

SEC Press Release (PDF 30k) Staff Accounting Bulletin 107 (PDF 362k)

March 2005: Bear, Stearns Study on Impact of Expensing Stock Options in the United States

If US public companies had been required to expense employee stock options in 2004, as will be required under FASB Statement 123R Share-Based Payment starting in third-quarter 2005:

the reported 2004 post-tax net income from continuing operations of the S&P 500 companies would have been reduced by 5%, and

2004 NASDAQ 100 post-tax net income from continuing operations would have been reduced by 22%.

Those are key findings of a study conducted by the Equity Research group at Bear, Stearns & Co. Inc. The purpose of the study is to help investors gauge the impact that expensing employee stock options will have on the 2005 earnings of US public companies. The Bear, Stearns analysis was based on the 2004 stock option disclosures in the most recently filed 10Ks of companies that were S&P 500 and NASDAQ 100 constituents as of 31 December 2004. Exhibits to the study present the results by company, by sector, and by industry. Visitors to IAS Plus are likely to find the study of interest because the requirements of FAS 123R for public companies are very similar to those of IFRS 2. We are grateful to Bear, Stearns for giving us permission to post the study on IAS Plus. The report remains

copyright Bear, Stears & Co. Inc., all rights reserved. Click to download 2004 Earnings Impact of Stock Options on the S&P 500 & NASDAQ 100 Earnings (PDF 486k).

November 2005: Standard & Poor's Study on Impact of Expensing Stock Options

In November 2005 Standard & Poor's published a report of the impact of expensing stock options on the S&P 500 companies. FAS 123(R) requires expensing of stock options (mandatory for most SEC registrants in 2006). IFRS 2 is nearly identical to FAS 123(R). S&P found:

Option expense will reduce S&P 500 earnings by 4.2%. Information Technology is affected the most, reducing earnings by 18%.... P/E ratios for all sectors will be increased, but will remain below historical averages.

The impact of option expensing on the Standard & Poor's 500 will be noticeable, but in an environment of record earnings, high margins and historically low operating price-to-earnings ratios, the index is in its best position in decades to absorb the additional expense.

S&P takes issue with those companies that try to emphasise earnings before deducting stock option expense and with those analysts who ignore option expensing. The report emphasises that:

Standard & Poor's will include and report option expense in all of its earnings values, across all of its business lines. This includes Operating, As Reported and Core, and applies to its analytical work in the S&P Domestic Indices, Stock Reports, as well as its forward estimates. It includes all of its electronic products.... The investment community benefits when it has clear and consistent information and analyses. A consistent earnings methodology that builds on accepted accounting standards and procedures is a vital component of investing. By supporting this definition, Standard & Poor's is contributing to a more reliable investment environment.

The current debate as to the presentation by companies of earnings that exclude option expense, generally being referred to as non-GAAP earnings, speaks to the heart of corporate governance. Additionally, many equity analysts are being encouraged to base their estimates on non-GAAP earnings. While we do not expect a repeat of the EBBS (Earnings Before Bad Stuff) pro-forma earnings of 2001, the ability to compare issues and sectors depends on an accepted set of accounting rules observed by all. In order to make informed investment decisions, the investing community requires data that conform to accepted accounting procedures. Of even more concern is the impact that such alternative presentation and calculations could have on the reduced level of faith and trust investors put into company reporting. The corporate governance events of the last two-years have eroded the trust of many investors, trust that will take years to earn back. In an era of instant access and carefully scripted investor releases, trust is now a major issue.

January 2008: Amendment of IFRS 2 to clarify vesting conditions and cancellations

On 17 January 2008, the IASB published final amendments to IFRS 2 Share-based Payment to clarify the terms 'vesting conditions' and 'cancellations' as follows:

Vesting conditions are service conditions and performance conditions only. Other features of a share-based payment are not vesting conditions. Under IFRS 2, features of a share-based payment that are not vesting conditions should be included in the grant date fair value of the share-based payment. The fair value also includes market-related vesting conditions.

All cancellations, whether by the entity or by other parties, should receive the same accounting treatment. Under IFRS 2, a cancellation of equity instruments is accounted for as an acceleration of the vesting period. Therefore any amount unrecognised that would otherwise have been charged is recognised immediately. Any payments made with the cancellation (up to the fair value of the equity instruments) is accounted for as the repurchase of an equity interest. Any payment in excess of the fair value of the equity instruments granted is recognised as an expense.

The Board had proposed the amendment in an exposure draft on 2 February 2006. The amendment is effective for annual periods beginning on or after 1 January 2009, with earlier application permitted.

Click for Press Release (PDF 47k).

Deloitte has published a Special Edition of our IAS Plus Newsletter explaining the amendments to IFRS 2 for vesting conditions and cancellations (PDF 126k).

June 2009: IASB amends IFRS 2 for group cash-settled share-based payment transactions, withdraws IFRICs 8 and 11

On 18 June 2009, the IASB issued amendments to IFRS 2 Share-based Payment that clarify the accounting for group cash-settled share-based payment transactions. The amendments clarify how an individual subsidiary in a group should account for some share-based payment arrangements in its own financial statements. In these arrangements, the subsidiary receives goods or services from employees or suppliers but its parent or another entity in the group must pay those suppliers. The amendments make clear that:

An entity that receives goods or services in a share-based payment arrangement must account for those goods or services no matter which entity in the group settles the transaction, and no matter whether the transaction is settled in shares or cash.

In IFRS 2 a 'group' has the same meaning as in IAS 27 Consolidated and Separate Financial Statements, that is, it includes only a parent and its subsidiaries.

The amendments to IFRS 2 also incorporate guidance previously included in IFRIC 8 Scope of IFRS 2 and IFRIC 11 IFRS 2–Group and Treasury Share Transactions. As a result, the IASB has withdrawn IFRIC 8 and IFRIC 11. The amendments are effective for annual periods beginning on or after 1 January 2010 and must be applied retrospectively. Earlier application is permitted. Click for IASB press release (PDF 103k)

IFRS 3 — Business Combinations Share on email Share on facebook Share on twitter Share on linkedin More Sharing Services

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Overview

IFRS 3 Business Combinations outlines the accounting when an acquirer obtains control of a business (e.g. an acquisition or merger). Such business combinations are accounted for using the 'acquisition method', which generally requires assets acquired and liabilities assumed to be measured at their fair values at the acquisition date.

A revised version of IFRS 3 was issued in January 2008 and applies to business combinations occurring in an entity's first annual period beginning on or after 1 July 2009.

History of IFRS 3Date Development Comments

July 2001 Project added to IASB agenda(carried over from the old IASC) History of the project

5 December 2002 Exposure Draft ED 3 Business Combinations and related exposure drafts proposing amendments to IAS 36 and IAS 38 published

Comment deadline 4 April 2003

31 March 2004 IFRS 3 Business Combinations (2004) and related amended versions of IAS 36 and IAS 38 issued(IFRS 3 supersedes IAS 22)

Effective for business combinations for which the agreement date is on or after 31 March 2004

29 April 2004

Exposure Draft Combinations by Contract Alone or Involving Mutual Entities published(These proposals were not finalised, but instead considered as part of the June 2005 exposure draft)

Comment deadline 31 July 2004

30 June 2005 Exposure Draft Proposed Amendments to IFRS 3 published Comment deadline 28 October 2005

10 January 2008 IFRS 3 Business Combinations (2008) issued

Applies to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 July 2009

6 May 2010

Amended by Annual Improvements to IFRSs 2010 (measurement of non-controlling interests, replaced share-based payment awards, transitional arrangements for contingent consideration)

Effective for annual periods beginning on or after 1 July 2010

12 December 2013 Amended by Annual Improvements to IFRSs 2010–2012 Cycle (contingent consideration)

Applicable for business combinations for which the acquisition date is on or after 1 July 2014

12 December 2013 Amended by Annual Improvements to IFRSs 2011–2013 Cycle (scope exception for joint ventures)

Effective for annual periods beginning on or after 1 July 2014

Related Interpretations

None

Amendments under consideration by the IASB

Common control transactions Post-implementation review — IFRS 3

Summary of IFRS 3

Background

IFRS 3 (2008) seeks to enhance the relevance, reliability and comparability of information provided about business combinations (e.g. acquisitions and mergers) and their effects. It sets out the principles on the recognition and measurement of acquired assets and liabilities, the determination of goodwill and the necessary disclosures.

IFRS 3 (2008) resulted from a joint project with the US Financial Accounting Standards Board (FASB) and replaced IFRS 3 (2004). FASB issued a similar standard in December 2007 (SFAS 141(R)). The revisions result in a high degree of convergence between IFRSs and US GAAP in the accounting for business combinations, although some potentially significant differences remain.

Key definitions

[IFRS 3, Appendix A]

business combination

A transaction or other event in which an acquirer obtains control of one or more businesses. Transactions sometimes referred to as 'true mergers' or 'mergers of equals' are also business combinations as that term is used in [IFRS 3]

businessAn integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs or other economic benefits directly to investors or other owners, members or participants

acquisition date The date on which the acquirer obtains control of the acquiree

acquirer The entity that obtains control of the acquiree

acquiree The business or businesses that the acquirer obtains control of in a business combination

Scope

IFRS 3 must be applied when accounting for business combinations, but does not apply to:

The formation of a joint venture* [IFRS 3.2(a)] The acquisition of an asset or group of assets that is not a business, although general guidance is provided on how

such transactions should be accounted for [IFRS 3.2(b)] Combinations of entities or businesses under common control (the IASB has a separate agenda project on common

control transactions) [IFRS 3.2(c)] Acquisitions by an investment entity of a subsidiary that is required to be measured at fair value through profit or loss

under IFRS 10 Consolidated Financial Statements. [IFRS 3.2A]

* Annual Improvements to IFRSs 2011–2013 Cycle, effective for annual periods beginning on or after 1 July 2014, amends this scope exclusion to clarify that is applies to the accounting for the formation of a joint arrangement in the financial statements of the joint arrangement itself.

Determining whether a transaction is a business combination

IFRS 3 provides additional guidance on determining whether a transaction meets the definition of a business combination, and so accounted for in accordance with its requirements. This guidance includes:

Business combinations can occur in various ways, such as by transferring cash, incurring liabilities, issuing equity instruments (or any combination thereof), or by not issuing consideration at all (i.e. by contract alone) [IFRS 3.B5]

Business combinations can be structured in various ways to satisfy legal, taxation or other objectives, including one entity becoming a subsidiary of another, the transfer of net assets from one entity to another or to a new entity [IFRS 3.B6]

The business combination must involve the acquisition of a business, which generally has three elements: [IFRS 3.B7] o Inputs – an economic resource (e.g. non-current assets, intellectual property) that creates outputs when

one or more processes are applied to ito Process – a system, standard, protocol, convention or rule that when applied to an input or inputs, creates

outputs (e.g. strategic management, operational processes, resource management)o Output – the result of inputs and processes applied to those inputs.

Method of accounting for business combinations

Acquisition method

The acquisition method (called the 'purchase method' in the 2004 version of IFRS 3) is used for all business combinations. [IFRS 3.4]

Steps in applying the acquisition method are: [IFRS 3.5]

1. Identification of the 'acquirer'2. Determination of the 'acquisition date'3. Recognition and measurement of the identifiable assets acquired, the liabilities assumed and any non-controlling

interest (NCI, formerly called minority interest) in the acquiree4. Recognition and measurement of goodwill or a gain from a bargain purchase

Identifying an acquirer

The guidance in IFRS   10 Consolidated Financial Statements is used to identify an acquirer in a business combination, i.e. the entity that obtains 'control' of the acquiree. [IFRS 3.7]

If the guidance in IFRS 10 does not clearly indicate which of the combining entities is an acquirer, IFRS 3 provides additional guidance which is then considered:

The acquirer is usually the entity that transfers cash or other assets where the business combination is effected in this manner [IFRS 3.B14]

The acquirer is usually, but not always, the entity issuing equity interests where the transaction is effected in this manner, however the entity also considers other pertinent facts and circumstances including: [IFRS 3.B15]

o relative voting rights in the combined entity after the business combinationo the existence of any large minority interest if no other owner or group of owners has a significant voting

interesto the composition of the governing body and senior management of the combined entityo the terms on which equity interests are exchanged

The acquirer is usually the entity with the largest relative size (assets, revenues or profit) [IFRS 3.B16] For business combinations involving multiple entities, consideration is given to the entity initiating the combination,

and the relative sizes of the combining entities. [IFRS 3.B17]

Acquisition date

An acquirer considers all pertinent facts and circumstances when determining the acquisition date, i.e. the date on which it obtains control of the acquiree. The acquisition date may be a date that is earlier or later than the closing date. [IFRS 3.8-9]

IFRS 3 does not provide detailed guidance on the determination of the acquisition date and the date identified should reflect all relevant facts and circumstances. Considerations might include, among others, the date a public offer becomes unconditional (with a controlling interest acquired), when the acquirer can effect change in the board of directors of the acquiree, the date of acceptance of an unconditional offer, when the acquirer starts directing the acquiree's operating and financing policies, or the date competition or other authorities provide necessarily clearances.

 

Acquired assets and liabilities

IFRS 3 establishes the following principles in relation to the recognition and measurement of items arising in a business combination:

Recognition principle. Identifiable assets acquired, liabilities assumed, and non-controlling interests in the acquiree, are recognised separately from goodwill [IFRS 3.10]

Measurement principle. All assets acquired and liabilities assumed in a business combination are measured at acquisition-date fair value. [IFRS 3.18]

Exceptions to the recognition and measurement principles

The following exceptions to the above principles apply:

Contingent liabilities – the requirements of IAS 37 Provisions, Contingent Liabilities and Contingent Assets do not apply to the recognition of contingent liabilities arising in a business combination [IFRS 3.22-23]

Income taxes – the recognition and measurement of income taxes is in accordance with IAS 12 Income Taxes [IFRS 3.24-25]

Employee benefits – assets and liabilities arising from an acquiree's employee benefits arrangements are recognised and measured in accordance with IAS 19 Employee Benefits (2011) [IFRS 2.26]

Indemnification assets - an acquirer recognises indemnification assets at the same time and on the same basis as the indemnified item [IFRS 3.27-28]

Reacquired rights – the measurement of reacquired rights is by reference to the remaining contractual term without renewals [IFRS 3.29]

Share-based payment transactions - these are measured by reference to the method in IFRS 2 Share-based Payment Assets held for sale – IFRS 5 Non-current Assets Held for Sale and Discontinued Operations is applied in measuring

acquired non-current assets and disposal groups classified as held for sale at the acquisition date.

In applying the principles, an acquirer classifies and designates assets acquired and liabilities assumed on the basis of the contractual terms, economic conditions, operating and accounting policies and other pertinent conditions existing at the acquisition date. For example, this might include the identification of derivative financial instruments as hedging instruments, or the separation of embedded derivatives from host contracts.[IFRS 3.15] However, exceptions are made for lease classification (between operating and finance leases) and the classification of contracts as insurance contracts, which are classified on the basis of conditions in place at the inception of the contract. [IFRS 3.17]

Acquired intangible assets must be recognised and measured at fair value in accordance with the principles if it is separable or arises from other contractual rights, irrespective of whether the acquiree had recognised the asset prior to the business combination occurring. This is because there is always sufficient information to reliably measure the

fair value of these assets. [IAS 38.33-37] There is no 'reliable measurement' exception for such assets, as was present under IFRS 3 (2004).

Goodwill

Goodwill is measured as the difference between:

the aggregate of (i) the value of the consideration transferred (generally at fair value), (ii) the amount of any non-controlling interest (NCI, see below), and (iii) in a business combination achieved in stages (see below), the acquisition-date fair value of the acquirer's previously-held equity interest in the acquiree, and

the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed (measured in accordance with IFRS 3). [IFRS 3.32]

This can be written in simplified equation form as follows:

Goodwill = Consideration transferred + Amount of non-controlling

interests + Fair value of previous equity interests - Net assets

recognised

If the difference above is negative, the resulting gain is a bargain purchase in profit or loss, which may arise in circumstances such as a forced seller acting under compulsion. [IFRS 3.34-35] However, before any bargain purchase gain is recognised in profit or loss, the acquirer is required to undertake a review to ensure the identification of assets and liabilities is complete, and that measurements appropriately reflect consideration of all available information. [IFRS 3.36]

Choice in the measurement of non-controlling interests (NCI)

IFRS 3 allows an accounting policy choice, available on a transaction by transaction basis, to measure non-controlling interests (NCI) either at: [IFRS 3.19]

fair value (sometimes called the full goodwill method), or the NCI's proportionate share of net assets of the acquiree.

The choice in accounting policy applies only to present ownership interests in the acquiree that entitle holders to a proportionate share of the entity's net assets in the event of a liquidation (e.g. outside holdings of an acquiree's ordinary shares). Other components of non-controlling interests at must be measured at acquisition date fair values or in accordance with other applicable IFRSs (e.g. share-based payment transactions accounted for under IFRS   2 Share-based Payment). [IFRS 3.19]

 

Example

P pays 800 to acquire an 80% interest in the ordinary shares of S. The aggregated fair value of 100% of S's identifiable assets and liabilities (determined in accordance with the requirements of IFRS 3) is 600, and the fair value of the non-controlling interest (the remaining 20% holding of ordinary shares) is 185.

The measurement of the non-controlling interest, and its resultant impacts on the determination of goodwill, under each option is illustrated below:

NCI based onfair value

NCI based onnet assets

Consideration transferred 800 800

Non-controlling interest 185 (1) 120 (2)

985 920

Net assets (600) (600)

Goodwill 385 320

(1) The fair value of the 20% non-controlling interest in S will not necessarily be proportionate to the price paid by P for its 80% interest, primarily due to any control premium or discount [IFRS 3.B45]

(2) Calculated as 20% of the fair value of the net assets of 600.

 

Business combination achieved in stages (step acquisitions)

Prior to control being obtained, an acquirer accounts for its investment in the equity interests of an acquiree in accordance with the nature of the investment by applying the relevant standard, e.g. IAS   28 Investments in Associates and Joint Ventures (2011), IFRS   11 Joint Arrangements, IAS   39 Financial Instruments: Recognition and Measurement or IFRS   9 Financial Instruments. As part of accounting for the business combination, the acquirer remeasures any previously held interest at fair value and takes this amount into account in the determination of goodwill as noted above [IFRS 3.32] Any resultant gain or loss is recognised in profit or loss or other comprehensive income as appropriate. [IFRS 3.42]

The accounting treatment of an entity's pre-combination interest in an acquiree is consistent with the view that the obtaining of control is a significant economic event that triggers a remeasurement. Consistent with this view, all of the assets and liabilities of the acquiree are fully remeasured in accordance with the requirements of IFRS 3 (generally at fair value). Accordingly, the determination of goodwill occurs only at the acquisition date. This is different to the accounting for step acquisitions under IFRS 3(2004).

Measurement period

If the initial accounting for a business combination can be determined only provisionally by the end of the first reporting period, the business combination is accounted for using provisional amounts. Adjustments to provisional amounts, and the recognition of newly identified asset and liabilities, must be made within the 'measurement period' where they reflect new information obtained about facts and circumstances that were in existence at the acquisition date. [IFRS 3.45] The measurement period cannot exceed one year from the acquisition date and no adjustments are permitted after one year except to correct an error in accordance with IAS 8. [IFRS 3.50]

Related transactions and subsequent accounting

General principles

In general:

transactions that are not part of what the acquirer and acquiree (or its former owners) exchanged in the business combination are identified and accounted for separately from business combination

the recognition and measurement of assets and liabilities arising in a business combination after the initial accounting for the business combination is dealt with under other relevant standards, e.g. acquired inventory is subsequently accounted under IAS 2 Inventories. [IFRS 3.54]

When determining whether a particular item is part of the exchange for the acquiree or whether it is separate from the business combination, an acquirer considers the reason for the transaction, who initiated the transaction and the timing of the transaction. [IFRS 3.B50]

Contingent consideration

Contingent consideration must be measured at fair value at the time of the business combination and is taken into account in the determination of goodwill. If the amount of contingent consideration changes as a result of a post-acquisition event (such as meeting an earnings target), accounting for the change in consideration depends on whether the additional consideration is classified as an equity instrument or an asset or liability: [IFRS 3.58]

If the contingent consideration is classified as an equity instrument, the original amount is not remeasured If the additional consideration is classified as an asset or liability that is a financial instrument, the contingent

consideration is measured at fair value and gains and losses are recognised in either profit or loss or other comprehensive income in accordance with IFRS 9 Financial Instruments or IAS 39 Financial Instruments: Recognition and Measurement

If the additional consideration is not within the scope of IFRS 9 (or IAS 39), it is accounted for in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets or other IFRSs as appropriate.

Note: Annual Improvements to IFRSs 2010–2012 Cycle changes these requirements for business combinations for which the acquisition date is on or after 1 July 2014. Under the amended requirements, contingent consideration that is classified as an asset or liability is measured at fair value at each reporting date and changes in fair value are recognised in profit or loss, both for contingent consideration that is within the scope of IFRS 9/IAS 39 or otherwise.

