Certifr PDF 2012

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This pdf download document includes all you need to study the Certificate of International Reporting course while not at your computer. However, you should note that some pages are not featured in this printed pdf version. These are: answers to questions answers to exercises mock assessment You will see that, because of this, the page numbering in this document does not match the page numbering in the online version of the course. These pages require your interaction and can only be seen via the course online. Thank you and enjoy the course.

© 2012 Association of Chartered Certified Accountants

Certificate in International Financial Financial Reporting

Welcome


Welcome Welcome to t he course The primary objectives of this course are: •

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To help you understand understand how International International Financial Financial Reporting Reporting Standards (IFRS) are used around the world To explain the workings workings of the IASB and how these are being changed To examine the fundamental fundamental requirements requirements of IFRS on a standardby-standard basis, for the benefit of preparers, auditors and users of financial statements To provide guidance on how to use IFRS in practice, with with the aid of questions, cases and exercises

The course includes questions and interactive exercises which you should complete before moving on. Avoid skimming the material in the hope that you will glean the appropriate points - you won‘t, you must set aside time to study the material fully. If you do need to get in touch with the course administrator click administrator click here (NB. Please do not alter the subject line of this email. For your enquiry to be dealt with as quickly as possible it should read “Certificate in International Financial Reporting”.)


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Welcome

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During exercises and activities you are invited to enter your answer and review the answers of others within the course blog.


Welcome


Course contents and the learning learning process You can work on this cour se whenever whenever you lik e, 24 24 hours a day, seven days a week.

The course contains the following modules: Module 1 - The nature and operations of the IASB Module 2 - The status and use of IAS/IFRS around the world You decide when you want or need to learn; you decide just how long you Module 3 - Presentation and profit will spend reviewing and revising a topic, and you decide when you are Module 4 - Accounting for assets and liabilities - part 1 ready to move on. Module 5 - Accounting for assets and liabilities - part 2 Module 6 - Group accounting It should take you between 20 and 30 hours to complete, but you can take Module 7 - Disclosure standards as long as you wish to complete the course, within the time limit of your Module 8 - Principal Differences between IFRS & UK GAAP/US GAAP course licence. Module 9 - Forthcoming proposals for change Mock Assessment You can also download and print this course as an Acrobat Reader document to use for study when you are not near a PC. If you do not have A number of pages in this course refer you to IAS Plus - a website Adobe Adobe Acroba Acrobatt Rea Reader der inst install alled ed on your your PC, PC, click click the ‘Get ‘Get Adobe Adobe dedicated to international financial reporting standards and to related Reader’ button. current issues and developments. It is maintained by Deloitte Touche Tohmatsu.

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Module 1: The nature and operations of the IASB

Certificate in International Financial Reporting

Module 1: What you will learn - the nature and operations of the IASB In this module you learn about the following: • • •

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The origins of the International Accounting Standards Board (IASB) The organisation of the IASB A list of International Accounting Standards (IASs) and International Financial Reporting Standards (IFRSs) The purpose of financial statements – The Conceptual Framework for Financial Reporting The future of accounting standards Frequently asked questions

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Table of con tents Select a topic to study or click next.

Module 1: What you will learn - the nature and operations of the IASB Formation of the IASB Current IASB standards The Conceptual Framework for Financial Reporting Frequently asked questions Quick Quiz