Where a change in the fair value of contingent consideration is the result of additional information about facts and circumstances that existed at the acquisition date, these changes are accounted for as measurement period adjustments if they arise during the measurement period (see above). [IFRS 3.58]

Acquisition costs

Costs of issuing debt or equity instruments are accounted for under IAS   32 Financial Instruments: Presentation and IAS   39 Financial Instruments: Recognition and Measurement/IFRS   9 Financial Instruments. All other costs associated with an acquisition must be expensed, including reimbursements to the acquiree for bearing some of the acquisition costs. Examples of costs to be expensed include finder's fees; advisory, legal, accounting, valuation and other professional or consulting fees; and general administrative costs, including the costs of maintaining an internal acquisitions department. [IFRS 3.53]

Pre-existing relationships and reacquired rights

If the acquirer and acquiree were parties to a pre-existing relationship (for instance, the acquirer had granted the acquiree a right to use its intellectual property), this must must be accounted for separately from the business combination. In most cases, this will lead to the recognition of a gain or loss for the amount of the consideration transferred to the vendor which effectively represents a 'settlement' of the pre-existing relationship. The amount of the gain or loss is measured as follows:

for pre-existing non-contractual relationships (for example, a lawsuit): by reference to fair value for pre-existing contractual relationships: at the lesser of (a) the favourable/unfavourable contract position and (b)

any stated settlement provisions in the contract available to the counterparty to whom the contract is unfavourable. [IFRS 3.B51-53]

However, where the transaction effectively represents a reacquired right, an intangible asset is recognised and measured on the basis of the remaining contractual term of the related contract excluding any renewals. The asset is then subsequently amortised over the remaining contractual term, again excluding any renewals. [IFRS 3.55]

Contingent liabilities

Until a contingent liability is settled, cancelled or expired, a contingent liability that was recognised in the initial accounting for a business combination is measured at the higher of the amount the liability would be recognised under IAS   37 Provisions, Contingent Liabilities and Contingent Assets, and the amount less accumulated amortisation under IAS   18 Revenue. [IFRS 3.56]

Contingent payments to employees and shareholders

As part of a business combination, an acquirer may enter into arrangements with selling shareholders or employees. In determining whether such arrangements are part of the business combination or accounted for separately, the acquirer considers a number of factors, including whether the arrangement requires continuing employment (and if so, its term), the level or remuneration compared to other employees, whether payments to shareholder employees are incremental to non-employee shareholders, the relative number of shares owns, linkages to valuation of the acquiree, how the consideration is calculated, and other agreements and issues. [IFRS 3.B55]

Where share-based payment arrangements of the acquiree exist and are replaced, the value of such awards must be apportioned between pre-combination and post-combination service and accounted for accordingly. [IFRS 3.B56-B62B]

Indemnification assets

Indemnification assets recognised at the acquisition date (under the exceptions to the general recognition and measurement principles noted above) are subsequently measured on the same basis of the indemnified liability or asset, subject to contractual impacts and collectibility. Indemnification assets are only derecognised when collected, sold or when rights to it are lost. [IFRS 3.57]

Other issues

In addition, IFRS 3 provides guidance on some specific aspects of business combinations including:

business combinations achieved without the transfer of consideration, e.g. 'dual listed' and 'stapled' arrangements [IFRS 3.43-44]

reverse acquisitions [IFRS 3.B19] identifying intangible assets acquired [IFRS 3.B31-34]

Disclosure

Disclosure of information about current business combinations

An acquirer is required to disclose information that enables users of its financial statements to evaluate the nature and financial effect of a business combination that occurs either during the current reporting period or after the end of the period but before the financial statements are authorised for issue. [IFRS 3.59]

Among the disclosures required to meet the foregoing objective are the following: [IFRS 3.B64-B66]

name and a description of the acquiree acquisition date percentage of voting equity interests acquired

primary reasons for the business combination and a description of how the acquirer obtained control of the acquiree description of the factors that make up the goodwill recognised qualitative description of the factors that make up the goodwill recognised, such as expected synergies from

combining operations, intangible assets that do not qualify for separate recognition acquisition-date fair value of the total consideration transferred and the acquisition-date fair value of each major

class of consideration details of contingent consideration arrangements and indemnification assets details of acquired receivables the amounts recognised as of the acquisition date for each major class of assets acquired and liabilities assumed details of contingent liabilities recognised total amount of goodwill that is expected to be deductible for tax purposes details about any transactions that are recognised separately from the acquisition of assets and assumption of

liabilities in the business combination information about a bargain purchase information about the measurement of non-controlling interests details about a business combination achieved in stages information about the acquiree's revenue and profit or loss information about a business combination whose acquisition date is after the end of the reporting period but before

the financial statements are authorised for issue

Disclosure of information about adjustments of past business combinations

An acquirer is required to disclose information that enables users of its financial statements to evaluate the financial effects of adjustments recognised in the current reporting period that relate to business combinations that occurred in the period or previous reporting periods. [IFRS 3.61]

Among the disclosures required to meet the foregoing objective are the following: [IFRS 3.B67]

details when the initial accounting for a business combination is incomplete for particular assets, liabilities, non-controlling interests or items of consideration (and the amounts recognised in the financial statements for the business combination thus have been determined only provisionally)

follow-up information on contingent consideration follow-up information about contingent liabilities recognised in a business combination a reconciliation of the carrying amount of goodwill at the beginning and end of the reporting period, with various

details shown separately the amount and an explanation of any gain or loss recognised in the current reporting period that both:

o relates to the identifiable assets acquired or liabilities assumed in a business combination that was effected in the current or previous reporting period, and

o is of such a size, nature or incidence that disclosure is relevant to understanding the combined entity's financial statements.

Deloitte guide to IFRS 3 and IAS 27

In July 2008, the Deloitte IFRS Global Office has published Business Combinations and Changes in Ownership Interests: A Guide to the Revised IFRS 3 and IAS 27. This 164-page guide deals mainly with accounting for business combinations under IFRS 3(2008). Where appropriate, it deals with related requirements of IAS 27(2008) – particularly as regards the definition of control, accounting for non-controlling interests, and changes in ownership interests. Other aspects of IAS 27 (such as the requirements to prepare consolidated financial statements and detailed procedures for consolidation) are not addressed.

Click to download the new Guide to IFRS 3 and IAS 27 (PDF 647k).

Deloitte United States guide to accounting for business combinations

In December 2009, Deloitte United States published an updated edition of A Roadmap to Accounting for Business Combinations and Related Topics (PDF 2,197k). This 285-page book reflects the FASB Accounting Standards Codification and includes a 12-page appendix that examines differences between US GAAP and IFRSs (IFRS 3 and IASs 27, 36, and 38) on this topic.

Contents of the book:

Section 1 - Scope of ASC 805 Section 2 - Identifying the Acquirer Section 3 - Recognizing and Measuring Assets Acquired and Liabilities Assumed - General Section 4 - Recognizing and Measuring Assets Acquired and Liabilities Assumed (Other Than Intangible Assets and

Goodwill) Section 5 - Recognizing and Measuring Acquired Intangible Assets and Goodwill Section 6 - Recognizing and Measuring the Consideration Transferred in a Business Combination Section 7 - Noncontrolling Interests Section 8 - Income Tax Considerations Section 9 - Push-Down Basis of Accounting Section 10 - Subsequent Accounting for Intangible Assets (Other Than Goodwill) Section 11 - Subsequent Accounting for Goodwill Section 12 - Financial Statement Presentation Requirements Section 13 - Financial Statement Disclosure Requirements Section 14 - Transition Requirements and Other Adoption Considerations

Overview of differences between IFRS 3 (2008) and IFRS 3 (2004)

The table below summarises some of key differences in accounting for business combinations under IFRS 3 (2008) and IFRS 3 (2004). The table is not exhaustive.

Area High-level overview of changes

Transaction costs acquisition costs such as adviser’s fees, stamp duty and similar costs cannot

be included in the measurement of goodwill

Calculation of goodwill pre-existing ownership interests are measured fair valued at acquisition date option to measure non-controlling interests on the basis of fair value or net

assets (transaction by transaction)

Contingent consideration (e.g. earn-outs)

fair value accounting at the acquisition date subsequent changes do not impact goodwill but are accounted for separately

Transactions arising in conjunction with business combinations

new detailed guidance on the split between compensation and consideration for replacement share-based payment awards

settlement of pre-existing relationships (contracts, legal cases, etc.) can result in a gain/loss

unrecognised deferred taxes no longer impact goodwill on subsequent measurement

Recognition and measurement 'reliable measurement' exclusion for intangible assets removed new guidance on indemnification assets and assets not expected to be used

Changes in ownership interests(see IFRS 10 )

buying or selling minority interests in a subsidiary only impacts equity loss of control requires fair valuing of retained holding and recycling of

reserves

IFRS 4 — Insurance Contracts Share on email Share on facebook Share on twitter Share on linkedin More Sharing Services

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Overview

IFRS 4 Insurance Contracts applies, with limited exceptions, to all insurance contracts (including reinsurance contracts) that an entity issues and to reinsurance contracts that it holds. In light of the IASB's comprehensive project on insurance contracts, the standard provides a temporary exemption from the requirements of some other IFRSs, including the requirement to consider IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors when selecting accounting policies for insurance contracts.

IFRS 4 was issued in March 2004 and applies to annual periods beginning on or after 1 January 2005.

History of IFRS 4Date Development Comments

1 April 2001Comprehensive insurance contracts project carried over from IASC to new IASB

History of the comprehensive project

May 2002Short-term insurance contracts project split off from comprehensive project

History of the short-term project

31 July 2003 Exposure Draft ED 5 Insurance Contracts published Comment deadline 31 October 2003

31 March 2004 IFRS 4 Insurance Contracts issuedEffective for annual periods beginning on or after 1 January 2005

18 August 2005 Amended by Financial Guarantee Contracts (Amendments to IAS 39 and IFRS 4)

Effective for annual periods beginning on or after 1 January 2006

Related Interpretations

None

Amendments under consideration by IASB

Insurance contracts — Comprehensive project

Summary of IFRS 4

Background

IFRS 4 is the first guidance from the IASB on accounting for insurance contracts – but not the last. A comprehensive project on insurance contracts is under way. The Board issued IFRS 4 because it saw an urgent need

for improved disclosures for insurance contracts, and some improvements to recognition and measurement practices, in time for the adoption of IFRS by listed companies throughout Europe and elsewhere in 2005.

Scope

IFRS 4 applies to virtually all insurance contracts (including reinsurance contracts) that an entity issues and to reinsurance contracts that it holds. [IFRS 4.2] It does not apply to other assets and liabilities of an insurer, such as financial assets and financial liabilities within the scope of IAS 39 Financial Instruments: Recognition and Measurement. [IFRS 4.3] Furthermore, it does not address accounting by policyholders. [IFRS 4.4(f)]

In 2005, the IASB amended the scope of IAS 39 to include financial guarantee contracts issued. However, if an issuer of financial guarantee contracts has previously asserted explicitly that it regards such contracts as insurance contracts and has used accounting applicable to insurance contracts, the issuer may elect to apply either IAS 39 or IFRS 4 to such financial guarantee contracts. [IFRS 4.4(d)]

Definition of insurance contract

An insurance contract is a "contract under which one party (the insurer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder." [IFRS 4.Appendix A]

Accounting policies

The IFRS exempts an insurer temporarily (until completion of Phase II of the Insurance Project) from some requirements of other IFRSs, including the requirement to consider IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors in selecting accounting policies for insurance contracts. However, the standard: [IFRS 4.14]

prohibits provisions for possible claims under contracts that are not in existence at the reporting date (such as catastrophe and equalisation provisions)

requires a test for the adequacy of recognised insurance liabilities and an impairment test for reinsurance assets requires an insurer to keep insurance liabilities in its balance sheet until they are discharged or cancelled, or expire,

and prohibits offsetting insurance liabilities against related reinsurance assets and income or expense from reinsurance contracts against the expense or income from the related insurance contract.

Changes in accounting policies

IFRS 4 permits an insurer to change its accounting policies for insurance contracts only if, as a result, its financial statements present information that is more relevant and no less reliable, or more reliable and no less relevant. [IFRS 4.22] In particular, an insurer cannot introduce any of the following practices, although it may continue using accounting policies that involve them: [IFRS 4.25]

measuring insurance liabilities on an undiscounted basis measuring contractual rights to future investment management fees at an amount that exceeds their fair value as

implied by a comparison with current market-based fees for similar services using non-uniform accounting policies for the insurance liabilities of subsidiaries.

Remeasuring insurance liabilities

The IFRS permits the introduction of an accounting policy that involves remeasuring designated insurance liabilities consistently in each period to reflect current market interest rates (and, if the insurer so elects, other current estimates and assumptions). Without this permission, an insurer would have been required to apply the change in accounting policies consistently to all similar liabilities. [IFRS 4.24]

Prudence

An insurer need not change its accounting policies for insurance contracts to eliminate excessive prudence. However, if an insurer already measures its insurance contracts with sufficient prudence, it should not introduce additional prudence. [IFRS 4.26]

Future investment margins

There is a rebuttable presumption that an insurer's financial statements will become less relevant and reliable if it introduces an accounting policy that reflects future investment margins in the measurement of insurance contracts. [IFRS 4.27]

Asset classifications

When an insurer changes its accounting policies for insurance liabilities, it may reclassify some or all financial assets as 'at fair value through profit or loss'. [IFRS 4.45]

Other issues

The standard:

clarifies that an insurer need not account for an embedded derivative separately at fair value if the embedded derivative meets the definition of an insurance contract [IFRS 4.7-8]

requires an insurer to unbundle (that is, to account separately for) deposit components of some insurance contracts, to avoid the omission of assets and liabilities from its balance sheet [IFRS 4.10]

clarifies the applicability of the practice sometimes known as 'shadow accounting' [IFRS 4.30] permits an expanded presentation for insurance contracts acquired in a business combination or portfolio transfer

[IFRS 4.31-33] addresses limited aspects of discretionary participation features contained in insurance contracts or financial

instruments. [IFRS 4.34-35]

Disclosures

The standard requires disclosure of:

information that helps users understand the amounts in the insurer's financial statements that arise from insurance contracts: [IFRS 4.36-37]

o accounting policies for insurance contracts and related assets, liabilities, income, and expenseo the recognised assets, liabilities, income, expense, and cash flows arising from insurance contractso if the insurer is a cedant, certain additional disclosures are requiredo information about the assumptions that have the greatest effect on the measurement of assets, liabilities,

income, and expense including, if practicable, quantified disclosure of those assumptionso the effect of changes in assumptionso reconciliations of changes in insurance liabilities, reinsurance assets, and, if any, related deferred acquisition

costs Information that helps users to evaluate the nature and extent of risks arising from insurance contracts: [IFRS 4.38-39]

o risk management objectives and policieso those terms and conditions of insurance contracts that have a material effect on the amount, timing, and

uncertainty of the insurer's future cash flowso information about insurance risk (both before and after risk mitigation by reinsurance), including

information about: the sensitivity to insurance risk concentrations of insurance risk actual claims compared with previous estimates

o the information about credit risk, liquidity risk and market risk that IFRS 7 would require if the insurance contracts were within the scope of IFRS 7

o information about exposures to market risk arising from embedded derivatives contained in a host insurance contract if the insurer is not required to, and does not, measure the embedded derivatives at fair value.

Rating agency analysis of IFRS 4

Fitch Ratings – a leading global fixed income rating agency – has analysed the implications of IFRS 4 Insurance Contracts and has concluded that Fitch "does not expect any rating actions as a direct result of the move to IFRS. However, Fitch cannot rule out the possibility that the additional disclosure and information contained in the accounts could lead to rating changes due to an improved perception of risk based on the enhanced information available." The special report Mind the GAAP: Fitch's View on Insurance IFRS provides an overview of IFRS 4 and the issues being addressed in Phase II of the IASB's insurance project; assesses the implications including increased volatility, greater use of discounting and fair values, changes to income recognition, and enhanced disclosures; and discusses how the changes affect ratings analysis. An excerpt:

Fitch welcomes the progress made by the IASB towards standards that will be more transparent and comparable across regions. The agency recognises the significant limitations of phase 1 but believes that the enhanced disclosure and greater consistency at phase 1 of the insurance accounting project (set out in IFRS 4) will aid in the analysis of insurers and is a useful stepping stone to the more valuable phase 2.

We are grateful to Fitch Ratings for allowing us to post their copyrighted report: Click to Download (PDF 209k).

IFRS 5 — Non-current Assets Held for Sale and Discontinued Operations Share on email Share on facebook Share on twitter Share on linkedin More Sharing Services

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Overview

IFRS 5 Non-current Assets Held for Sale and Discontinued Operations outlines how to account for non-current assets held for sale (or for distribution to owners). In general terms, assets (or disposal groups) held for sale are not depreciated, are measured at the lower of carrying amount and fair value less costs to sell, and are presented separately in the statement of financial position. Specific disclosures are also required for discontinued operations and disposals of non-current assets.

IFRS 5 was issued in March 2004 and applies to annual periods beginning on or after 1 January 2005.

History of IFRS 5Date Development Comments

September 2002 Project added to IASB agenda History of the project

24 July 2003 Exposure Draft ED 4 Disposal of Non-current Assets and Presentation of Discontinued Operations published

Comment deadline 24 October 2003

31 March 2004 IFRS 5 Non-current Assets Held for Sale and Discontinued Operations issued

Effective for annual periods beginning on or after 1 January 2005

22 May 2008 Amended by Improvements to IFRSs 2007 (sale of a controlling interest in the subsidiary)

Effective for annual periods beginning on or after 1 July 2009

27 November 2008 Consequential amendments from IFRIC 17 Distributions of Non-cash Assets to Owners (assets held for distribution to owners)

Effective for annual periods beginning on or after 1 July 2009

16 April 2009 Amended by Improvements to IFRSs 2009 (disclosure requirements in other standards)

Effective for annual periods beginning on or after 1 January 2010

25 September 2014Amended by Improvements to IFRSs 2014 (changes in methods of disposal)

Effective for annual periods beginning on or after 1 January 2016

Related Interpretations

None

Amendments under consideration

Convergence — Assets held for sale and discontinued operations

Summary of IFRS 5

Background

IFRS 5 achieves substantial convergence with the requirements of US SFAS 144 Accounting for the Impairment or Disposal of Long-Lived Assets with respect to the timing of the classification of operations as discontinued operations and the presentation of such operations. With respect to long-lived assets that are not being disposed of, the impairment recognition and measurement standards in SFAS 144 are significantly different from those in IAS   36 Impairment of Assets. However those differences were not addressed in the short-term IASB-FASB convergence project.

Key provisions of IFRS 5 relating to assets held for sale

Held-for-sale classification

In general, the following conditions must be met for an asset (or 'disposal group') to be classified as held for sale: [IFRS 5.6-8]

management is committed to a plan to sell the asset is available for immediate sale an active programme to locate a buyer is initiated the sale is highly probable, within 12 months of classification as held for sale (subject to limited exceptions) the asset is being actively marketed for sale at a sales price reasonable in relation to its fair value actions required to complete the plan indicate that it is unlikely that plan will be significantly changed or withdrawn

The assets need to be disposed of through sale. Therefore, operations that are expected to be wound down or abandoned would not meet the definition (but may be classified as discontinued once abandoned). [IFRS 5.13]

An entity that is committed to a sale involving loss of control of a subsidiary that qualifies for held-for-sale classification under IFRS 5 classifies all of the assets and liabilities of that subsidiary as held for sale, even if the entity will retain a non-controlling interest in its former subsidiary after the sale. [IFRS 5.8A]

Held for distribution to owners classification

The classification, presentation and measurement requirements of IFRS 5 also apply to a non-current asset (or disposal group) that is classified as held for distribution to owners. [IFRS 5.5A and IFRIC 17]  The entity must be committed to the distribution, the assets must be available for immediate distribution and the distribution must be highly probable. [IFRS 5.12A]

Disposal group concept

A 'disposal group' is a group of assets, possibly with some associated liabilities, which an entity intends to dispose of in a single transaction. The measurement basis required for non-current assets classified as held for sale is applied to the group as a whole, and any resulting impairment loss reduces the carrying amount of the non-current assets in the disposal group in the order of allocation required by IAS 36. [IFRS 5.4]

Measurement

The following principles apply:

At the time of classification as held for sale. Immediately before the initial classification of the asset as held for sale, the carrying amount of the asset will be measured in accordance with applicable IFRSs. Resulting adjustments are also recognised in accordance with applicable IFRSs. [IFRS 5.18]

After classification as held for sale. Non-current assets or disposal groups that are classified as held for sale are measured at the lower of carrying amount and fair value less costs to sell (fair value less costs to distribute in the case of assets classified as held for distribution to owners). [IFRS 5.15-15A]

Impairment.Impairment must be considered both at the time of classification as held for sale and subsequently: o At the time of classification as held for sale. Immediately prior to classifying an asset or disposal group as

held for sale, impairment is measured and recognised in accordance with the applicable IFRSs (generally IAS 16 Property, Plant and Equipment, IAS 36 Impairment of Assets, IAS 38 Intangible Assets, and IAS 39 Financial Instruments: Recognition and Measurement/IFRS 9 Financial Instruments). Any impairment loss is recognised in profit or loss unless the asset had been measured at revalued amount under IAS 16 or IAS 38, in which case the impairment is treated as a revaluation decrease.

o After classification as held for sale. Calculate any impairment loss based on the difference between the adjusted carrying amounts of the asset/disposal group and fair value less costs to sell. Any impairment loss that arises by using the measurement principles in IFRS 5 must be recognised in profit or loss [IFRS 5.20], even for assets previously carried at revalued amounts. This is supported by IFRS 5 BC.47 and BC.48, which indicate the inconsistency with IAS 36.

Assets carried at fair value prior to initial classification. For such assets, the requirement to deduct costs to sell from fair value may result in an immediate charge to profit or loss.

Subsequent increases in fair value. A gain for any subsequent increase in fair value less costs to sell of an asset can be recognised in the profit or loss to the extent that it is not in excess of the cumulative impairment loss that has been recognised in accordance with IFRS 5 or previously in accordance with IAS 36. [IFRS 5.21-22]

No depreciation. Non-current assets or disposal groups that are classified as held for sale are not depreciated. [IFRS 5.25]

The measurement provisions of IFRS 5 do not apply to deferred tax assets, assets arising from employee benefits, financial assets within the scope of IFRS   9 Financial Instruments, non-current assets measured at fair value in accordance with IAS   41 Agriculture, and contractual rights under insurance contracts.  [IFRS 5.5]

Presentation

Assets classified as held for sale, and the assets and liabilities included within a disposal group classified as held for sale, must be presented separately on the face of the statement of financial position. [IFRS 5.38]

Disclosures

IFRS 5 requires the following disclosures about assets (or disposal groups) that are held for sale: [IFRS 5.41]

description of the non-current asset or disposal group description of facts and circumstances of the sale (disposal) and the expected timing impairment losses and reversals, if any, and where in the statement of comprehensive income they are recognised if applicable, the reportable segment in which the non-current asset (or disposal group) is presented in accordance

with IFRS 8 Operating Segments

Disclosures in other IFRSs do not apply to assets held for sale (or discontinued operations, discussed below) unless those other IFRSs require specific disclosures in respect of such assets, or in respect of certain measurement disclosures where assets and liabilities are outside the scope of the measurement requirements of IFRS 5. [IFRS 5.5B]

 

Key provisions of IFRS 5 relating to discontinued operations

Classification as discontinuing

A discontinued operation is a component of an entity that either has been disposed of or is classified as held for sale, and: [IFRS 5.32]

represents either a separate major line of business or a geographical area of operations is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations,

or is a subsidiary acquired exclusively with a view to resale and the disposal involves loss of control.

IFRS 5 prohibits the retroactive classification as a discontinued operation, when the discontinued criteria are met after the end of the reporting period. [IFRS 5.12]

Disclosure in the statement of comprehensive income

The sum of the post-tax profit or loss of the discontinued operation and the post-tax gain or loss recognised on the measurement to fair value less cost to sell or fair value adjustments on the disposal of the assets (or disposal group) is presented as a single amount on the face of the statement of comprehensive income. If the entity presents profit or loss in a separate statement, a section identified as relating to discontinued operations is presented in that separate statement. [IFRS 5.33-33A].

Detailed disclosure of revenue, expenses, pre-tax profit or loss and related income taxes is required either in the notes or in the statement of comprehensive income in a section distinct from continuing operations. [IFRS 5.33] Such detailed disclosures must cover both the current and all prior periods presented in the financial statements. [IFRS 5.34]

Cash flow information

The net cash flows attributable to the operating, investing, and financing activities of a discontinued operation is separately presented on the face of the cash flow statement or disclosed in the notes. [IFRS 5.33]

Disclosures

The following additional disclosures are required:

adjustments made in the current period to amounts disclosed as a discontinued operation in prior periods must be separately disclosed [IFRS 5.35]

if an entity ceases to classify a component as held for sale, the results of that component previously presented in discontinued operations must be reclassified and included in income from continuing operations for all periods presented [IFRS 5.36]

Special edition of IAS Plus Newsletter on IFRS 5

Click to download a Special Global Edition of our IAS Plus Newsletter (PDF 56k) devoted to IFRS 5.

IFRS 6 — Exploration for and Evaluation of Mineral Resources Share on email Share on facebook Share on twitter Share on linkedin More Sharing Services

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Overview

IFRS 6 Exploration for and Evaluation of Mineral Resources has the effect of allowing entities adopting the standard for the first time to use accounting policies for exploration and evaluation assets that were applied before adopting IFRSs. It also modifies impairment testing of exploration and evaluation assets by introducing different impairment indicators and allowing the carrying amount to be tested at an aggregate level (not greater than a segment).

IFRS 6 was issued in December 2004 and applies to annual periods beginning on or after 1 January 2006.

History of IFRS 6Date Development Comments

November 2000IASC issues paper Summary of Issues: Extractive Industries published and comments invited

Comment deadline 30 June 2001

1 April 2001 Project on extractive industries carried over from IASCHistory of the comprehensive project

September 2002 Short-term project split off from comprehensive project History of the short-term project

16 January 2004 Exposure Draft ED 6 Exploration for and Evaluation of Mineral Resources published

Comment deadline 16 April 2004

9 December 2004 IFRS 6 Exploration and Evaluation of Mineral Resources issuedEffective for annual periods beginning on or after 1 January 2006

30 June 2005 Amended by Amendments to IFRS 1 First-time Adoption of International Financial Reporting Standards and IFRS 6 Exploration for and Evaluation of Mineral Resources (transitional relief)

Amended Basis for Conclusions to IFRS 6 only

Related Interpretations

None

Amendments under consideration by the IASB

Research project — Intangible assets

Summary of IFRS 6

Definitions

Exploration for and evaluation of mineral resources means the search for mineral resources, including minerals, oil, natural gas and similar non-regenerative resources after the entity has obtained legal rights to explore in a specific area, as well as the determination of the technical feasibility and commercial viability of extracting the mineral resource. [IFRS 6.Appendix A]

Exploration and evaluation expenditures are expenditures incurred in connection with the exploration and evaluation of mineral resources before the technical feasibility and commercial viability of extracting a mineral resource is demonstrable. [IFRS 6.Appendix A]

Accounting policies for exploration and evaluation

IFRS 6 permits an entity to develop an accounting policy for recognition of exploration and evaluation expenditures as assets without specifically considering the requirements of paragraphs 11 and 12 of IAS   8 Accounting Policies, Changes in Accounting Estimates and Errors. [IFRS 6.9] Thus, an entity adopting IFRS 6 may continue to use the accounting policies applied immediately before adopting the IFRS. This includes continuing to use recognition and measurement practices that are part of those accounting policies.

Impairment

IFRS 6 effectively modifies the application of IAS   36 Impairment of Assets to exploration and evaluation assets recognised by an entity under its accounting policy. Specifically:

Entities recognising exploration and evaluation assets are required to perform an impairment test on those assets when specific facts and circumstances outlined in the standard indicate an impairment test is required. The facts and circumstances outlined in IFRS 6 are non-exhaustive, and are applied instead of the 'indicators of impairment' in IAS 36 [IFRS 6.19-20]

Entities are permitted to determine an accounting policy for allocating exploration and evaluation assets to cash-generating units or groups of CGUs. [IFRS 6.21] This accounting policy may result in a different allocation than might otherwise arise on applying the requirements of IAS 36

If an impairment test is required, any impairment loss is measured, presented and disclosed in accordance with IAS 36. [IFRS 6.18]

Presentation and disclosure

An entity treats exploration and evaluation assets as a separate class of assets and make the disclosures required by either IAS   16 Property, Plant and Equipment or IAS   38 Intangible Assets consistent with how the assets are classified. [IFRS 6.25]

IFRS 6 requires disclosure of information that identifies and explains the amounts recognised in its financial statements arising from the exploration for and evaluation of mineral resources, including: [IFRS 6.23–24]

1. its accounting policies for exploration and evaluation expenditures including the recognition of exploration and evaluation assets

2. the amounts of assets, liabilities, income and expense and operating and investing cash flows arising from the exploration for and evaluation of mineral resources.

Special IAS Plus Newsletter explaining IFRS 6

On 31 January 2005, Deloitte's IFRS Global Office published a special edition of our IAS Plus Newsletter titled IFRS 6 Exploration for and Evaluation of Mineral Resources.

IFRS 7 — Financial Instruments: Disclosures Share on email Share on facebook Share on twitter Share on linkedin More Sharing Services

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Overview

IFRS 7 Financial Instruments: Disclosures requires disclosure of information about the significance of financial instruments to an entity, and the nature and extent of risks arising from those financial instruments, both in qualitative and quantitative terms. Specific disclosures are required in relation to transferred financial assets and a number of other matters.

IFRS 7 was originally issued in August 2005 and applies to annual periods beginning on or after 1 January 2007.

History of IFRS 7Date Development Comments

22 July 2004 Exposure Draft ED 7 Financial Instruments: Disclosures publishedComment deadline 14 September 2009

18 August 2005 IFRS 7 Financial Instruments: Disclosures issuedEffective for annual periods beginning on or after 1 January 2007

22 May 2008 Amended by Improvements to IFRSs (required disclosures when interests in jointly controlled entities are accounted for at fair value through profit or loss, presentation of finance costs)

Effective for annual periods beginning on or after 1 January 2009

13 October 2008 Reclassification of Financial Assets (Amendments to IAS 39 and IFRS 7) issued

Effective 1 July 2008

23 December 2008 Exposure Draft Investments in Debt Instruments (Proposed Amendments to IFRS 7) published

Comment deadline 15 January 2009(Project subsequently abandoned in January 2009)

5 March 2009 Improving Disclosures about Financial Instruments (Amendments to IFRS 7) issued

Effective for annual periods beginning on or after 1 January 2009

6 May 2010 Amended by Improvements to IFRSs (clarification of disclosures)Effective for annual periods beginning on or after 1 January 2011

7 October 2010 Disclosures – Transfers of Financial Assets (Amendments to IFRS 7) issued

Effective for annual periods beginning on or after 1 July 2011

16 December 2011 Disclosures — Offsetting Financial Assets and Financial Liabilities (Amendments to IFRS 7) issued

Effective for annual periods beginning on or after 1 January 2013

16 December 2011 Mandatory Effective Date and Transition Disclosures (Amendments to IFRS 9 and IFRS 7) issued

Effective for annual periods beginning on or after 1 January 2015 (or otherwise when IFRS 9 is first applied)*

19 November 2013

IFRS 9 Financial Instruments (Hedge Accounting and amendments to IFRS 9, IFRS 7 and IAS 39) issued, implementing additional disclosures (and consequential amendments) resulting from the introduction of the hedge accounting chapter in IFRS 9

Applies when IFRS 9 is applied*

25 September 2014Amended by Improvements to IFRSs 2014 (servicing contracts and applicability of the amendments to IFRS 7 to condensed interim financial statements)

Effective for annual periods beginning on or after 1 January 2016

* The release of IFRS 9 Financial Instruments (2013) on 19 November 2013 contained no stated effective date and contained consequential amendments which removed the mandatory effective date of IFRS 9 (2010) and IFRS 9 (2009), leaving the effective date open but leaving each standard available for application. Accordingly, these amendments apply when IFRS 9 is applied.

Related Interpretations

None

Amendments under consideration by IASB

None

Summary of IFRS 7

Overview of IFRS 7

IFRS 7:

adds certain new disclosures about financial instruments to those previously required by IAS 32 Financial Instruments: Disclosure and Presentation (as it was then cited)

replaces the disclosures previously required by IAS 30 Disclosures in the Financial Statements of Banks and Similar Financial Institutions

puts all of those financial instruments disclosures together in a new standard on Financial Instruments: Disclosures. The remaining parts of IAS 32 deal only with financial instruments presentation matters.

Disclosure requirements of IFRS 7

IFRS requires certain disclosures to be presented by category of instrument based on the IAS 39 measurement categories. Certain other disclosures are required by class of financial instrument. For those disclosures an entity must group its financial instruments into classes of similar instruments as appropriate to the nature of the information presented. [IFRS 7.6]

The two main categories of disclosures required by IFRS 7 are:

1. information about the significance of financial instruments.2. information about the nature and extent of risks arising from financial instruments

Information about the significance of financial instruments

Statement of financial position

Disclose the significance of financial instruments for an entity's financial position and performance. [IFRS 7.7] This includes disclosures for each of the following categories: [IFRS 7.8]

o financial assets measured at fair value through profit and loss, showing separately those held for trading and those designated at initial recognition

o held-to-maturity investmentso loans and receivableso available-for-sale assetso financial liabilities at fair value through profit and loss, showing separately those held for trading and those

designated at initial recognitiono financial liabilities measured at amortised cost

Other balance sheet-related disclosures: o special disclosures about financial assets and financial liabilities designated to be measured at fair value

through profit and loss, including disclosures about credit risk and market risk, changes in fair values attributable to these risks and the methods of measurement.[IFRS 7.9-11]

o reclassifications of financial instruments from one category to another (e.g. from fair value to amortised cost or vice versa) [IFRS 7.12-12A]

o information about financial assets pledged as collateral and about financial or non-financial assets held as collateral [IFRS 7.14-15]

o reconciliation of the allowance account for credit losses (bad debts) by class of financial assets[IFRS 7.16]o information about compound financial instruments with multiple embedded derivatives [IFRS 7.17]o breaches of terms of loan agreements [IFRS 7.18-19]

Statement of comprehensive income

Items of income, expense, gains, and losses, with separate disclosure of gains and losses from: [IFRS 7.20(a)] o financial assets measured at fair value through profit and loss, showing separately those held for trading

and those designated at initial recognition.o held-to-maturity investments.o loans and receivables.o available-for-sale assets.

o financial liabilities measured at fair value through profit and loss, showing separately those held for trading and those designated at initial recognition.

o financial liabilities measured at amortised cost.

Other income statement-related disclosures: o total interest income and total interest expense for those financial instruments that are not measured at

fair value through profit and loss [IFRS 7.20(b)]o fee income and expense [IFRS 7.20(c)]o amount of impairment losses by class of financial assets [IFRS 7.20(e)]o interest income on impaired financial assets [IFRS 7.20(d)]

Other disclosures

Accounting policies for financial instruments [IFRS 7.21] Information about hedge accounting, including: [IFRS 7.22]

o description of each hedge, hedging instrument, and fair values of those instruments, and nature of risks being hedged

o for cash flow hedges, the periods in which the cash flows are expected to occur, when they are expected to enter into the determination of profit or loss, and a description of any forecast transaction for which hedge accounting had previously been used but which is no longer expected to occur

o if a gain or loss on a hedging instrument in a cash flow hedge has been recognised in other comprehensive income, an entity should disclose the following: [IAS 7.23]

o the amount that was so recognised in other comprehensive income during the periodo the amount that was removed from equity and included in profit or loss for the periodo the amount that was removed from equity during the period and included in the initial measurement of the

acquisition cost or other carrying amount of a non-financial asset or non- financial liability in a hedged highly probable forecast transactionNote: Where IFRS 9 Financial Instruments (2013) is applied, revised disclosure requirements apply. The required hedge accounting disclosures apply where the entity elects to adopt hedge accounting and require information to be provided in three broad categories: (1) the entity’s risk management strategy and how it is applied to manage risk (2) how the entity’s hedging activities may affect the amount, timing and uncertainty of its future cash flows, and (3) the effect that hedge accounting has had on the entity’s statement of financial position, statement of comprehensive income and statement of changes in equity. The disclosures are required to be presented in a single note or separate section in its financial statements, although some information can be incorporated by reference.

For fair value hedges, information about the fair value changes of the hedging instrument and the hedged item [IFRS 7.24(a)]

Hedge ineffectiveness recognised in profit and loss (separately for cash flow hedges and hedges of a net investment in a foreign operation) [IFRS 7.24(b-c)]

Information about the fair values of each class of financial asset and financial liability, along with: [IFRS 7.25-30] o comparable carrying amountso description of how fair value was determinedo the level of inputs used in determining fair valueo reconciliations of movements between levels of fair value measurement hierarchy additional disclosures for

financial instruments whose fair value is determined using level 3 inputs including impacts on profit and loss, other comprehensive income and sensitivity analysis

o information if fair value cannot be reliably measured

The fair value hierarchy introduces 3 levels of inputs based on the lowest level of input significant to the overall fair value (IFRS 7.27A-27B):

Level 1 – quoted prices for similar instruments Level 2 – directly observable market inputs other than Level 1 inputs Level 3 – inputs not based on observable market data

Note that disclosure of fair values is not required when the carrying amount is a reasonable approximation of fair value, such as short-term trade receivables and payables, or for instruments whose fair value cannot be measured reliably. [IFRS 7.29(a)]

Nature and extent of exposure to risks arising from financial instruments

Qualitative disclosures [IFRS 7.33]

The qualitative disclosures describe: o risk exposures for each type of financial instrumento management's objectives, policies, and processes for managing those riskso changes from the prior period

Quantitative disclosures

The quantitative disclosures provide information about the extent to which the entity is exposed to risk, based on information provided internally to the entity's key management personnel. These disclosures include: [IFRS 7.34]

o summary quantitative data about exposure to each risk at the reporting dateo disclosures about credit risk, liquidity risk, and market risk and how these risks are managed as further

described belowo concentrations of risk

Credit risk

Credit risk is the risk that one party to a financial instrument will cause a loss for the other party by failing to pay for its obligation. [IFRS 7. Appendix A]

Disclosures about credit risk include: [IFRS 7.36-38] o maximum amount of exposure (before deducting the value of collateral), description of collateral,

information about credit quality of financial assets that are neither past due nor impaired, and information about credit quality of financial assets whose terms have been renegotiated [IFRS 7.36]

o for financial assets that are past due or impaired, analytical disclosures are required [IFRS 7.37]o information about collateral or other credit enhancements obtained or called [IFRS 7.38]

Liquidity risk

Liquidity risk is the risk that an entity will have difficulties in paying its financial liabilities. [IFRS 7. Appendix A] Disclosures about liquidity risk include: [IFRS 7.39]

o a maturity analysis of financial liabilitieso description of approach to risk management

Market risk [IFRS 7.40-42]

Market risk is the risk that the fair value or cash flows of a financial instrument will fluctuate due to changes in market prices. Market risk reflects interest rate risk, currency risk and other price risks. [IFRS 7. Appendix A]

Disclosures about market risk include: o a sensitivity analysis of each type of market risk to which the entity is exposedo additional information if the sensitivity analysis is not representative of the entity's risk exposure (for

example because exposures during the year were different to exposures at year-end).o IFRS 7 provides that if an entity prepares a sensitivity analysis such as value-at-risk for management

purposes that reflects interdependencies of more than one component of market risk (for instance, interest risk and foreign currency risk combined), it may disclose that analysis instead of a separate sensitivity analysis for each type of market risk

Transfers of financial assets [IFRS 7.42A-H]

An entity shall disclose information that enables users of its financial statements:

a. to understand the relationship between transferred financial assets that are not derecognised in their entirety and the associated liabilities; and

b. to evaluate the nature of, and risks associated with, the entity's continuing involvement in derecognised financial assets. [IFRS 7 42B]

Transferred financial assets that are not derecognised in their entirety

Required disclosures include description of the nature of the transferred assets, nature of risk and rewards as well as description of the nature and quantitative disclosure depicting relationship between transferred financial assets and the associated liabilities. [IFRS 7.42D]

Transferred financial assets that are derecognised in their entirety

Required disclosures include the carrying amount of the assets and liabilities recognised, fair value of the assets and liabilities that represent continuing involvement, maximum exposure to loss from the continuing involvement as well as maturity analysis of the undiscounted cash flows to repurchase the derecognised financial assets. [IFRS 7.42E]

Additional disclosures are required for any gain or loss recognised at the date of transfer of the assets, income or expenses recognise from the entity's continuing involvement in the derecognised financial assets as well as details of uneven distribution of proceed from transfer activity throughout the reporting period. [IFRS 7.42G]

Application guidance

An appendix of mandatory application guidance (Appendix B) is part of the standard.

There is also an appendix of non-mandatory implementation guidance (Appendix C) that describes how an entity might provide the disclosures required by IFRS 7.

IFRS 8 — Operating Segments Share on email Share on facebook Share on twitter Share on linkedin More Sharing Services

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Overview

IFRS 8 Operating Segments requires particular classes of entities (essentially those with publicly traded securities) to disclose information about their operating segments, products and services, the geographical areas in which they operate, and their major customers. Information is based on internal management reports, both in the identification of operating segments and measurement of disclosed segment information.

IFRS 8 was issued in November 2006 and applies to annual periods beginning on or after 1 January 2009.