Formation of the IASB The International Acco unti ng Standards Commit tee (now IFRSF) was Acco un ti ng st and ard s w ere s et b y a par t-t im e, volu nteer IA SC Bo ard founded in 1973 after a conference in Sydney in 1972. The IASC was that had 13 country members and up to 3 additional organisational members. Each member was generally represented by two formed through an agreement made by the professional acc ountancy bodies from Australia, Canada, France, Germany, Japan, Mexico, the “representatives” and one “technical advisor”. The individuals came from Netherlands, the United Kingdom with Ireland, and the United States of a wide range of backgrounds – accounting practice, multinational America. businesses, financial analysis, accounting education, and national accounting standard-setting. The Board also had a number of observer The accounting “ rule makers” in these countries were often not members. these professional accountancy bodies. In considering the The IASC concluded in 1997 that to continue to perform its role requirements for international accounting standards, it was regarded as effectively, there must be convergence between national accounting too difficult for governments to reach agreement - so the accountancy standards and practices and global accounting standards. The IASC bodies have worked together to try to devise a consistent set of global guidelines. saw, therefore, a need to change its structure. A new Constitution took effect from 1 July 2000 under which was established a requirement for full From 1973 to 2001 the number of accountancy bodies with constitutional review every five years. At this point the standards-setting membershi p of th e IASC increased to over 140. These accountancy body was renamed the International Accounting Standards Board (IASB). bodies represented over 100 countries, including China, represented by On 1 April 2001, the new IASB took o ver fro m the IASC the the Chinese accountancy body from 1997. responsibility for setting International Accounting Standards.



The organisation of th e IASB The IASB sits under the wider parent body the ‘IFRS Foundation’ and is supported by a number of other groups and advisory panels. Since its creation in 2000, there have been two full constitutional reviews. The latest was completed in March 2010. The key elements of the resulting structure, operational now, are illustrated in the diagram below and discussed further on subsequent pages.





The organisation of th e IASB The IFRS foundation is the umbrella organisation. It oversees the work of the IASB, its structure and strategy and has fundraising responsibility. It is made up of 22 trustees: • • • • • •

Six from North America Six from Europe Six from the Asia/Oceania region One from Africa One from South America Two from any area, subject to maintaining overall geographical balance

The Trustees act by simple majority vote except for amendments to the Constitution, which require a 75% majority. The Monitoring Board was created under the latest constitutional review to provide a link between the trustees of the IFRS foundation and public authorities . It will participate in, and approve, appointment of trustees of the IFRS foundation. It will also provide advice to and meet at least annually with the trustees.


Membership of the monitoring board will initially comprise six specific persons including the responsible member of the European Commission, the chair of the US Securities and Exchange Commission and the Commissioner of the Japanese Financial Services Agency.



The organisation of th e IASB The IASB has sole responsibi lity for publication o f IFRSs.

“ The princi pal responsibiliti es of the IASB are to develop and issue International Financial Reporting Standards and Exposure Drafts, and approve Interpretations developed b y the IFRS Interpretations Committee”.

There are currently 14 members of the Board up to three of whom may serve on a part-time basis. By no later than 1 July 2012 this number will grow to 16, to include: • • • • • •

Four from North America Four from Europe Four from the Asia/Oceania region One from Africa One from South America Two from any area, subject to maintaining overall geographical balance.

The Board has full discretion over developing and pursuing its technical agenda. The trustees’ annual review of the strategy of the IFRS Foundation, its effectiveness, and the IASB includes consideration, but not determination, of the IASB’s agenda. The publication of a Standard, Exposure Draft, or final Interpretation requires approval by 9 of the board’s members if there are fewer than 16 in total, or by 10 members if there are 16 in total.




The organisation of th e IASB The IASB normally form Working Groups or oth er types of specialist advisory groups to give advice on major projects. The Board is required to consult the IFRS Advisory Council on major projects, agenda decisions and work priorities.

The IFRS Interpretations Committee (‘Interpretations Committee’) was known as the International Financial Reporting Interpretations Committee (or IFRIC) until the latest constitutional review. The Interpretations Committee has 14 members, appointed by the Trustees.

Its responsibilities are to: The IFRS Advisory Council (‘Advisory Council’) pr ovides a forum for organisations and individuals w ith an interest in int ernational financial reporting with the objective of: Advising the Board on priorities in the Board’s work Informing the Board of the views of the organisations and individuals on the Council on major standard-setting projects, and Giving other advice to the Board or to the Trustees

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Under the constitution of the IFRS Foundation, the Advisory Council should have a minimum of 30 members.