History of IFRS 8Date Development Comments

19 January 2006 ED 8 Operating Segments issuedComment deadline 19 May 2006. (IASB press release)

30 November 2006 IFRS 8 Operating Segments issuedEffective for annual periods beginning on or after 1 January 2009, superseding IAS 14 Segment Reporting

16 April 2009 Amended by Annual Improvements to IFRSs 2009 (disclosures of segment assets)

Effective for annual periods beginning on or after 1 January 2010

18 July 2013 Report and Feedback Statement Post-implementation Review: IFRS 8 Operating Segments published

Areas for potential improvement and amendment will be considered through the IASB's normal processes

12 December 2013 Amended by Annual Improvements to IFRSs 2010–2012 Cycle (aggregation of operating segments, reconciliations of assets)

Effective for annual periods beginning on or after 1 July 2014

Related Interpretations

None

Amendments under consideration by IASB

None

Deloitte resources

Special edition newsletter

Deloitte has published a Special edition IAS Plus newsletter explaining the requirements of IFRS 8 and what has changed from IAS   14 Segment Reporting.

Summary of IFRS 8

Scope

IFRS 8 applies to the separate or individual financial statements of an entity (and to the consolidated financial statements of a group with a parent):

whose debt or equity instruments are traded in a public market or that files, or is in the process of filing, its (consolidated) financial statements with a securities commission or other

regulatory organisation for the purpose of issuing any class of instruments in a public market [IFRS 8.2]

However, when both separate and consolidated financial statements for the parent are presented in a single financial report, segment information need be presented only on the basis of the consolidated financial statements [IFRS 8.4]

Operating segments

IFRS 8 defines an operating segment as follows. An operating segment is a component of an entity: [IFRS 8.2]

that engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same entity)

whose operating results are reviewed regularly by the entity's chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance and

for which discrete financial information is available

Reportable segments

IFRS 8 requires an entity to report financial and descriptive information about its reportable segments. Reportable segments are operating segments or aggregations of operating segments that meet specified criteria: [IFRS 8.13]

its reported revenue, from both external customers and intersegment sales or transfers, is 10 per cent or more of the combined revenue, internal and external, of all operating segments, or

the absolute measure of its reported profit or loss is 10 per cent or more of the greater, in absolute amount, of (i) the combined reported profit of all operating segments that did not report a loss and (ii) the combined reported loss of all operating segments that reported a loss, or

its assets are 10 per cent or more of the combined assets of all operating segments.

Two or more operating segments may be aggregated into a single operating segment if aggregation is consistent with the core principles of the the standard, the segments have similar economic characteristics and are similar in various prescribed respects. [IFRS 8.12]

If the total external revenue reported by operating segments constitutes less than 75 per cent of the entity's revenue, additional operating segments must be identified as reportable segments (even if they do not meet the quantitative thresholds set out above) until at least 75 per cent of the entity's revenue is included in reportable segments. [IFRS 8.15]

Disclosure requirements

Required disclosures include:

general information about how the entity identified its operating segments and the types of products and services from which each operating segment derives its revenues [IFRS 8.22]

judgements made by management in applying the aggregation criteria to allow two or more operating segments to be aggregated [IFRS 8.22(aa)]#

information about the profit or loss for each reportable segment, including certain specified revenues* and expenses* such as revenue from external customers and from transactions with other segments, interest revenue and expense, depreciation and amortisation, income tax expense or income and material non-cash items [IFRS 8.21(b) and 23]

a measure of total assets* and total liabilities* for each reportable segment, and the amount of investments in associates and joint ventures and the amounts of additions to certain non-current assets ('capital expenditure') [IFRS 8.23-24]

an explanation of the measurements of segment profit or loss, segment assets and segment liabilities, including certain minimum disclosures, e.g. how transactions between segments are measured, the nature of measurement differences between segment information and other information included in the financial statements, and asymmetrical allocations to reportable segments [IFRS 8.27]

reconciliations of the totals of segment revenues, reported segment profit or loss, segment assets*, segment liabilities* and other material items to corresponding items in the entity's financial statements [IFRS 8.21(b) and 28]

some entity-wide disclosures that are required even when an entity has only one reportable segment, including information about each product and service or groups of products and services [IFRS 8.32]

analyses of revenues and certain non-current assets by geographical area – with an expanded requirement to disclose revenues/assets by individual foreign country (if material), irrespective of the identification of operating segments [IFRS 8.33]

information about transactions with major customers [IFRS 8.34]

# This disclosure requirement was added by Annual Improvements to IFRSs 2010–2012 Cycle, effective for annual periods beginning on or after 1 July 2014.

* This disclosure is required only if such amounts are regularly provided to the chief operating decision maker, or in the case of specific items of revenue and expense or asset-related items, if those specified amounts are included in the relevant measure (segment profit or loss or segment assets).

Considerable segment information is required at interim reporting dates by IAS 34.

Remaining differences with US GAAP

The remaining differences with US GAAP (SFAS 131) are listed in IFRS 8.BC60.

IFRS 9 — Financial Instruments Share on email Share on facebook Share on twitter Share on linkedin More Sharing Services

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Overview

IFRS 9 Financial Instruments issued on 24 July 2014 is the IASB's replacement of IAS 39 Financial Instruments: Recognition and Measurement. The Standard includes requirements for recognition and measurement, impairment, derecognition and general hedge accounting. The IASB completed its project to replace IAS 39 in phases, adding to the standard as it completed each phase.

The version of IFRS 9 issued in 2014 supersedes all previous versions and is mandatorily effective for periods beginning on or after 1 January 2018 with early adoption permitted (subject to local endorsement requirements). For a limited period, previous versions of IFRS 9 may be adopted early if not already done so provided the relevant date of initial application is before 1 February 2015.

IFRS 9 does not replace the requirements for portfolio fair value hedge accounting for interest rate risk (often referred to as the ‘macro hedge accounting’ requirements) since this phase of the project was separated from the IFRS 9 project due to the longer term nature of the macro hedging project which is currently at the discussion paper phase of the due process. In April 2014, the IASB published a Discussion Paper Accounting for Dynamic Risk management: a Portfolio Revaluation Approach to Macro Hedging. Consequently, the exception in IAS 39 for a fair value hedge of an interest rate exposure of a portfolio of financial assets or financial liabilities continues to apply.

 

History of IFRS 9Date Development Comments

14 July 2009 Exposure Draft ED/2009/7 Financial Instruments: Classification and Measurement published

Comment deadline 14 September 2009

12 November 2009 IFRS 9 Financial Instruments issued, covering classification and measurement of financial assets

Original effective date 1 January 2013, later removed

11 May 2010 Exposure Draft ED/2010/4 Fair Value Option for Financial Liabilities published

Comment deadline 16 July 2010

28 October 2010 IFRS 9 Financial Instruments reissued, incorporating new requirements on accounting for financial liabilities and carrying over from IAS 39

Original effective date 1 January 2013, later removed

the requirements for derecognition of financial assets and financial liabilities

4 August 2011

ED/2011/3 Amendments to IFRS 9 (2009) and IFRS 9 (2010): Mandatory Effective Date published, proposing the adjust the mandatory effective date of IFRS 9 from 1 January 2013 to 1 January 2015

Comment deadline 21 October 2011

16 December 2011 Mandatory Effective Date and Transition Disclosures (Amendments to IFRS 9 and IFRS 7) published

Amended the effective date of IFRS 9 to annual periods beginning on or after 1 January 2015 (removed in 2013), and modified the relief from restating comparative periods and the associated disclosures in IFRS 7

28 November 2012 Exposure Draft ED/2012/4 Classification and Measurement: Limited Amendments to IFRS 9 (proposed amendments to IFRS 9 (2010)) published

Comment deadline 28 March 2013

19 November 2013

IASB issues IFRS 9 Financial Instruments (Hedge Accounting and amendments to IFRS 9, IFRS 7 and IAS 39) amending IFRS 9 to:

include the new general hedge accounting model;

allow early adoption of the requirement to present fair value changes due to own credit on liabilities designated as at fair value through profit or loss to be presented in other comprehensive income; and

remove the 1 January 2015 effective date

Removed the mandatory effective date of IFRS 9 (2009) and IFRS 9 (2010)

24 July 2014 IASB issues IFRS 9 Financial Instruments

IFRS 9 (2014) was issued as a complete standard including the requirements previously issued and the additional amendments to introduce a new expected loss impairment model and limited changes to the classification and measurement requirements for financial assets.

This amendment completes the IASB’s financial instruments project and the Standard is effective for reporting periods beginning on or after 1 January 2018 with early adoption permitted (subject to local endorsement requirements).

Related Interpretations

None

Related projects

Financial instruments — Macro hedge accounting

Summary of IFRS 9

The phased completion of IFRS 9

On 12 November 2009, the IASB issued IFRS 9 Financial Instruments as the first step in its project to replace IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 introduced new requirements for classifying and measuring financial assets that had to be applied starting 1 January 2013, with early adoption permitted. Click for IASB Press Release (PDF 101k).

On 28 October 2010, the IASB reissued IFRS 9, incorporating new requirements on accounting for financial liabilities, and carrying over from IAS 39 the requirements for derecognition of financial assets and financial liabilities. Click for IASB Press Release (PDF 33k).

On 16 December 2011, the IASB issued Mandatory Effective Date and Transition Disclosures (Amendments to IFRS 9 and IFRS 7), which amended the effective date of IFRS 9 to annual periods beginning on or after 1 January 2015, and modified the relief from restating comparative periods and the associated disclosures in IFRS 7.

On 19 November 2013, the IASB issued IFRS 9 Financial Instruments (Hedge Accounting and amendments to IFRS 9, IFRS 7 and IAS 39) amending IFRS 9 to include the new general hedge accounting model, allow early adoption of the treatment of fair value changes due to own credit on liabilities designated at fair value through profit or loss and remove the 1 January 2015 effective date.

On 24 July 2014, the IASB issued the final version of IFRS 9 incorporating a new expected loss impairment model and introducing limited amendments to the classification and measurement requirements for financial assets.   This version supersedes all previous versions and is mandatorily effective for periods beginning on or after 1 January 2018 with early adoption permitted (subject to local endorsement requirements). For a limited period, previous versions of IFRS 9 may be adopted early if not already done so provided the relevant date of initial application is before 1 February 2015.

Overview of IFRS 9

Initial measurement of financial instruments

All financial instruments are initially measured at fair value plus or minus, in the case of a financial asset or financial liability not at fair value through profit or loss, transaction costs. [IFRS 9, paragraph 5.1.1]

Subsequent measurement of financial assets

IFRS 9 divides all financial assets that are currently in the scope of IAS 39 into two classifications - those measured at amortised cost and those measured at fair value.

Where assets are measured at fair value, gains and losses are either recognised entirely in profit or loss (fair value through profit or loss, FVTPL), or recognised in other comprehensive income (fair value through other comprehensive income, FVTOCI).

For debt instruments the FVTOCI classification is mandatory for certain assets unless the fair value option is elected. Whilst for equity investments, the FVTOCI classification is an election. Furthermore, the requirements for reclassifying gains or losses recognised in other comprehensive income are different for debt instruments and equity investments.

The classification of a financial asset is made at the time it is initially recognised, namely when the entity becomes a party to the contractual provisions of the instrument. [IFRS 9, paragraph 4.1.1] If certain conditions are met, the classification of an asset may subsequently need to be reclassified.

Debt instruments

A debt instrument that meets the following two conditions must be measured at amortised cost (net of any write down for impairment) unless the asset is designated at FVTPL under the fair value option (see below):

[IFRS 9, paragraph 4.1.2]

Business model test: The objective of the entity's business model is to hold the financial asset to collect the contractual cash flows (rather than to sell the instrument prior to its contractual maturity to realise its fair value changes).

Cash flow characteristics test: The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

A debt instrument that meets the following two conditions must be measured at FVTOCI unless the asset is designated at FVTPL under the fair value option (see below):

[IFRS 9, paragraph 4.1.2A]

Business model test: The financial asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets.

Cash flow characteristics test: The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

All other debt instruments must be measured at fair value through profit or loss (FVTPL). [IFRS 9, paragraph 4.1.4]

Fair value option

Even if an instrument meets the two requirements to be measured at amortised cost or FVTOCI, IFRS 9 contains an option to designate, at initial recognition, a financial asset as measured at FVTPL if doing so eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as an 'accounting mismatch') that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases. [IFRS 9, paragraph 4.1.5]

Equity instruments

All equity investments in scope of IFRS 9 are to be measured at fair value in the statement of financial position, with value changes recognised in profit or loss, except for those equity investments for which the entity has elected to present value changes in 'other comprehensive income'. There is no 'cost exception' for unquoted equities.

'Other comprehensive income' option

If an equity investment is not held for trading, an entity can make an irrevocable election at initial recognition to measure it at FVTOCI with only dividend income recognised in profit or loss. [IFRS 9, paragraph 5.7.5]

Measurement guidance

Despite the fair value requirement for all equity investments, IFRS 9 contains guidance on when cost may be the best estimate of fair value and also when it might not be representative of fair value.

Subsequent measurement of financial liabilities

IFRS 9 doesn't change the basic accounting model for financial liabilities under IAS 39. Two measurement categories continue to exist: FVTPL and amortised cost. Financial liabilities held for trading are measured at FVTPL, and all other financial liabilities are measured at amortised cost unless the fair value option is applied. [IFRS 9, paragraph 4.2.1]

Fair value option

IFRS 9 contains an option to designate a financial liability as measured at FVTPL if [IFRS 9, paragraph 4.2.2]:

doing so eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as an 'accounting mismatch') that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases, or

the liability is part or a group of financial liabilities or financial assets and financial liabilities that is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, and information about the group is provided internally on that basis to the entity's key management personnel.

A financial liability which does not meet any of these criteria may still be designated as measured at FVTPL when it contains one or more embedded derivatives that sufficiently modify the cash flows of the liability and are not clearly closely related. [IFRS 9, paragraph 4.3.5]

IFRS 9 requires gains and losses on financial liabilities designated as at FVTPL to be split into the amount of change in fair value attributable to changes in credit risk of the liability, presented in other comprehensive income, and the remaining amount presented in profit or loss. The new guidance allows the recognition of the full amount of change in the fair value in profit or loss only if the presentation of changes in the liability's credit risk in other comprehensive income would create or enlarge an accounting mismatch in profit or loss. That determination is made at initial recognition and is not reassessed. [IFRS 9, paragraphs 5.7.7-5.7.8]

Amounts presented in other comprehensive income shall not be subsequently transferred to profit or loss, the entity may only transfer the cumulative gain or loss within equity.

Derecognition of financial assets

The basic premise for the derecognition model in IFRS 9 (carried over from IAS 39) is to determine whether the asset under consideration for derecognition is: [IFRS 9, paragraph 3.2.2]

an asset in its entirety or specifically identified cash flows from an asset (or a group of similar financial assets) or a fully proportionate (pro rata) share of the cash flows from an asset (or a group of similar financial assets). or a fully proportionate (pro rata) share of specifically identified cash flows from a financial asset (or a group of similar

financial assets)

Once the asset under consideration for derecognition has been determined, an assessment is made as to whether the asset has been transferred, and if so, whether the transfer of that asset is subsequently eligible for derecognition.

An asset is transferred if either the entity has transferred the contractual rights to receive the cash flows, or the entity has retained the contractual rights to receive the cash flows from the asset, but has assumed a contractual obligation to pass those cash flows on under an arrangement that meets the following three conditions: [IFRS 9, paragraphs 3.2.4-3.2.5]

the entity has no obligation to pay amounts to the eventual recipient unless it collects equivalent amounts on the original asset

the entity is prohibited from selling or pledging the original asset (other than as security to the eventual recipient), the entity has an obligation to remit those cash flows without material delay

Once an entity has determined that the asset has been transferred, it then determines whether or not it has transferred substantially all of the risks and rewards of ownership of the asset. If substantially all the risks and rewards have been transferred, the asset is derecognised. If substantially all the risks and rewards have been retained, derecognition of the asset is precluded. [IFRS 9, paragraphs 3.2.6(a)-(b)]

If the entity has neither retained nor transferred substantially all of the risks and rewards of the asset, then the entity must assess whether it has relinquished control of the asset or not. If the entity does not control the asset then derecognition is appropriate; however if the entity has retained control of the asset, then the entity continues to recognise the asset to the extent to which it has a continuing involvement in the asset. [IFRS 9, paragraph 3.2.6(c)]

These various derecognition steps are summarised in the decision tree in paragraph B3.2.1.

Derecognition of financial liabilities

A financial liability should be removed from the balance sheet when, and only when, it is extinguished, that is, when the obligation specified in the contract is either discharged or cancelled or expires. [IFRS 9, paragraph 3.3.1] Where there has been an exchange between an existing borrower and lender of debt instruments with substantially different terms, or there has been a substantial modification of the terms of an existing financial liability, this transaction is accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability. A gain or loss from extinguishment of the original financial liability is recognised in profit or loss. [IFRS 9, paragraphs 3.3.2-3.3.3]

Derivatives

All derivatives in scope of IFRS 9, including those linked to unquoted equity investments, are measured at fair value. Value changes are recognised in profit or loss unless the entity has elected to apply hedge accounting by designating the derivative as a hedging instrument in an eligible hedging relationship.

Embedded derivatives

An embedded derivative is a component of a hybrid contract that also includes a non-derivative host, with the effect that some of the cash flows of the combined instrument vary in a way similar to a stand-alone derivative. A derivative that is attached to a financial instrument but is contractually transferable independently of that instrument, or has a different counterparty, is not an embedded derivative, but a separate financial instrument. [IFRS 9, paragraph 4.3.1]

The embedded derivative concept that existed in IAS 39 has been included in IFRS 9 to apply only to hosts that are not financial assets within the scope of the Standard. Consequently, embedded derivatives that under IAS 39 would have been separately accounted for at FVTPL because they were not closely related to the host financial asset will no longer be separated. Instead, the contractual cash flows of the financial asset are assessed in their entirety, and the asset as a whole is measured at FVTPL if the contractual cash flow characteristics test is not passed (see above).

The embedded derivative guidance that existed in IAS 39 is included in IFRS 9 to help preparers identify when an embedded derivative is closely related to a financial liability host contract or a host contract not within the scope of the Standard (e.g. leasing contracts, insurance contracts, contracts for the purchase or sale of a non-financial items).

Reclassification

For financial assets, reclassification is required between FVTPL, FVTOCI and amortised cost, if and only if the entity's business model objective for its financial assets changes so its previous model assessment would no longer apply. [IFRS 9, paragraph 4.4.1]

If reclassification is appropriate, it must be done prospectively from the reclassification date which is defined as the first day of the first reporting period following the change in business model. An entity does not restate any previously recognised gains, losses, or interest.

IFRS 9 does not allow reclassification:

for equity investments measured at FVTOCI, or where the fair value option has been exercised in any circumstance for a financial assets or financial liability.

Hedge accounting

The hedge accounting requirements in IFRS 9 are optional. If certain eligibility and qualification criteria are met, hedge accounting allows an entity to reflect risk management activities in the financial statements by matching gains or losses on financial hedging instruments with losses or gains on the risk exposures they hedge.

The hedge accounting model in IFRS 9 is not designed to accommodate hedging of open, dynamic portfolios. As a result, for a fair value hedge of interest rate risk of a portfolio of financial assets or liabilities an entity can apply the hedge accounting requirements in IAS 39 instead of those in IFRS 9. [IFRS 9 paragraph 6.1.3]

In addition when an entity first applies IFRS 9, it may choose as its accounting policy choice to continue to apply the hedge accounting requirements of IAS 39 instead of the requirements of Chapter 6 of IFRS 9 [IFRS 9 paragraph 7.2.21]

Qualifying criteria for hedge accounting

A hedging relationship qualifies for hedge accounting only if all of the following criteria are met:

1. the hedging relationship consists only of eligible hedging instruments and eligible hedged items.2. at the inception of the hedging relationship there is formal designation and documentation of the hedging

relationship and the entity’s risk management objective and strategy for undertaking the hedge.3. the hedging relationship meets all of the hedge effectiveness requirements (see below) [IFRS 9 paragraph 6.4.1]

Hedging instruments

Only contracts with a party external to the reporting entity may be designated as hedging instruments. [IFRS 9 paragraph 6.2.3]

A hedging instrument may be a derivative (except for some written options) or non-derivative financial instrument measured at FVTPL unless it is a financial liability designated as at FVTPL for which changes due to credit risk are presented in OCI. For a hedge of foreign currency risk, the foreign currency risk component of a non-derivative financial instrument, except equity investments designated as FVTOCI, may be designated as the hedging instrument. [IFRS 9 paragraphs 6.2.1-6.2.2]

IFRS 9 allows a proportion (e.g. 60%) but not a time portion (eg the first 6 years of cash flows of a 10 year instrument) of a hedging instrument to be designated as the hedging instrument. IFRS 9 also allows only the intrinsic value of an option, or the spot element of a forward to be designated as the hedging instrument.  An entity may also exclude the foreign currency basis spread from a designated hedging instrument. [IFRS 9 paragraph 6.2.4]

IFRS 9 allows combinations of derivatives and non-derivatives to be designated as the hedging instrument. [IFRS 9 paragraph 6.2.5]

Combinations of purchased and written options do not qualify if they amount to a net written option at the date of designation. [IFRS 9 paragraph 6.2.6]

Hedged items

A hedged item can be a recognised asset or liability, an unrecognised firm commitment, a highly probable forecast transaction or a net investment in a foreign operation and must be reliably measurable. [IFRS 9 paragraphs 6.3.1-6.3.3]

An aggregated exposure that is a combination of an eligible hedged item as described above and a derivative may be designated as a hedged item. [IFRS 9 paragraph 6.3.4]

The hedged item must generally be with a party external to the reporting entity, however, as an exception the foreign currency risk of an intragroup monetary item may qualify as a hedged item in the consolidated financial statements if it results in an exposure to foreign exchange rate gains or losses that are not fully eliminated on consolidation. In addition, the foreign currency risk of a highly probable forecast intragroup transaction may qualify as a hedged item in consolidated financial statements provided that the transaction is denominated in a currency other than the functional currency of the entity entering into that transaction and the foreign currency risk will affect consolidated profit or loss. [IFRS 9 paragraphs 6.3.5 -6.3.6]

An entity may designate an item in its entirety or a component of an item as the hedged item. The component may be a risk component that is separately identifiable and reliably measurable; one or more selected contractual cash flows; or components of a nominal amount. [IFRS 9 paragraph 6.3.7]

A group of items (including net positions is an eligible hedged item only if:

1. it consists of items individually, eligible hedged items;2. the items in the group are managed together on a group basis for risk management purposes; and3. in the case of a cash flow hedge of a group of items whose variabilities in cash flows are not expected to be

approximately proportional to the overall variability in cash flows of the group:1. it is a hedge of foreign currency risk; and2. the designation of that net position specifies the reporting period in which the forecast transactions are

expected to affect profit or loss, as well as their nature and volume [IFRS 9 paragraph 6.6.1]

For a hedge of a net position whose hedged risk affects different line items in the statement of profit or loss and other comprehensive income, any hedging gains or losses in that statement are presented in a separate line from those affected by the hedged items. [IFRS 9 paragraph 6.6.4]

Accounting for qualifying hedging relationships

There are three types of hedging relationships:

Fair value hedge: a hedge of the exposure to changes in fair value of a recognised asset or liability or an unrecognised firm commitment, or a component of any such item, that is attributable to a particular risk and could affect profit or loss (or OCI in the case of an equity instrument designated as at FVTOCI). [IFRS 9 paragraphs 6.5.2(a) and 6.5.3]

For a fair value hedge, the gain or loss on the hedging instrument is recognised in profit or loss (or OCI, if hedging an equity instrument at FVTOCI and the hedging gain or loss on the hedged item adjusts the carrying amount of the hedged item and is recognised in profit or loss. However, if the hedged item is an equity instrument at FVTOCI,

those amounts remain in OCI. When a hedged item is an unrecognised firm commitment the cumulative hedging gain or loss is recognised as an asset or a liability with a corresponding gain or loss recognised in profit or loss. [IFRS 9 paragraph 6.5.8]

If the hedged item is a debt instrument measured at amortised cost or FVTOCI any hedge adjustment is amortised to profit or loss based on a recalculated effective interest rate. Amortisation may begin as soon as an adjustment exists and shall begin no later than when the hedged item ceases to be adjusted for hedging gains and losses. [IFRS 9 paragraph 6.5.10]

Cash flow hedge: a hedge of the exposure to variability in cash flows that is attributable to a particular risk associated with all, or a component of, a recognised asset or liability (such as all or some future interest payments on variable-rate debt) or a highly probable forecast transaction, and could affect profit or loss. [IFRS 9 paragraph 6.5.2(b)]

For a cash flow hedge the cash flow hedge reserve in equity is adjusted to the lower of the following (in absolute amounts):

the cumulative gain or loss on the hedging instrument from inception of the hedge; and the cumulative change in fair value of the hedged item from inception of the hedge.

The portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognised in OCI and any remaining gain or loss is hedge ineffectiveness that is recognised in profit or loss.

If a hedged forecast transaction subsequently results in the recognition of a non-financial item or becomes a firm commitment for which fair value hedge accounting is applied, the amount that has been accumulated in the cash flow hedge reserve is removed and included directly in the initial cost or other carrying amount of the asset or the liability. In other cases the amount that has been accumulated in the cash flow hedge reserve is reclassified to profit or loss in the same period(s) as the hedged cash flows affect profit or loss. [IFRS 9 paragraph 6.5.11]

When an entity discontinues hedge accounting for a cash flow hedge, if the hedged future cash flows are still expected to occur, the amount that has been accumulated in the cash flow hedge reserve remains there until the future cash flows occur; if the hedged future cash flows are no longer expected to occur, that amount is immediately reclassified to profit or loss [IFRS 9 paragraph 6.5.12]

A hedge of the foreign currency risk of a firm commitment may be accounted for as a fair value hedge or a cash flow hedge. [IFRS 9 paragraph 6.5.4]

Hedge of a net investment in a foreign operation (as defined in IAS 21), including a hedge of a monetary item that is accounted for as part of the net investment, is accounted for similarly to cash flow hedges:

the portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognised in OCI; and

the ineffective portion is recognised in profit or loss. [IFRS 9 paragraph 6.5.13]

The cumulative gain or loss on the hedging instrument relating to the effective portion of the hedge is reclassified to profit or loss on the disposal or partial disposal of the foreign operation. [IFRS 9 paragraph 6.5.14]

Hedge effectiveness requirements

In order to qualify for hedge accounting, the hedge relationship must meet the following effectiveness criteria at the beginning of each hedged period:

there is an economic relationship between the hedged item and the hedging instrument;

the effect of credit risk does not dominate the value changes that result from that economic relationship; and the hedge ratio of the hedging relationship is the same as that actually used in the economic hedge [IFRS 9 paragraph

6.4.1(c)]

Rebalancing and discontinuation

If a hedging relationship ceases to meet the hedge effectiveness requirement relating to the hedge ratio but the risk management objective for that designated hedging relationship remains the same, an entity adjusts the hedge ratio of the hedging relationship (i.e. rebalances the hedge) so that it meets the qualifying criteria again. [IFRS 9 paragraph 6.5.5]

An entity discontinues hedge accounting prospectively only when the hedging relationship (or a part of a hedging relationship) ceases to meet the qualifying criteria (after any rebalancing). This includes instances when the hedging instrument expires or is sold, terminated or exercised. Discontinuing hedge accounting can either affect a hedging relationship in its entirety or only a part of it (in which case hedge accounting continues for the remainder of the hedging relationship). [IFRS 9 paragraph 6.5.6]

Time value of options

When an entity separates the intrinsic value and time value of an option contract and designates as the hedging instrument only the change in intrinsic value of the option, it recognises some or all of the change in the time value in OCI which is later removed or reclassified from equity as a single amount or on an amortised basis (depending on the nature of the hedged item) and ultimately recognised in profit or loss. [IFRS 9 paragraph 6.5.15] This reduces profit or loss volatility compared to recognising the change in value of time value directly in profit or loss.

Forward points and foreign currency basis spreads

When an entity separates the forward points and the spot element of a forward contract and designates as the hedging instrument only the change in the value of the spot element, or when an entity excludes the foreign currency basis spread from a hedge the entity may recognise the change in value of the excluded portion in OCI to be later removed or reclassified from equity as a single amount or on an amortised basis  (depending on the nature of the hedged item) and ultimately recognised in profit or loss. [IFRS 9 paragraph 6.5.16] This reduces profit or loss volatility compared to recognising the change in value of forward points or currency basis spreads directly in profit or loss.

Credit exposures designated at FVTPL

If an entity uses a credit derivative measured at FVTPL to manage the credit risk of a financial instrument (credit exposure) it may designate all or a proportion of that financial instrument as measured at FVTPL if:

the name of the credit exposure matches the reference entity of the credit derivative (‘name matching’); and the seniority of the financial instrument matches that of the instruments that can be delivered in accordance with the

credit derivative.

An entity may make this designation irrespective of whether the financial instrument that is managed for credit risk is within the scope of IFRS 9 (for example, it can apply to loan commitments that are outside the scope of IFRS 9). The entity may designate that financial instrument at, or subsequent to, initial recognition, or while it is unrecognised and shall document the designation concurrently. [IFRS 9 paragraph 6.7.1]

If designated after initial recognition, any difference in the previous carrying amount and fair value is recognised immediately in profit or loss [IFRS 9 paragraph 6.7.2]

An entity discontinues measuring the financial instrument that gave rise to the credit risk at FVTPL if the qualifying criteria are no longer met and the instrument is not otherwise required to be measured at FVTPL. The fair value at discontinuation becomes its new carrying amount. [IFRS 9 paragraphs 6.7.3 and 6.7.4]

Impairment

The impairment model in IFRS 9 is based on the premise of providing for expected losses.

Scope

IFRS 9 requires that the same impairment model apply to all of the following:

[IFRS 9 paragraph 5.5.1]

Financial assets measured at amortised cost; Financial assets mandatorily measured at FVTOCI; Loan commitments when there is a present obligation to extend credit (except where these are measured at FVTPL);

o Financial guarantee contracts to which IFRS 9 is applied (except those measured at FVTPL);o Lease receivables within the scope of IAS 17 Leases; ando Contract assets within the scope of IFRS 15 Revenue from Contracts with Customers (i.e. rights to

consideration following transfer of goods or services).

General Approach

With the exception of purchased or originated credit impaired financial assets (see below), expected credit losses are required to be measured through a loss allowance at an amount equal to:

[IFRS 9 paragraphs 5.5.3 and 5.5.5]

the 12-month expected credit losses (expected credit losses that result from those default events on the financial instrument that are possible within 12 months after the reporting date); or

full lifetime expected credit losses (expected credit losses that result from all possible default events over the life of the financial instrument).

A loss allowance for full lifetime expected credit losses is required for a financial instrument if the credit risk of that financial instrument has increased significantly since initial recognition, as well as to contract assets or trade receivables that do not constitute a financing transaction in accordance with IFRS 15. [IFRS 9 paragraphs 5.5.3 and 5.5.15]

Additionally, entities can elect an accounting policy to recognise full lifetime expected losses for all contract assets and/or all trade receivables that do constitute a financing transaction in accordance with IFRS 15. The same election is also separately permitted for lease receivables. [IFRS 9 paragraph 5.5.16]

For all other financial instruments, expected credit losses are measured at an amount equal to the 12-month expected credit losses. [IFRS 9 paragraph 5.5.5]

Significant increase in credit risk

With the exception of purchased or originated credit-impaired financial assets (see below), the loss allowance for financial instruments is measured at an amount equal to lifetime expected losses if the credit risk of a financial instrument has increased significantly since initial recognition, unless the credit risk of the financial instrument is

low at the reporting date in which case it can be assumed that credit risk on the financial instrument has not increased significantly since initial recognition. [IFRS 9 paragraphs 5.5.3 and 5.5.10]

The Standard considers credit risk low if there is a low risk of default, the borrower has a strong capacity to meet its contractual cash flow obligations in the near term and adverse changes in economic and business conditions in the longer term may, but will not necessarily, reduce the ability of the borrower to fulfil its contractual cash flow obligations. The Standard suggests that ‘investment grade’ rating might be an indicator for a low credit risk. [IFRS 9 paragraphs B5.5.22 – B5.5.24]

The assessment of whether there has been a significant increase in credit risk is based on an increase in the probability of a default occurring since initial recognition. Under the Standard, an entity may use various approaches to assess whether credit risk has increased significantly (provided that the approach is consistent with the requirements). An approach can be consistent with the requirements even if it does not include an explicit probability of default occurring as an input. The application guidance provides a list of factors that may assist an entity in making the assessment. Also, whilst in principle the assessment of whether a loss allowance should be based on lifetime expected credit losses is to be made on an individual basis, some factors or indicators might not be available at an instrument level. In this case, the entity should perform the assessment on appropriate groups or portions of a portfolio of financial instruments.

The requirements also contain a rebuttable presumption that the credit risk has increased significantly when contractual payments are more than 30 days past due. IFRS 9 also requires that (other than for purchased or originated credit impaired financial instruments) if a significant increase in credit risk that had taken place since initial recognition and has reversed by a subsequent reporting period (i.e., cumulatively credit risk is not significantly higher than at initial recognition) then the expected credit losses on the financial instrument revert to being measured based on an amount equal to the 12-month expected credit losses. [IFRS 9 paragraph 5.5.11]

Purchased or originated credit-impaired financial assets

Purchased or originated credit-impaired financial assets are treated differently because the asset is credit-impaired at initial recognition. For these assets, an entity would recognise changes in lifetime expected losses since initial recognition as a loss allowance with any changes recognised in profit or loss. Under the requirements, any favourable changes for such assets are an impairment gain even if the resulting expected cash flows of a financial asset exceed the estimated cash flows on initial recognition. [IFRS 9 paragraphs 5.5.13 – 5.5.14]

Credit-impaired financial asset

Under IFRS 9 a financial asset is credit-impaired when one or more events that have occurred and have a significant impact on the expected future cash flows of the financial asset. It includes observable data that has come to the attention of the holder of a financial asset about the following events:

[IFRS 9 Appendix A]

significant financial difficulty of the issuer or borrower; a breach of contract, such as a default or past-due event; the lenders for economic or contractual reasons relating to the borrower’s financial difficulty granted the borrower a

concession that would not otherwise be considered; it becoming probable that the borrower will enter bankruptcy or other financial reorganisation; the disappearance of an active market for the financial asset because of financial difficulties; or the purchase or origination of a financial asset at a deep discount that reflects incurred credit losses.

Basis for estimating expected credit losses

Any measurement of expected credit losses under IFRS 9 shall reflect an unbiased and probability-weighted amount that is determined by evaluating the range of possible outcomes as well as incorporating the time value of money.

Also, the entity should consider reasonable and supportable information about past events, current conditions and reasonable and supportable forecasts of future economic conditions when measuring expected credit losses. [IFRS 9 paragraph 5.5.17]

The Standard defines expected credit losses as the weighted average of credit losses with the respective risks of a default occurring as the weightings. [IFRS 9 Appendix A] Whilst an entity does not need to consider every possible scenario, it must consider the risk or probability that a credit loss occurs by considering the possibility that a credit loss occurs and the possibility that no credit loss occurs, even if the probability of a credit loss occurring is low. [IFRS 9 paragraph 5.5.18]

In particular, for lifetime expected losses, an entity is required to estimate the risk of a default occurring on the financial instrument during its expected life. 12-month expected credit losses represent the lifetime cash shortfalls that will result if a default occurs in the 12 months after the reporting date, weighted by the probability of that default occurring.

An entity is required to incorporate reasonable and supportable information (i.e., that which is reasonably available at the reporting date). Information is reasonably available if obtaining it does not involve undue cost or effort (with information available for financial reporting purposes qualifying as such).

For applying the model to a loan commitment an entity will consider the risk of a default occurring under the loan to be advanced, whilst application of the model for financial guarantee contracts an entity considers the risk of a default occurring of the specified debtor.  [IFRS 9 paragraphs B5.5.31 and B5.5.32]

An entity may use practical expedients when estimating expected credit losses if they are consistent with the principles in the Standard (for example, expected credit losses on trade receivables may be calculated using a provision matrix where a fixed provision rate applies depending on the number of days that a trade receivable is outstanding). [IFRS 9 paragraph B5.5.35]

To reflect time value, expected losses should be discounted to the reporting date using the effective interest rate of the asset (or an approximation thereof) that was determined at initial recognition. A “credit-adjusted effective interest” rate should be used for expected credit losses of purchased or originated credit-impaired financial assets.  In contrast to the “effective interest rate” (calculated using expected cash flows that ignore expected credit losses), the credit-adjusted effective interest rate reflects expected credit losses of the financial asset. [IFRS 9 paragraphs B5.5.44-45]

Expected credit losses of undrawn loan commitments should be discounted by using the effective interest rate (or an approximation thereof) that will be applied when recognising the financial asset resulting from the commitment. If the effective interest rate of a loan commitment cannot be determined, the discount rate should reflect the current market assessment of time value of money and the risks that are specific to the cash flows but only if, and to the extent that, such risks are not taken into account by adjusting the discount rate. This approach shall also be used to discount expected credit losses of financial guarantee contracts. [IFRS 9 paragraphs B5.5.47]

Presentation

Whilst interest revenue is always required to be presented as a separate line item, it is calculated differently according to the status of the asset with regard to credit impairment. In the case of a financial asset that is not a purchased or originated credit-impaired financial asset and for which there is no objective evidence of impairment at the reporting date, interest revenue is calculated by applying the effective interest rate method to the gross carrying amount. [IFRS 9 paragraph 5.4.1]

In the case of a financial asset that is not a purchased or originated credit-impaired financial asset but subsequently has become credit-impaired, interest revenue is calculated by applying the effective interest rate to the amortised cost balance, which comprises the gross carrying amount adjusted for any loss allowance. [IFRS 9 paragraph 5.4.1]

In the case of purchased or originated credit-impaired financial assets, interest revenue is always recognised by applying the credit-adjusted effective interest rate to the amortised cost carrying amount. [IFRS 9 paragraph 5.4.1] The credit-adjusted effective interest rate is the rate that discounts the cash flows expected on initial recognition (explicitly taking account of expected credit losses as well as contractual terms of the instrument) back to the amortised cost at initial recognition. [IFRS 9 Appendix A]

Consequential amendments of IFRS 9 to IAS 1 require that impairment losses, including reversals of impairment losses and impairment gains (in the case of purchased or originated credit-impaired financial assets), are presented in a separate line item in the statement of profit or loss and other comprehensive income.

Disclosures

IFRS 9 amends some of the requirements of IFRS 7 Financial Instruments: Disclosures including adding disclosures about investments in equity instruments designated as at FVTOCI, disclosures on risk management activities and hedge accounting and disclosures on credit risk management and impairment.

IFRS 10 — Consolidated Financial Statements Share on email Share on facebook Share on twitter Share on linkedin More Sharing Services

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Overview

IFRS 10 Consolidated Financial Statements outlines the requirements for the preparation and presentation of consolidated financial statements, requiring entities to consolidate entities it controls. Control requires exposure or rights to variable returns and the ability to affect those returns through power over an investee.

IFRS 10 was issued in May 2011 and applies to annual periods beginning on or after 1 January 2013.

History of IFRS 10Date Development Comments

April 2002 Project on consolidation added to the IASB's agenda (project history)

18 December 2008 ED 10 Consolidated Financial Statements published Comment deadline 20 March 2009

29 September 2010 Staff draft of IFRS X Consolidated Financial Statements published

12 May 2011 IFRS 10 Consolidated Financial Statements publishedEffective for annual periods beginning on or after 1 January 2013

28 June 2012 Amended by Consolidated Financial Statements, Joint Arrangements and Disclosure of Interests in Other Entities: Transition Guidance (project history)

Effective for annual periods beginning on or after 1 January 2013

31 October 2012 Amended by Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27) (project history)

Effective for annual periods beginning on or after 1 January

2014

11 September 2014Amended by Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (Amendments to IFRS 10 and IAS 28)

Effective for annual periods beginning on or after 1 January 2016

Related Interpretations

IFRS 10 superseded SIC-12 Consolidation – Special Purpose Entities

Amendments under consideration by the IASB

Common control transactions IFRS 10/IAS 28 — Investment entity amendments IFRS 13 — Unit of account

In addition, the IASB has signalled an intention to conduct a post-implementation review, commencing in 2016.

Publications and resources

IFRS in Focus Newsletter IASB issues new standard on consolidation summarising the requirements of IFRS 10 (PDF 82k, May 2011)

Deloitte IFRS Podcast (May 2011, 12 minutes, 8mb) Effect analysis for IFRS 10 and IFRS 12 (link to IASB website)

Summary of IFRS 10

Objective

The objective of IFRS 10 is to establish principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities. [IFRS 10:1]

The Standard: [IFRS 10:1]

requires a parent entity (an entity that controls one or more other entities) to present consolidated financial statements

defines the principle of control, and establishes control as the basis for consolidation set out how to apply the principle of control to identify whether an investor controls an investee and therefore must

consolidate the investee sets out the accounting requirements for the preparation of consolidated financial statements defines an investment entity and sets out an exception to consolidating particular subsidiaries of an investment

entity*.

* Added by Investment Entities amendments, effective 1 January 2014.

 

Key definitions

[IFRS 10:Appendix A]

Consolidated financial statements

The financial statements of a group in which the assets, liabilities, equity, income, expenses and cash flows of the parent and its subsidiaries are presented as those of a single economic entity

Control of an investeeAn investor controls an investee when the investor is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee

Investment entity*

An entity that:

1. obtains funds from one or more investors for the purpose of providing those investor(s) with investment management services

2. commits to its investor(s) that its business purpose is to invest funds solely for returns from capital appreciation, investment income, or both, and

3. measures and evaluates the performance of substantially all of its investments on a fair value basis.

Parent An entity that controls one or more entities

Power Existing rights that give the current ability to direct the relevant activities

Protective rightsRights designed to protect the interest of the party holding those rights without giving that party power over the entity to which those rights relate

Relevant activities Activities of the investee that significantly affect the investee's returns

* Added by Investment Entities amendments, effective 1 January 2014.

 

Control

An investor determines whether it is a parent by assessing whether it controls one or more investees. An investor considers all relevant facts and circumstances when assessing whether it controls an investee. An investor controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. [IFRS 10:5-6; IFRS 10:8]

An investor controls an investee if and only if the investor has all of the following elements: [IFRS 10:7]

power over the investee, i.e. the investor has existing rights that give it the ability to direct the relevant activities (the activities that significantly affect the investee's returns)

exposure, or rights, to variable returns from its involvement with the investee the ability to use its power over the investee to affect the amount of the investor's returns.

Power arises from rights. Such rights can be straightforward (e.g. through voting rights) or be complex (e.g. embedded in contractual arrangements). An investor that holds only protective rights cannot have power over an investee and so cannot control an investee [IFRS 10:11, IFRS 10:14].

An investor must be exposed, or have rights, to variable returns from its involvement with an investee to control the investee. Such returns must have the potential to vary as a result of the investee's performance and can be positive, negative, or both. [IFRS 10:15]

A parent must not only have power over an investee and exposure or rights to variable returns from its involvement with the investee, a parent must also have the ability to use its power over the investee to affect its returns from its involvement with the investee. [IFRS 10:17].

When assessing whether an investor controls an investee an investor with decision-making rights determines whether it acts as principal or as an agent of other parties. A number of factors are considered in making this assessment. For instance, the remuneration of the decision-maker is considered in determining whether it is an agent. [IFRS 10:B58, IFRS 10:B60]

Accounting requirements

Preparation of consolidated financial statements

A parent prepares consolidated financial statements using uniform accounting policies for like transactions and other events in similar circumstances. [IFRS 10:19]

However, a parent need not present consolidated financial statements if it meets all of the following conditions: [IFRS 10:4(a)]

it is a wholly-owned subsidiary or is a partially-owned subsidiary of another entity and its other owners, including those not otherwise entitled to vote, have been informed about, and do not object to, the parent not presenting consolidated financial statements

its debt or equity instruments are not traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets)

it did not file, nor is it in the process of filing, its financial statements with a securities commission or other regulatory organisation for the purpose of issuing any class of instruments in a public market, and

its ultimate or any intermediate parent of the parent produces consolidated financial statements available for public use that comply with IFRSs.

Investment entities are prohibited from consolidating particular subsidiaries (see further information below).

Furthermore, post-employment benefit plans or other long-term employee benefit plans to which IAS   19 Employee Benefits applies are not required to apply the requirements of IFRS 10. [IFRS 10:4(b)]

Consolidation procedures

Consolidated financial statements: [IFRS 10:B86]

combine like items of assets, liabilities, equity, income, expenses and cash flows of the parent with those of its subsidiaries

offset (eliminate) the carrying amount of the parent's investment in each subsidiary and the parent's portion of equity of each subsidiary (IFRS 3 Business Combinations explains how to account for any related goodwill)

eliminate in full intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between entities of the group (profits or losses resulting from intragroup transactions that are recognised in assets, such as inventory and fixed assets, are eliminated in full).

A reporting entity includes the income and expenses of a subsidiary in the consolidated financial statements from the date it gains control until the date when the reporting entity ceases to control the subsidiary. Income and expenses of the subsidiary are based on the amounts of the assets and liabilities recognised in the consolidated financial statements at the acquisition date. [IFRS 10:B88]

The parent and subsidiaries are required to have the same reporting dates, or consolidation based on additional financial information prepared by subsidiary, unless impracticable. Where impracticable, the most recent financial statements of the subsidiary are used, adjusted for the effects of significant transactions or events between the

reporting dates of the subsidiary and consolidated financial statements. The difference between the date of the subsidiary's financial statements and that of the consolidated financial statements shall be no more than three months [IFRS 10:B92, IFRS 10:B93]

Non-controlling interests (NCIs)

A parent presents non-controlling interests in its consolidated statement of financial position within equity, separately from the equity of the owners of the parent. [IFRS 10:22]

A reporting entity attributes the profit or loss and each component of other comprehensive income to the owners of the parent and to the non-controlling interests. The proportion allocated to the parent and non-controlling interests are determined on the basis of present ownership interests. [IFRS 10:B94, IFRS 10:B89]

The reporting entity also attributes total comprehensive income to the owners of the parent and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance. [IFRS 10:B94]

Changes in ownership interests

Changes in a parent's ownership interest in a subsidiary that do not result in the parent losing control of the subsidiary are equity transactions (i.e. transactions with owners in their capacity as owners). When the proportion of the equity held by non-controlling interests changes, the carrying amounts of the controlling and non-controlling interests area adjusted to reflect the changes in their relative interests in the subsidiary. Any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognised directly in equity and attributed to the owners of the parent.[IFRS 10:23, IFRS 10:B96]

If a parent loses control of a subsidiary, the parent [IFRS 10:25]:

derecognises the assets and liabilities of the former subsidiary from the consolidated statement of financial position recognises any investment retained in the former subsidiary when control is lost and subsequently accounts for it and

for any amounts owed by or to the former subsidiary in accordance with relevant IFRSs. That retained interest is remeasured and the remeasured value is regarded as the fair value on initial recognition of a financial asset in accordance with IFRS 9 Financial Instruments or, when appropriate, the cost on initial recognition of an investment in an associate or joint venture

recognises the gain or loss associated with the loss of control attributable to the former controlling interest.

If a parent loses control of a subsidiary that does not contain a business in a transaction with an associate or a joint venture gains or losses resulting from those transactions are recognised in the parent's profit or loss only to the extent of the unrelated investors' interests in that associate or joint venture.*

* Added by Sale or Contribution of Assets between an Investor and its Associate or Joint Venture amendments, effective 1 January 2016.

Investment entities consolidation exemption

[Note: The investment entity consolidation exemption was introduced by Investment Entities, issued on 31 October 2012 and effective for annual periods beginning on or after 1 January 2014.]

IFRS 10 contains special accounting requirements for investment entities. Where an entity meets the definition of an 'investment entity' (see above), it does not consolidate its subsidiaries, or apply IFRS   3 Business Combinations when it obtains control of another entity.  [IFRS 10:31]

An entity is required to consider all facts and circumstances when assessing whether it is an investment entity, including its purpose and design.  IFRS 10 provides that an investment entity should have the following typical characteristics [IFRS 10:28]:

it has more than one investment it has more than one investor it has investors that are not related parties of the entity it has ownership interests in the form of equity or similar interests.

The absence of any of these typical characteristics does not necessarily disqualify an entity from being classified as an investment entity.

An investment entity is required to measure an investment in a subsidiary at fair value through profit or loss in accordance with IFRS   9 Financial Instruments or IAS   39 Financial Instruments: Recognition and Measurement. However, an investment entity is still required to consolidate a subsidiary where that subsidiary provides services that relate to the investment entity’s investment activities. [IFRS 10:31-32]

Because an investment entity is not required to consolidate its subsidiaries, intragroup related party transactions and outstanding balances are not eliminated [IAS 24.4, IAS 39.80].

Special requirements apply where an entity becomes, or ceases to be, an investment entity. [IFRS 10:B100-B101]

The exemption from consolidation only applies to the investment entity itself.  Accordingly, a parent of an investment entity is required to consolidate all entities that it controls, including those controlled through an investment entity subsidiary, unless the parent itself is an investment entity. [IFRS 10:33]

Disclosure

There are no disclosures specified in IFRS 10. Instead, IFRS 12 Disclosure of Interests in Other Entities outlines the disclosures required.

Applicability and early adoption

Note: This section has been updated to reflect the amendments to IFRS 10 made in June 2012 and October 2012.

IFRS 10 is applicable to annual reporting periods beginning on or after 1 January 2013 [IFRS 10:C1].

Retrospective application is generally required in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors [IFRS 10:C2]. However, an entity is not required to make adjustments to the accounting for its involvement with entities that were previously consolidated and continue to be consolidated, or entities that were previously unconsolidated and continue not to be consolidated at the date of initial application of the IFRS [IFRS 10:C3].

Furthermore, an entity is not required to present the quantitative information required by paragraph 28(f) of IAS 8 for the annual period immediately preceding the date of initial application of the standard (the beginning of the annual reporting period for which IFRS 10 is first applied) [IFRS 10:C2A-C2B].  However, an entity may choose to present adjusted comparative information for earlier reporting periods, any must clearly identify any unadjusted comparative information and explain the basis on which the comparative information has been prepared [IFRS 10.C6A-C6B].

IFRS 10 prescribes modified accounting on its first application in the following circumstances:

an entity consolidates an entity not previously consolidated [IFRS 10:C4-C4C] an entity no longer consolidates an entity that was previously consolidated [IFRS 10:C5-C5A] in relation to certain amendments to IAS 27 made in 2008 that have been carried forward into IFRS 10 [IFRS 10:C6].

An entity may apply IFRS 10 to an earlier accounting period, but if doing so it must disclose the fact that is has early adopted the standard and also apply:

IFRS 11 Joint Arrangements IFRS 12 Disclosure of Interests in Other Entities IAS 27 Separate Financial Statements (as amended in 2011) IAS 28 Investments in Associates and Joint Ventures (as amended in 2011).

The amendments made by Investment Entities are applicable to annual reporting periods beginning on or after 1 January 2014 [IFRS 10:C1B].  At the date of initial application of the amendments, an entity assesses whether it is an investment entity on the basis of the facts and circumstances that exist at that date and additional transitional provisions apply [IFRS 10:C3B–C3F].

IFRS 11 — Joint Arrangements Share on email Share on facebook Share on twitter Share on linkedin More Sharing Services

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Overview

IFRS 11 Joint Arrangements outlines the accounting by entities that jointly control an arrangement. Joint control involves the contractually agreed sharing of control and arrangements subject to joint control are classified as either a joint venture (representing a share of net assets and equity accounted) or a joint operation (representing rights to assets and obligations for liabilities, accounted for accordingly).

IFRS 11 was issued in May 2011 and applies to annual reporting periods beginning on or after 1 January 2013.

History of IFRS 11Date Development Comments

November 2004 Project on joint arrangements added to the IASB's agenda History of the project

13 September 2007 Exposure Draft ED 9 Joint Arrangements published Comment deadline 11 January 2008

12 May 2011 IFRS 11 Joint Arrangements issuedEffective for annual periods beginning on or after 1 January 2013

28 June 2012 Amended by Consolidated Financial Statements, Joint Arrangements and Disclosure of Interests in Other Entities: Transition Guidance

Effective for annual periods beginning on or after 1 January 2013

6 May 2014Amended by Accounting for Acquisitions of Interests in Joint Operations (Amendments to IFRS 11)

Effective for annual periods beginning on or after 1 January 2016

Related Interpretations

IFRS 11 superseded SIC-13 Jointly Controlled Entities - Non-Monetary Contributions by Venturers

Amendments under consideration by the IASB

The IASB has signalled an intention to conduct a post-implementation review of IFRS 11, commencing in 2016.

Publications and resources

IFRS in Focus Newsletter IASB issues new standard on joint arrangements summarising the requirements of IFRS 11 (PDF 69k, May 2011)

Deloitte IFRS Podcast (May 2011, 10 minutes, 7mb) Effect analysis for IFRS 11 (link to IASB website)

Summary of IFRS 11

Core principle

The core principle of IFRS 11 is that a party to a joint arrangement determines the type of joint arrangement in which it is involved by assessing its rights and obligations and accounts for those rights and obligations in accordance with that type of joint arrangement. [IFRS 11:1-2]

Key definitions

[IFRS 11:Appendix A]

Joint arrangement An arrangement of which two or more parties have joint control

Joint controlThe contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control

Joint operationA joint arrangement whereby the parties that have joint control of the arrangement have rights to the assets, and obligations for the liabilities, relating to the arrangement

Joint ventureA joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement

Joint venturer A party to a joint venture that has joint control of that joint venture

Party to a joint arrangement

An entity that participates in a joint arrangement, regardless of whether that entity has joint control of the arrangement

Separate vehicleA separately identifiable financial structure, including separate legal entities or entities recognised by statute, regardless of whether those entities have a legal personality

Joint arrangements

A joint arrangement is an arrangement of which two or more parties have joint control. [IFRS 11:4]

A joint arrangement has the following characteristics: [IFRS 11:5]

the parties are bound by a contractual arrangement, and the contractual arrangement gives two or more of those parties joint control of the arrangement.

A joint arrangement is either a joint operation or a joint venture. [IFRS 11:6]

Joint control

Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control. [IFRS 11:7]

Before assessing whether an entity has joint control over an arrangement, an entity first assesses whether the parties, or a group of the parties, control the arrangement (in accordance with the definition of control in IFRS 10 Consolidated Financial Statements). [IFRS 11:B5]

After concluding that all the parties, or a group of the parties, control the arrangement collectively, an entity shall assess whether it has joint control of the arrangement. Joint control exists only when decisions about the relevant activities require the unanimous consent of the parties that collectively control the arrangement. [IFRS 11:B6]

The requirement for unanimous consent means that any party with joint control of the arrangement can prevent any of the other parties, or a group of the parties, from making unilateral decisions (about the relevant activities) without its consent. [IFRS 11:B9]

Types of joint arrangements

Joint arrangements are either joint operations or joint ventures:

A joint operation is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the assets, and obligations for the liabilities, relating to the arrangement. Those parties are called joint operators. [IFRS 11:15]

A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement. Those parties are called joint venturers. [IFRS 11:16]

Classifying joint arrangements

The classification of a joint arrangement as a joint operation or a joint venture depends upon the rights and obligations of the parties to the arrangement. An entity determines the type of joint arrangement in which it is involved by considering the structure and form of the arrangement, the terms agreed by the parties in the contractual arrangement and other facts and circumstances. [IFRS 11:6, IFRS 11:14, IFRS 11:17]

Regardless of the purpose, structure or form of the arrangement, the classification of joint arrangements depends upon the parties' rights and obligations arising from the arrangement. [IFRS 11:B14; IFRS 11:B15]

A joint arrangement in which the assets and liabilities relating to the arrangement are held in a separate vehicle can be either a joint venture or a joint operation. [IFRS 11:B19]

A joint arrangement that is not structured through a separate vehicle is a joint operation. In such cases, the contractual arrangement establishes the parties' rights to the assets, and obligations for the liabilities, relating to the arrangement, and the parties' rights to the corresponding revenues and obligations for the corresponding expenses. [IFRS 11:B16]

Financial statements of parties to a joint arrangement

Joint operations

A joint operator recognises in relation to its interest in a joint operation: [IFRS 11:20]

its assets, including its share of any assets held jointly; its liabilities, including its share of any liabilities incurred jointly; its revenue from the sale of its share of the output of the joint operation; its share of the revenue from the sale of the output by the joint operation; and its expenses, including its share of any expenses incurred jointly.

A joint operator accounts for the assets, liabilities, revenues and expenses relating to its involvement in a joint operation in accordance with the relevant IFRSs. [IFRS 11:21]

The acquirer of an interest in a joint operation in which the activity constitutes a business, as defined in IFRS 3 Business Combinations, is required to apply all of the principles on business combinations accounting in IFRS 3 and other IFRSs with the exception of those principles that conflict with the guidance in IFRS 11. [IFRS 11:21A] These requirements apply both to the initial acquisition of an interest in a joint operation, and the acquisition of an additional interest in a joint operation (in the latter case, previously held interests are not remeasured). [IFRS 11:B33C]

Note: The requirements above were introduced by Accounting for Acquisitions of Interests in Joint Operations, which applies to annual periods beginning on or after 1 January 2016 on a prospective basis to acquisitions of interests in joint operations occurring from the beginning of the first period in which the amendments are applied.

A party that participates in, but does not have joint control of, a joint operation shall also account for its interest in the arrangement in accordance with the above if that party has rights to the assets, and obligations for the liabilities, relating to the joint operation. [IFRS 11:23]

Joint ventures

A joint venturer recognises its interest in a joint venture as an investment and shall account for that investment using the equity method in accordance with IAS 28 Investments in Associates and Joint Ventures unless the entity is exempted from applying the equity method as specified in that standard. [IFRS 11:24]

A party that participates in, but does not have joint control of, a joint venture accounts for its interest in the arrangement in accordance with IFRS 9 Financial Instruments unless it has significant influence over the joint venture, in which case it accounts for it in accordance with IAS 28 (as amended in 2011). [IFRS 11:25]

Separate Financial Statements

The accounting for joint arrangements in an entity's separate financial statements depends on the involvement of the entity in that joint arrangement and the type of the joint arrangement:

If the entity is a joint operator or joint venturer it shall account for its interest in o a joint operation in accordance with paragraphs 20-22;o a joint venture in accordance with paragraph 10 of IAS 27 Separate Financial Statements. [IFRS 11:26]

If the entity is a party that participates in, but does not have joint control of, a joint arrangement shall account for its interest in:

o a joint operation in accordance with paragraphs 23;o a joint venture in accordance with IFRS 9, unless the entity has significant influence over the joint venture,

in which case it shall apply paragraph 10 of IAS 27 (as amended in 2011). [IFRS 11:27]

Disclosure

There are no disclosures specified in IFRS 11. Instead, IFRS 12 Disclosure of Interests in Other Entities outlines the disclosures required.

Applicability and early adoption

Note: This section has been updated to reflect the amendments to IFRS 11 made in June 2012.

IFRS 11 is applicable to annual reporting periods beginning on or after 1 January 2013. [IFRS 11:Appendix C1]

When IFRS 11 is first applied, an entity need only present the quantitative information required by paragraph 28(f) of IAS 8 for the annual period immediately preceding the first annual period for which the standard is applied [IFRS 11:C1B]

Special transitional provisions are included for: [IFRS 11.Appendix C2-C13]

transition from proportionate consolidation to the equity method for joint ventures transition from the equity method to accounting for assets and liabilities for joint operations transition in an entity's separate financial statements for a joint operation previously accounted for as an investment

at cost.

In general terms, the special transitional adjustments are required to be applied at the beginning of the immediately preceding period (rather than the the beginning of the earliest period presented).  However, an entity may choose to

present adjusted comparative information for earlier reporting periods, and must clearly identify any unadjusted comparative information and explain the basis on which the comparative information has been prepared [IFRS 11.C12A-C12B].

An entity may apply IFRS 11 to an earlier accounting period, but if doing so it must disclose the fact that is has early adopted the standard and also apply: [IFRS 11.Appendix C1]

IFRS 10 Consolidated Financial Statements IFRS 12 Disclosure of Interests in Other Entities IAS 27 Separate Financial Statements (as amended in 2011) IAS 28 Investments in Associates and Joint Ventures (as amended in 2011).

IFRS 12 — Disclosure of Interests in Other Entities Share on email Share on facebook Share on twitter Share on linkedin More Sharing Services

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Overview

IFRS 12 Disclosure of Interests in Other Entities is a consolidated disclosure standard requiring a wide range of disclosures about an entity's interests in subsidiaries, joint arrangements, associates and unconsolidated 'structured entities'. Disclosures are presented as a series of objectives, with detailed guidance on satisfying those objectives.

IFRS 12 was issued in May 2011 and applies to annual periods beginning on or after 1 January 2013.

History of IFRS 12Date Development Comments

April 2002 Project on consolidation added to the IASB's agenda History of the project

November 2004 Project on joint arrangements added to the IASB's agenda History of the project

13 September 2007 ED 9 Joint Arrangements publishedComment deadline 11 January 2008

18 December 2008 ED 10 Consolidated Financial Statements publishedComment deadline 20 March 2009

January 2010

IASB decision to issue a separate disclosure standard addressing a reporting entity's involvement with other entities that are not in the scope of IAS 39/IFRS 9 (including subsidiaries, associates and joint arrangements and unconsolidated SPEs/structured entities)

12 May 2011 IFRS 12 Disclosure of Interests in Other Entities issuedEffective for annual periods beginning on or after 1 January 2013

28 June 2012 Amended by Consolidated Financial Statements, Joint Arrangements and Disclosure of Interests in Other Entities: Transition Guidance (project history)

Effective for annual periods beginning on or after 1 January 2013

31 October 2012 Amended by Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27) (project history)

Effective for annual periods beginning on or after 1 January 2014

Amendments under consideration by the IASB

IFRS 13 — Unit of account

The IASB has signalled an intention to conduct a post-implementation review of IFRS 12, commencing in 2016.

Related Interpretations

None

Publications and resources

IFRS in Focus Newsletter IASB issues new standard on disclosure of interests in other entities summarising the requirements of IFRS 12 (PDF 65k, May 2011)

Effect analysis for IFRS 10 and IFRS 12 (link to IASB website)

Summary of IFRS 12

Objective and scope

The objective of IFRS 12 is to require the disclosure of information that enables users of financial statements to evaluate: [IFRS 12:1]

the nature of, and risks associated with, its interests in other entities the effects of those interests on its financial position, financial performance and cash flows.

Where the disclosures required by IFRS 12, together with the disclosures required by other IFRSs, do not meet the above objective, an entity is required to disclose whatever additional information is necessary to meet the objective. [IFRS 12:3]

IFRS 12 is required to be applied by an entity that has an interest in any of the following: [IFRS 12:5]

subsidiaries joint arrangements (joint operations or joint ventures) associates unconsolidated structured entities

IFRS 12 does not apply to certain employee benefit plans, separate financial statements to which IAS   27 Separate Financial Statements applies (except in relation to unconsolidated structured entities and investment entities in some cases), certain interests in joint ventures held by an entity that does not share in joint control, and the majority of interests in another entity accounted for in accordance with IFRS   9 Financial Instruments. [IFRS 12:6]

Key definitions

[IFRS 12:Appendix A]

Interest in another entity

Refers to contractual and non-contractual involvement that exposes an entity to variability of returns from the performance of the other entity. An interest in another entity can be evidenced by, but is not limited to, the holding of equity or debt instruments as well as other forms of involvement such as the provision of funding, liquidity support, credit enhancement and guarantees. It includes the means by which an entity has control or joint control of, or significant influence over, another entity. An entity does not necessarily have an interest in another entity solely because of a typical customer supplier relationship.

Structured entity

An entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when any voting rights relate to administrative tasks only and the relevant activities are directed by means of contractual arrangements.

Disclosures required

Important note: The summary of disclosures that follows is a high-level summary of the main requirements of IFRS 12. It does not list every specific disclosure required by the standard, but instead highlights the broad objectives, categories and nature of the disclosures required. IFRS 12 lists specific examples and additional disclosures which further expand upon the disclosure objectives, and includes other guidance on the disclosures required. Accordingly, readers should not consider this to be a comprehensive or complete listing of the disclosure requirements of IFRS 12.

Significant judgements and assumptions

An entity discloses information about significant judgements and assumptions it has made (and changes in those judgements and assumptions) in determining: [IFRS 12:7]

that it controls another entity that it has joint control of an arrangement or significant influence over another entity the type of joint arrangement (i.e. joint operation or joint venture) when the arrangement has been structured

through a separate vehicle.

Interests in subsidiaries

An entity shall disclose information that enables users of its consolidated financial statements to: [IFRS 12:10]

understand the composition of the group understand the interest that non-controlling interests have in the group's activities and cash flows evaluate the nature and extent of significant restrictions on its ability to access or use assets, and settle liabilities, of

the group evaluate the nature of, and changes in, the risks associated with its interests in consolidated structured entities evaluate the consequences of changes in its ownership interest in a subsidiary that do not result in a loss of control evaluate the consequences of losing control of a subsidiary during the reporting period.

Interests in unconsolidated subsidiaries

[Note: The investment entity consolidation exemption referred to in this section was introduced by Investment Entities, issued on 31 October 2012 and effective for annual periods beginning on or after 1 January 2014.]

In accordance with IFRS   10 Consolidated Financial Statements, an investment entity is required to apply the exception to consolidation and instead account for its investment in a subsidiary at fair value through profit or loss. [IFRS 10:31].

Where an entity is an investment entity, IFRS 12 requires additional disclosure, including:

the fact the entity is an investment entity [IFRS 12:19A] information about significant judgements and assumptions it has made in determining that it is an investment entity,

and specifically where the entity does not have one or more of the 'typical characteristics' of an investment entity [IFRS 12:9A]

details of subsidiaries that have not been consolidated (name, place of business, ownership interests held) [IFRS 12:19B]

details of the relationship and certain transactions between the investment entity and the subsidiary (e.g. restrictions on transfer of funds, commitments, support arrangements, contractual arrangements) [IFRS 12: 19D-19G]

information where an entity becomes, or ceases to be, an investment entity [IFRS 12:9B]

An entity making these disclosures are not required to provide various other disclosures required by IFRS 12 [IFRS 12:21A, IFRS 12:25A].

Interests in joint arrangements and associates

An entity shall disclose information that enables users of its financial statements to evaluate: [IFRS 12:20]

the nature, extent and financial effects of its interests in joint arrangements and associates, including the nature and effects of its contractual relationship with the other investors with joint control of, or significant influence over, joint arrangements and associates

the nature of, and changes in, the risks associated with its interests in joint ventures and associates.

Interests in unconsolidated structured entities

An entity shall disclose information that enables users of its financial statements to: [IFRS 12:24]

understand the nature and extent of its interests in unconsolidated structured entities evaluate the nature of, and changes in, the risks associated with its interests in unconsolidated structured entities.

Applicability and early adoption

Note: This section has been updated to reflect the amendments to IFRS 12 made in June 2012 and October 2012.

[IFRS 12: Appendix C]

IFRS 12 is applicable to annual reporting periods beginning on or after 1 January 2013. Early application is permitted.

The disclosure requirements of IFRS 12 need not be applied for any period presented that begins before the annual period immediately preceding the first annual period for which IFRS 12 is applied [IFRS 12:C2A]

Entities are encouraged to voluntarily provide the information required by IFRS 12 prior to its adoption. Providing some of the disclosures required by IFRS 12 does not compel an entity to comply with all of the requirements of the IFRS or to also apply:

IFRS 10 Consolidated Financial Statements IFRS 11 Joint Arrangements IAS 27 Separate Financial Statements (2011) IAS 28 Investments in Associates and Joint Ventures (2011).

The amendments to IFRS 12 made by Investment Entities are applicable to annual reporting periods beginning on or after 1 January 2014 [IFRS 12:C1B].

IFRS 13 — Fair Value Measurement Share on email Share on facebook Share on twitter Share on linkedin More Sharing Services

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Overview

IFRS 13 Fair Value Measurement applies to IFRSs that require or permit fair value measurements or disclosures and provides a single IFRS framework for measuring fair value and requires disclosures about fair value measurement. The Standard defines fair value on the basis of an 'exit price' notion and uses a 'fair value hierarchy', which results in a market-based, rather than entity-specific, measurement.

IFRS 13 was originally issued in May 2011 and applies to annual periods beginning on or after 1 January 2013.

History of IFRS 13Date Development Comments

September 2005 Project on fair value measurement added to the IASB's agenda History of the project

30 November 2006 Discussion Paper Fair Value Measurements published Comment deadline 2 April 2007

28 May 2009 Exposure Draft Fair Value Measurement published Comment deadline 28 September 2009

29 June 2010 Exposure Draft Measurement Uncertainty Analysis Disclosure for Fair Value Measurements published

Comment deadline 7 September 2010

19 August 2010 Staff draft of a IFRS on fair value measurement released

12 May 2011 IFRS 13 Fair Value Measurement issuedEffective for annual periods beginning on or after 1 January 2013

12 December 2013 Amended by Annual Improvements to IFRSs 2010–2012 Cycle (short-term receivables and payables)

Amendment to the basis for conclusions only

12 December 2013 Amended by Annual Improvements to IFRSs 2011–2013 Cycle (scope of portfolio exception in paragraph 52)

Effective for annual period beginning on or after 1 July 2014

Related Interpretations

None

Amendments under consideration by the IASB

IFRS 13 — Unit of account Research project — Discount rates

In addition, the IASB has signalled an intention to conduct a post-implementation review of IFRS 13, commencing in 2015.

Publications and resources

IFRS in Focus Newsletter IASB issues new standard on fair value measurement and disclosure summarising the requirements of IFRS 13 (PDF 78k, May 2011)

Deloitte IFRS Podcast (May 2011, 10 minutes, 7mb)

Summary of IFRS 13

Objective

IFRS 13: [IFRS 13:1]

defines fair value sets out in a single IFRS a framework for measuring fair value requires disclosures about fair value measurements.

IFRS 13 applies when another IFRS requires or permits fair value measurements or disclosures about fair value measurements (and measurements, such as fair value less costs to sell, based on fair value or disclosures about those measurements), except for: [IFRS 13:5-7]

share-based payment transactions within the scope of IFRS 2 Share-based Payment leasing transactions within the scope of IAS 17 Leases measurements that have some similarities to fair value but that are not fair value, such as net realisable value in IAS 2

Inventories or value in use in IAS 36 Impairment of Assets.

Additional exemptions apply to the disclosures required by IFRS 13.

Key definitions

[IFRS 13:Appendix A]

Fair valueThe price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date

Active marketA market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis

Exit price The price that would be received to sell an asset or paid to transfer a liability

Highest and best useThe use of a non-financial asset by market participants that would maximise the value of the asset or the group of assets and liabilities (e.g. a business) within which the asset would be used

Most advantageous market

The market that maximises the amount that would be received to sell the asset or minimises the amount that would be paid to transfer the liability, after taking into account transaction costs and transport costs

Principal market The market with the greatest volume and level of activity for the asset or liability

Fair value hierarchy

Overview

IFRS 13 seeks to increase consistency and comparability in fair value measurements and related disclosures through a 'fair value hierarchy'. The hierarchy categorises the inputs used in valuation techniques into three levels. The hierarchy gives the highest priority to (unadjusted) quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. [IFRS 13:72]

If the inputs used to measure fair value are categorised into different levels of the fair value hierarchy, the fair value measurement is categorised in its entirety in the level of the lowest level input that is significant to the entire measurement (based on the application of judgement). [IFRS 13:73]

Level 1 inputs

Level 1 inputs are quoted prices in active markets for identical assets or liabilities that the entity can access at the measurement date. [IFRS 13:76]

A quoted market price in an active market provides the most reliable evidence of fair value and is used without adjustment to measure fair value whenever available, with limited exceptions. [IFRS 13:77]

If an entity holds a position in a single asset or liability and the asset or liability is traded in an active market, the fair value of the asset or liability is measured within Level 1 as the product of the quoted price for the individual asset or liability and the quantity held by the entity, even if the market's normal daily trading volume is not sufficient to absorb the quantity held and placing orders to sell the position in a single transaction might affect the quoted price. [IFRS 13:80]

Level 2 inputs

Level 2 inputs are inputs other than quoted market prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. [IFRS 13:81]

Level 2 inputs include:

quoted prices for similar assets or liabilities in active markets quoted prices for identical or similar assets or liabilities in markets that are not active inputs other than quoted prices that are observable for the asset or liability, for example

o interest rates and yield curves observable at commonly quoted intervalso implied volatilitieso credit spreads

inputs that are derived principally from or corroborated by observable market data by correlation or other means ('market-corroborated inputs').

Level 3 inputs

Level 3 inputs inputs are unobservable inputs for the asset or liability. [IFRS 13:86]

Unobservable inputs are used to measure fair value to the extent that relevant observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. An entity develops unobservable inputs using the best information available in the circumstances, which might include the entity's own data, taking into account all information about market participant assumptions that is reasonably available. [IFRS 13:87-89]

Measurement of fair value

Overview of fair value measurement approach

The objective of a fair value measurement is to estimate the price at which an orderly transaction to sell the asset or to transfer the liability would take place between market participants at the measurement date under current market conditions. A fair value measurement requires an entity to determine all of the following: [IFRS 13:B2]

the particular asset or liability that is the subject of the measurement (consistently with its unit of account) for a non-financial asset, the valuation premise that is appropriate for the measurement (consistently with its highest

and best use) the principal (or most advantageous) market for the asset or liability the valuation technique(s) appropriate for the measurement, considering the availability of data with which to

develop inputs that represent the assumptions that market participants would use when pricing the asset or liability and the level of the fair value hierarchy within which the inputs are categorised.

Guidance on measurement

IFRS 13 provides the guidance on the measurement of fair value, including the following:

An entity takes into account the characteristics of the asset or liability being measured that a market participant would take into account when pricing the asset or liability at measurement date (e.g. the condition and location of the asset and any restrictions on the sale and use of the asset) [IFRS 13:11]

Fair value measurement assumes an orderly transaction between market participants at the measurement date under current market conditions [IFRS 13:15]

Fair value measurement assumes a transaction taking place in the principal market for the asset or liability, or in the absence of a principal market, the most advantageous market for the asset or liability [IFRS 13:24]

A fair value measurement of a non-financial asset takes into account its highest and best use [IFRS 13:27] A fair value measurement of a financial or non-financial liability or an entity's own equity instruments assumes it is

transferred to a market participant at the measurement date, without settlement, extinguishment, or cancellation at the measurement date [IFRS 13:34]

The fair value of a liability reflects non-performance risk (the risk the entity will not fulfil an obligation), including an entity's own credit risk and assuming the same non-performance risk before and after the transfer of the liability [IFRS 13:42]

An optional exception applies for certain financial assets and financial liabilities with offsetting positions in market risks or counterparty credit risk, provided conditions are met (additional disclosure is required). [IFRS 13:48, IFRS 13:96]

Valuation techniques

An entity uses valuation techniques appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. [IFRS 13:61, IFRS 13:67]

The objective of using a valuation technique is to estimate the price at which an orderly transaction to sell the asset or to transfer the liability would take place between market participants and the measurement date under current market conditions. Three widely used valuation techniques are: [IFRS 13:62]

market approach – uses prices and other relevant information generated by market transactions involving identical or comparable (similar) assets, liabilities, or a group of assets and liabilities (e.g. a business)

cost approach – reflects the amount that would be required currently to replace the service capacity of an asset (current replacement cost)

income approach – converts future amounts (cash flows or income and expenses) to a single current (discounted) amount, reflecting current market expectations about those future amounts.

In some cases, a single valuation technique will be appropriate, whereas in others multiple valuation techniques will be appropriate. [IFRS 13:63]

Disclosure

Disclosure objective

IFRS 13 requires an entity to disclose information that helps users of its financial statements assess both of the following: [IFRS 13:91]

for assets and liabilities that are measured at fair value on a recurring or non-recurring basis in the statement of financial position after initial recognition, the valuation techniques and inputs used to develop those measurements

for fair value measurements using significant unobservable inputs (Level 3), the effect of the measurements on profit or loss or other comprehensive income for the period.

Disclosure exemptions

The disclosure requirements are not required for: [IFRS 13:7]

plan assets measured at fair value in accordance with IAS 19 Employee Benefits retirement benefit plan investments measured at fair value in accordance with IAS 26 Accounting and Reporting by

Retirement Benefit Plans assets for which recoverable amount is fair value less costs of disposal in accordance with IAS 36 Impairment of

Assets.

Identification of classes

Where disclosures are required to be provided for each class of asset or liability, an entity determines appropriate classes on the basis of the nature, characteristics and risks of the asset or liability, and the level of the fair value hierarchy within which the fair value measurement is categorised. [IFRS 13:94]

Determining appropriate classes of assets and liabilities for which disclosures about fair value measurements should be provided requires judgement. A class of assets and liabilities will often require greater disaggregation than the line items presented in the statement of financial position. The number of classes may need to be greater for fair value measurements categorised within Level 3.

Some disclosures are differentiated on whether the measurements are:

Recurring fair value measurements – fair value measurements required or permitted by other IFRSs to be recognised in the statement of financial position at the end of each reporting period

Non-recurring fair value measurements are fair value measurements that are required or permitted by other IFRSs to be measured in the statement of financial position in particular circumstances.

Specific disclosures required

To meet the disclosure objective, the following minimum disclosures are required for each class of assets and liabilities measured at fair value (including measurements based on fair value within the scope of this IFRS) in the statement of financial position after initial recognition (note these are requirements have been summarised and additional disclosure is required where necessary): [IFRS 13:93]

the fair value measurement at the end of the reporting period* for non-recurring fair value measurements, the reasons for the measurement* the level of the fair value hierarchy within which the fair value measurements are categorised in their entirety (Level

1, 2 or 3)* for assets and liabilities held at the reporting date that are measured at fair value on a recurring basis, the amounts of

any transfers between Level 1 and Level 2 of the fair value hierarchy, the reasons for those transfers and the entity's policy for determining when transfers between levels are deemed to have occurred, separately disclosing and discussing transfers into and out of each level

for fair value measurements categorised within Level 2 and Level 3 of the fair value hierarchy, a description of the valuation technique(s) and the inputs used in the fair value measurement, any change in the valuation techniques and the reason(s) for making such change (with some exceptions)*

for fair value measurements categorised within Level 3 of the fair value hierarchy, quantitative information about the significant unobservable inputs used in the fair value measurement (with some exceptions)

for recurring fair value measurements categorised within Level 3 of the fair value hierarchy, a reconciliation from the opening balances to the closing balances, disclosing separately changes during the period attributable to the following:

o total gains or losses for the period recognised in profit or loss, and the line item(s) in profit or loss in which those gains or losses are recognised – separately disclosing the amount included in profit or loss that is attributable to the change in unrealised gains or losses relating to those assets and liabilities held at the end of the reporting period, and the line item(s) in profit or loss in which those unrealised gains or losses are recognised

o total gains or losses for the period recognised in other comprehensive income, and the line item(s) in other comprehensive income in which those gains or losses are recognised

o purchases, sales, issues and settlements (each of those types of changes disclosed separately)o the amounts of any transfers into or out of Level 3 of the fair value hierarchy, the reasons for those

transfers and the entity's policy for determining when transfers between levels are deemed to have occurred. Transfers into Level 3 shall be disclosed and discussed separately from transfers out of Level 3

for fair value measurements categorised within Level 3 of the fair value hierarchy, a description of the valuation processes used by the entity

for recurring fair value measurements categorised within Level 3of the fair value hierarchy: o a narrative description of the sensitivity of the fair value measurement to changes in unobservable inputs if

a change in those inputs to a different amount might result in a significantly higher or lower fair value measurement. If there are interrelationships between those inputs and other unobservable inputs used in the fair value measurement, the entity also provides a description of those interrelationships and of how they might magnify or mitigate the effect of changes in the unobservable inputs on the fair value measurement

o for financial assets and financial liabilities, if changing one or more of the unobservable inputs to reflect reasonably possible alternative assumptions would change fair value significantly, an entity shall state that fact and disclose the effect of those changes. The entity shall disclose how the effect of a change to reflect a reasonably possible alternative assumption was calculated

if the highest and best use of a non-financial asset differs from its current use, an entity shall disclose that fact and why the non-financial asset is being used in a manner that differs from its highest and best use*.

'*' in the list above indicates that the disclosure is also applicable to a class of assets or liabilities which is not measured at fair value in the statement of financial position but for which the fair value is disclosed. [IFRS 13:97]

Quantitative disclosures are required to be presented in a tabular format unless another format is more appropriate. [IFRS 13:99]

Effective date and transition

[IFRS 13:Appendix C]

IFRS 13 is applicable to annual reporting periods beginning on or after 1 January 2013. An entity may apply IFRS 13 to an earlier accounting period, but if doing so it must disclose the fact.

Application is required prospectively as of the beginning of the annual reporting period in which the IFRS is initially applied. Comparative information need not be disclosed for periods before initial application.

IFRS 14 — Regulatory Deferral Accounts Share on email Share on facebook Share on twitter Share on linkedin More Sharing Services

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Overview

IFRS 14 Regulatory Deferral Accounts permits an entity which is a first-time adopter of International Financial Reporting Standards to continue to account, with some limited changes, for 'regulatory deferral account balances' in accordance with its previous GAAP, both on initial adoption of IFRS and in subsequent financial statements. Regulatory deferral account balances, and movements in them, are presented separately in the statement of financial position and statement of profit or loss and other comprehensive income, and specific disclosures are required.

IFRS 14 was originally issued in January 2014 and applies to an entity's first annual IFRS financial statements for a period beginning on or after 1 January 2016.

History of IFRS 14Date Development Comments

December 2012IASB reactivated the rate regulated activities project

The IASB indicated it would consider an interim standard for entities adopting IFRS before completing a comprehensive project

25 April 2013 Exposure Draft ED/2013/5 Regulatory Deferral Accounts published

Comment deadline 4 September 2013

30 January 2014 IFRS 14 Regulatory Deferral Accounts issued

Effective for an entity's first annual IFRS financial statements for periods beginning on or after 1 January 2016

Related Interpretations

None

Amendments under consideration by the IASB

Rate regulated activities — Comprehensive project

 

Summary of IFRS 14

Objective

The objective of IFRS 14 is to specify the financial reporting requirements for 'regulatory deferral account balances' that arise when an entity provides good or services to customers at a price or rate that is subject to rate regulation. [IFRS 14:1]

IFRS 14 is designed as a limited scope Standard to provide an interim, short-term solution for rate-regulated entities that have not yet adopted International Financial Reporting Standards (IFRS). Its purpose is to allow rate-regulated entities adopting IFRS for the first-time to avoid changes in accounting policies in respect of regulatory deferral accounts until such time as the International Accounting Standards Board (IASB) can complete its comprehensive project on rate regulated activities.

Scope

IFRS 14 is permitted, but not required, to be applied where an entity conducts rate-regulated activities and has recognised amounts in its previous GAAP financial statements that meet the definition of 'regulatory deferral account balances' (sometimes referred to 'regulatory assets' and 'regulatory liabilities'). [IFRS 14.5]

Entities which are eligible to apply IFRS 14 are not required to do so, and so can chose to apply only the requirements of IFRS 1 First-time Adoption of International Financial Reporting Standards when first applying IFRSs. The election to adopt IFRS 14 is only available on the initial adoption of IFRSs, meaning an entity cannot apply IFRS 14 for the first time in financial statements subsequent to those prepared on the initial adoption of

IFRSs.  However, an entity that elects to apply IFRS 14 in its first IFRS financial statements must continue to apply it in subsequent financial statements. [IFRS 14.6]

When applied, the requirements of IFRS 14 must be applied to all regulatory deferral account balances arising from an entity's rate-regulated activities. [IFRS 14.8]

Key definitions

[IFRS 14:Appendix A]

Rate regulationA framework for establishing the prices that can be charged to customers for goods and services and that framework is subject to oversight and/or approval by a rate-regulator

Rate regulator

An authorised body that is empowered by statute or regulation to establish the rate or range of rates that bind an entity. The rate regulator may be a third-party body or a related party of the entity, including the entity's own governing board, if that body is required by statute or regulation to set rates both in the interest of customers and to ensure the overall financial viability of the entity

Regulatory deferral account balance

The balance of any expense (or income) account that would not be recognised as an asset or a liability in accordance with other Standards, but that qualifies for deferral because it is included, or is expected to be included, by the rate regulator in establishing the rate(s) that can be charged to customers

Accounting policies for regulatory deferral account balances

IFRS 14 provides an exemption from paragraph 11 of IAS   8 Accounting Policies, Changes in Accounting Estimates and Errors when an entity determines its accounting policies for regulatory deferral account balances. [IFRS 14.9] Paragraph 11 of IAS 8 requires an entity to consider the requirements of IFRSs dealing with similar matters and the requirements of the Conceptual Framework when setting its accounting policies.

The effect of the exemption is that eligible entities can continue to apply the accounting policies used for regulatory deferral account balances under the basis of accounting used immediately before adopting IFRS ('previous GAAP') when applying IFRSs, subject to the presentation requirements of IFRS 14 [IFRS 14.11].

Entities are permitted to change their accounting policies for regulatory deferral account balances in accordance with IAS 8, but only if the change makes the financial statements more relevant and no less reliable, or more reliable and not less relevant, to the economic decision-making needs of users of the entity's financial statements. However, an entity is not permitted to change accounting policies to start to recognise regulatory deferral account balances. [IFRS 14.13]

Interaction with other Standards

The requirements of other IFRSs are required to be applied to regulatory deferral account balances, subject to specific exceptions, exemptions and additional requirements contained in IFRS 14 [IFRS 14.16]. These are briefly summarised below: [IFRS 14.B7-B28]

 

IFRS Requirements

IAS 10 Events After the Reporting Period

The requirements of IAS 10 are applied when determining which events after the end of the reporting period should be taken into account in the recognition and measurement of

regulatory deferral account balances

IAS 12 Income TaxesDeferred tax assets and liabilities arising from regulatory deferral account balances are presented separately from total deferred tax amounts and movements in those deferred tax balances are presented separately from tax expense (income)

IAS 33 Earnings Per ShareEntities applying IFRS 14 are required to present an additional basic and diluted earnings per share that excludes the impacts of the net movement in regulatory deferral account balances

IAS 36 Impairment of AssetsRegulatory deferral account balances are included in the carrying amount of any relevant cash-generating unit (CGU) and are treated in the same way as other assets and liabilities where an impairment loss arises

IFRS 3 Business Combinations

The entity's accounting policies for regulatory deferral account balances are used in applying the acquisition method, which can result in the recognition of regulatory deferral account balances in respect of an acquiree, regardless of whether the acquiree itself recognised such balances

IFRS 5 Non-current Assets Held for Sale and Discontinued Operations

The measurement requirements of IFRS 5 do not apply to regulatory deferral account balances, and modifications are made to the presentation of information about discontinued operations and disposal groups in relation to such balances

IFRS 10 Consolidated Financial Statements and IAS 28 Investments in Associates and Joint Ventures (2011)

The entity's accounting policies in respect of regulatory deferral account balances are required to be applied in an entity's consolidated financial statements or in the determination of equity accounted information of associates or joint ventures, notwithstanding that the entity's investees may not have recognised regulatory deferral account balances in their financial statements

IFRS 12 Disclosure of Interests in Other Entities

Separate disclosure of regulatory deferral account balances and net movements in those balances recognised in profit or loss or other comprehensive income are required for various IFRS 12 disclosures

Presentation in financial statements

The impact of regulatory deferral account balances are separately presented in an entity's financial statements. This requirements applies regardless of the entity's previous presentation policies in respect of regulatory deferral balance accounts under its previous GAAP. Accordingly:

Separate line items are presented in the statement of financial position for the total of all regulatory deferral account debit balances, and all regulatory deferral account credit balances [IFRS 14.20]

Regulatory deferral account balances are not classified between current and non-current, but are separately disclosed using subtotals [IFRS 14.21]

The net movement in regulatory deferral account balances are separately presented in the statement of profit or loss and other comprehensive income using subtotals [IFRS 14.22-23]

The Illustrative examples accompanying IFRS 14 set out an illustrative presentation of financial statements by an entity applying the Standard.

Disclosures

IFRS 14 sets out disclosure objectives to allow users to assess: [IFRS 14.27]

the nature of, and risks associated with, the rate regulation that establishes the price(s) the entity can charge customers for the goods or services it provides - including information about the entity's rate-regulated activities and the rate-setting process, the identity of the rate regulator(s), and the impacts of risks and uncertainties on the recovery or reversal of regulatory deferral balance accounts

the effects of rate regulation on the entity's financial statements - including the basis on which regulatory deferral account balances are recognised, how they are assessed for recovery, a reconciliation of the carrying amount at the beginning and end of the reporting period, discount rates applicable, income tax impacts and details of balances that are no longer considered recoverable or reversible.

Effective date

Where an entity elects to apply it, IFRS 14 is effective for an entity's first annual IFRS financial statements that are for a period beginning on or after 1 January 2016. The standard can be applied earlier, but the entity must disclose when it has done so. [IFRS 14.C1]

IFRS 15 — Revenue from Contracts with Customers Share on email Share on facebook Share on twitter Share on linkedin More Sharing Services

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Overview

IFRS 15 specifies how and when an IFRS reporter will recognise revenue as well as requiring such entities to provide users of financial statements with more informative, relevant disclosures. The standard provides a single, principles based five-step model to be applied to all contracts with customers.

IFRS 15 was issued in May 2014 and applies to an annual reporting period beginning on or after 1 January 2017.

History of IFRS 15Date Development Comments

June 2002 Project on revenue added to the IASB's agenda History of the project

19 December 2008 Discussion Paper Preliminary Views on Revenue Recognition in Contracts with Customers published

Comment deadline 19 June 2009

24 June 2010 Exposure Draft ED/2010/6 Revenue from Contracts with Customers published

Comment deadline 22 October 2010

14 November 2011 Exposure Draft ED/2011/6 Revenue from Contracts with Customers published (re-exposure)

Comment deadline 13 March 2012

28 May 2014 IFRS 15 Revenue from Contracts with Customers issued

Effective for an entity's first annual IFRS financial statements for periods beginning on or after 1 January 2017

Related Interpretations

None

Amendments under consideration by the IASB

None

Superseded Standards

IFRS 15 replaces the following standards and interpretations:

IAS 11 Construction contracts IAS 18 Revenue IFRIC 13 Customer Loyalty Programmes IFRIC 15 Agreements for the Construction of Real Estate IFRIC 18 Transfers of Assets from Customers SIC-31 Revenue - Barter Transactions Involving Advertising Services

 

Summary of IFRS 15

Objective

The objective of IFRS 15 is to establish the principles that an entity shall apply to report useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue and cash flows arising from a contract with a customer. [IFRS 15:1] Application of the standard is mandatory for annual reporting periods starting from 1 January 2017 onwards. Earlier application is permitted.

 

Scope

IFRS 15 Revenue from Contracts with Customers applies to all contracts with customers except for: leases within the scope of IAS 17 Leases; financial instruments and other contractual rights or obligations within the scope of IFRS 9 Financial Instruments, IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements, IAS 27

Separate Financial Statements and IAS 28 Investments in Associates and Joint Ventures; insurance contracts within the scope of IFRS 4 Insurance Contracts; and non-monetary exchanges between entities in the same line of business to facilitate sales to customers or potential customers. [IFRS 15:5]

A contract with a customer may be partially within the scope of IFRS 15 and partially within the scope of another standard.  In that scenario: [IFRS 15:7]

if other standards specify how to separate and/or initially measure one or more parts of the contract, then those separation and measurement requirements are applied first. The transaction price is then reduced by the amounts that are initially measured under other standards;

if no other standard provides guidance on how to separate and/or initially measure one or more parts of the contract, then IFRS 15 will be applied.

 

Key definitions

[IFRS 15: Appendix A]

Contract An agreement between two or more parties that creates enforceable rights and obligations.

CustomerA party that has contracted with an entity to obtain goods or services that are an output of the entity’s ordinary activities in exchange for consideration.

IncomeIncreases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in an increase in equity, other than those relating to contributions from equity participants.

Performance obligation

A promise in a contract with a customer to transfer to the customer either:

a good or service (or a bundle of goods or services) that is distinct; or a series of distinct goods or services that are substantially the same and that have the same pattern

of transfer to the customer.

Revenue Income arising in the course of an entity’s ordinary activities.

Transaction priceThe amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties.

 

Accounting requirements for revenue

The five-step model framework

The core principle of IFRS 15 is that an entity will recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  This core principle is delivered in a five-step model framework: [IFRS 15:IN7]

Identify the contract(s) with a customer

Identify the performance obligations in the contract Determine the transaction price Allocate the transaction price to the performance obligations in the contract Recognise revenue when (or as) the entity satisfies a performance obligation.

Application of this guidance will depend on the facts and circumstances present in a contract with a customer and will require the exercise of judgment.

Step 1: Identify the contract with the customer

A contract with a customer will be within the scope of IFRS 15 if all the following conditions are met: [IFRS 15:9]

the contract has been approved by the parties to the contract; each party’s rights in relation to the goods or services to be transferred can be identified; the payment terms for the goods or services to be transferred can be identified; the contract has commercial substance; and it is probable that the consideration to which the entity is entitled to in exchange for the goods or services will be

collected.

If a contract with a customer does not yet meet all of the above criteria, the entity will continue to re-assess the contract going forward to determine whether it subsequently meets the above criteria. From that point, the entity will apply IFRS 15 to the contract. [IFRS 15:14]

The standard provides detailed guidance on how to account for approved contract modifications. If certain conditions are met, a contract modification will be accounted for as a separate contract with the customer. If not, it will be accounted for by modifying the accounting for the current contract with the customer. Whether the latter type of modification is accounted for prospectively or retrospectively depends on whether the remaining goods or services to be delivered after the modification are distinct from those delivered prior to the modification. Further details on accounting for contract modifications can be found in the Standard. [IFRS 15:18-21].

Step 2: Identify the performance obligations in the contract

At the inception of the contract, the entity should assess the goods or services that have been promised to the customer, and identify as a performance obligation: [IFRS 15.22]

a good or service (or bundle of goods or services) that is distinct; or a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the

customer.

A series of distinct goods or services is transferred to the customer in the same pattern if both of the following criteria are met: [IFRS 15:23]  

each distinct good or service in the series that the entity promises to transfer consecutively to the customer would be a performance obligation that is satisfied over time (see below); and

a single method of measuring progress would be used to measure the entity’s progress towards complete satisfaction of the performance obligation to transfer each distinct good or service in the series to the customer.

A good or service is distinct if both of the following criteria are met: [IFRS 15:27]

the customer can benefit from the good or services on its own or in conjunction with other readily available resources; and

the entity’s promise to transfer the good or service to the customer is separately idenitifable from other promises in the contract.

Factors for consideration as to whether a promise to transfer the good or service to the customer is separately identifiable include, but are not limited to: [IFRS 15:29]

the entity does not provide a significant service of integrating the good or service with other goods or services promised in the contract.

the good or service does not significantly modify or customise another good or service promised in the contract. the good or service is not highly interrelated with or highly dependent on other goods or services promised in the

contract.

Step 3: Determine the transaction price

The transaction price is the amount to which an entity expects to be entitled in exchange for the transfer of goods and services. When making this determination, an entity will consider past customary business practices. [IFRS 15:47]

Where a contract contains elements of variable consideration, the entity will estimate the amount of variable consideration to which it will be entitled under the contract. [IFRS 15:50] Variable consideration can arise, for example, as a result of discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses, penalties or other similar items. Variable consideration is also present if an entity’s right to consideration is contingent on the occurrence of a future event.  [IFRS 15:51]

The standard deals with the uncertainty relating to variable consideration by limiting the amount of variable consideration that can be recognised. Specifically, variable consideration is only included in the transaction price if, and to the extent that, it is highly probable that its inclusion will not result in a significant revenue reversal in the future when the uncertainty has been subsequently resolved. [IFRS 15:56]

However, a different, more restrictive approach is applied in respect of sales or usage-based royalty revenue arising from licences of intellectual property. Such revenue is recognised only when the underlying sales or usage occur. [IFRS 15:B63]

Step 4: Allocate the transaction price to the performance obligations in the contracts

Where a contract has multiple performance obligations, an entity will allocate the transaction price to the performance obligations in the contract by reference to their relative standalone selling prices. [IFRS 15:74] If a standalone selling price is not directly observable, the entity will need to estimate it. IFRS 15 suggests various methods that might be used, including: [IFRS 15:79]

Adjusted market assessment approach Expected cost plus a margin approach Residual approach (only permissible in limited circumstances).

Any overall discount compared to the aggregate of standalone selling prices is allocated between performance obligations on a relative standalone selling price basis. In certain circumstances, it may be appropriate to allocate such a discount to some but not all of the performance obligations. [IFRS 15:81]

Where consideration is paid in advance or in arrears, the entity will need to consider whether the contract includes a significant financing arrangement and, if so, adjust for the time value of money. [IFRS 15:60] A practical expedient is available where the interval between transfer of the promised goods or services and payment by the customer is expected to be less than 12 months. [IFRS 15:63]

Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation

Revenue is recognised as control is passed, either over time or at a point in time. [IFRS 15:32]

Control of an asset is defined as the ability to direct the use of and obtain substantially all of the remaining benefits from the asset. This includes the ability to prevent others from directing the use of and obtaining the benefits from the asset. The benefits related to the asset are the potential cash flows that may be obtained directly or indirectly. These include, but are not limited to: [IFRS 15:31-33]

using the asset to produce goods or provide services; using the asset to enhance the value of other assets; using the asset to settle liabilities or to reduce expenses; selling or exchanging the asset; pledging the asset to secure a loan; and holding the asset.

An entity recognises revenue over time if one of the following criteria is met: [IFRS 15:35]

the customer simultaneously receives and consumes all of the benefits provided by the entity as the entity performs; the entity’s performance creates or enhances an asset that the customer controls as the asset is created; or the entity’s performance does not create an asset with an alternative use to the entity and the entity has an

enforceable right to payment for performance completed to date.

If an entity does not satisfy its performance obligation over time, it satisfies it at a point in time. Revenue will therefore be recognised when control is passed at a certain point in time. Factors that may indicate the point in time at which control passes include, but are not limited to: [IFRS 15:38]

the entity has a present right to payment for the asset; the customer has legal title to the asset; the entity has transferred physical possession of the asset; the customer has the significant risks and rewards related to the ownership of the asset; and the customer has accepted the asset.

Contract costs

The incremental costs of obtaining a contract must be recognised as an asset if the entity expects to recover those costs. However, those incremental costs are limited to the costs that the entity would not have incurred if the contract had not been successfully obtained (e.g. ‘success fees’ paid to agents). A practical expedient is available, allowing the incremental costs of obtaining a contract to be expensed if the associated amortisation period would be 12 months or less. [IFRS 15:91-94]

Costs incurred to fulfil a contract are recognised as an asset if and only if all of the following criteria are met: [IFRS 15:95]

the costs relate directly to a contract (or a specific anticipated contract); the costs generate or enhance resources of the entity that will be used in satisfying performance obligations in the

future; and the costs are expected to be recovered.

These include costs such as direct labour, direct materials, and the allocation of overheads that relate directly to the contract. [IFRS 15:97]

The asset recognised in respect of the costs to obtain or fulfil a contract is amortised on a systematic basis that is consistent with the pattern of transfer of the goods or services to which the asset relates. [IFRS 15:99]

Further useful implementation guidance in relation to applying IFRS 15

These topics include:

Performance obligations satisfied over time Methods for measuring progress towards complete satisfaction of a performance obligation Sale with a right of return Warranties Principal versus agent considerations Customer options for additional goods or services Customers’ unexercised rights Non-refundable upfront fees Licensing Repurchase arrangements Consignment arrangements Bill-and-hold arrangements Customer acceptance Disclosures of disaggregation of revenue

These topics should be considered carefully when applying IFRS 15.

 

Presentation in financial statements

Contracts with customers will be presented in an entity’s statement of financial position as a contract liability, a contract asset, or a receivable, depending on the relationship between the entity’s performance and the customer’s payment. [IFRS 15:105]

A contract liability is presented in the statement of financial position where a customer has paid an amount of consideration prior to the entity performing by transferring the related good or service to the customer. [IFRS 15:106]

Where the entity has performed by transferring a good or service to the customer and the customer has not yet paid the related consideration, a contract asset or a receivable is presented in the statement of financial position, depending on the nature of the entity’s right to consideration. A contract asset is recognised when the entity’s right to consideration is conditional on something other than the passage of time, for example future performance of the entity. A receivable is recognised when the entity’s right to consideration is unconditional except for the passage of time.

Contract assets and receivables shall be accounted for in accordance with IFRS 9. Any impairment relating to contracts with customers should be measured, presented and disclosed in accordance with IFRS 9. Any difference between the initial recognition of a receivable and the corresponding amount of revenue recognised should also be presented as an expense, for example, an impairment loss. [IFRS 15:107-108]

 

Disclosures

The disclosure objective stated in IFRS 15 is for an entity to disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Therefore, an entity should disclose qualitative and quantitative information about all of the following: [IFRS 15:110]

its contracts with customers; the significant judgments, and changes in the judgments, made in applying the guidance to those contracts; and any assets recognised from the costs to obtain or fulfil a contract with a customer.

Entities will need to consider the level of detail necessary to satisfy the disclosure objective and how much emphasis to place on each of the requirements. An entity should aggregate or disaggregate disclosures to ensure that useful information is not obscured. [IFRS 15:111]

In order to achieve the disclosure objective stated above, the Standard introduces a number of new disclosure requirements. Further detail about these specific requirements can be found at IFRS 15:113-129.

 

Effective date and transition

The standard should be applied in an entity’s IFRS financial statements for annual reporting periods beginning on or after 1 January 2017. Earlier application is permitted.  An entity that chooses to apply IFRS 15 earlier than 1 January 2017 should disclose this fact in its relevant financial statements. [IFRS 15:C1]

When first applying IFRS 15, entities should apply the standard in full for the current period, including retrospective application to all contracts that were not yet complete at the beginning of that period. In respect of prior periods, the transition guidance allows entities an option to either: [IFRS 15:C3]

apply IFRS 15 in full to prior periods (with certain limited practical expedients being available); or retain prior period figures as reported under the previous standards, recognising the cumulative effect of applying

IFRS 15 as an adjustment to the opening balance of equity as at the date of initial application (beginning of current reporting period).

HISTORY OF IAS AND IFRS

Historically, the International Accounting Standards started in the mid-1960 ′s, more precisely, in 1966, with an initial proposal to enact the ICAEW, AICPA and the CICA for England and Wales, US and Canada respectively. Consequently, the Accounts International Study Group was founded in the following year, 1967, which aggressively championed for change by publishing papers on topics with great significance. As a result of these papers, the way was paved for the standards that were to come, and in 1973, an agreement was reached to establish an international body with the sole purpose of writing accounting standards to be used internationally.

In mid 1973, the IASC (International Accounting Standards Committee) was established; mandated with releasing new international standards, which would be rapidly accepted and implemented worldwide. The ISAC lasted 27 years until the year 2001, when it was restructured to become the International Accounting Standards Board (IASB).

A series of accounting standards, known as the International Accounting Standards, were released by the IASC between 1973 and 2000, and were ordered numerically. The series started with IAS 1, and concluded with the IAS 41, in December 2000. At the time when the IASB was established, they agreed to adopt the set of standards that were issued by the IASC, i.e. the IAS 1 to 41, but that any standards to be published after that would follow a series known as the International Financial Reporting Standards (IFRS).

The Difference

The question of the differences between the IAS and IFRS has arisen on a number of occasions in accounting circles, and in fact, some would question if there is any difference at all. One of the major differences is that the series of standards in the IAS were published by the International Accounting Standards Committee (IASC) between 1973 and 2001, whereas, the standards for the IFRS were published by the International Accounting Standards Board (IASB), starting from 2001. When the IASB was established in 2001, it was agreed to adopt all IAS standards, and name future standards as IFRS. One major implication worth noting, is that any principles within

IFRS that may be contradictory, will definitely supersede those of the IAS. Basically, when contradictory standards are issued, older ones are usually disregarded.

Summary:IAS stands for International Accounting Standards, while IFRS refers to International Financial Reporting Standards.IAS standards were published between 1973 and 2001, while IFRS standards were published from 2001 onwards.IAS standards were issued by the IASC, while the IFRS are issued by the IASB, which succeeded the IASC.Principles of the IFRS take precedence if there’s contradiction with those of the IAS, and this results in the IAS principles being dropped.

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