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Interpret the application of International Financial Reporting Standards (IFRSs) and provide timely guidance on f inancial reporting issues not specifically addressed in IFRSs or IASs Publish Draft Interpretations for public comment and consider comments made within a reasonable period before f inalising an Interpretation.

Approval of draft or final Interpretations requires that not more than four voting members vote against the Draft or final Interpretation.


Current IASB standards International Accounting Standards (IASs) were issued by the IASC from 1973 to 2000. The IASB replaced the IASC in 2001. Since then, the IASB has amended some IASs, has proposed to amend other IASs, has proposed to replace some IASs with new International Financial Reporting Standards (IFRSs), and has adopted or proposed certain new IFRSs on topics for which there was no previous IAS. Through committees, both the IASC and the IASB have also issued Interpretations of Standards. Financial statements may not be described as complying with IFRSs unless they comply with all of the requirements of each applicable standard and each applicable interpretation.





Current IASB standards The list below outlines the standards as they currently exist. IFRS 1 IFRS 2 IFRS 3 IFRS 4 IFRS 5 IFRS 6 IFRS 7 IFRS 8 IFRS 9 IFRS 10 IFRS 11 IFRS 12 IFRS 13 IAS 1 IAS 2 IAS 7 IAS 8 IAS 10 IAS 11 IAS 12 IAS 16 IAS 17

First-time Adoption of International Financial Reporting Standards Share-based Payment Business Combinations Insurance Contracts Non-current Assets Held for Sale and Discontinued Operations Explanation for and Evaluation of Mineral Resources Financial Instruments: Disclosures Operating Segments Financial Instruments Consolidated Financial Statements Joint Arrangements Disclosure of Interests in Other Entities Fair Value Measurement Presentation of Financial Statements Inventories Statement of Cash Flows Accounting Policies, Changes in Accounting Estimates and Errors Events After the Reporting Period Construction Contracts Income Taxes Property, Plant and Equipment Leases


IAS 18 Revenue IAS 19 Employee Benefits IAS 20 Accounting for Government Grants and Disclosure of Government Assistance IAS 21 The Effects of Changes in Foreign Exchange Rates IAS 23 Borrowing Costs IAS 24 Related Party Disclosures IAS 26 Accounting and Reporting by Retirement Benefit Plans IAS 27 Separate Financial Statements (revised 2011) IAS 28 Investments in Associates and Joint Ventures (revised 2011) IAS 29 Financial Reporting in Hyperinflationary Economies IAS 30 Disclosure in the Financial Statements of Banks and Similar Financial Institutions IAS 32 Financial Instruments: Disclosure and Presentation IAS 33 Earnings Per Share IAS 34 Interim Financial Reporting IAS 36 Impairment of Assets IAS 37 Provisions, Contingent Liabilities and Contingent Assets IAS 38 Intangible Assets IAS 39 Financial Instruments: Recognition and Measurement IAS 40 Investment Property IAS 41 Agriculture



Current IASB standards

“ You will no te that a number of st andards seem to be mis sing , e.g. IASs 3, 4, 5, and 6. This is because they have been replaced by l ater standard s, e.g. IAS 3 (which related to consol idated financial statements) was replaced by th e much more detailed standards 27, 28 and (more recently) IFRS 10, 11 and 12.”

The above standards are examined in more detai l in later modules.


The standards are frequently changed in order to improve and remove options and establish more detailed rules in certain areas. Sometimes standards are amended retaining the same standard number where the scope of the standard has remained broadly the same. The latest s tandards (IFRS 10, 11, 12 and 13) were iss ued in May 2011.

The application dates of standards (i.e. when companies start to use the guidance they contain) are normally somewhat after their date of publication, e.g. these latest standards will all come into force for accounting years beginning on or after January 1st 2013. Early application is possible though.



The Conceptual Framework for financial Reportin g A majo r i tem in th e li st of pu bl ic ati on s i s t he Con cep tual Fr amewor k The framework is particularly designed to be used by the Board for Financial Reporting 2010 (“th e framework” ). This establishes the itself when preparing standards but is also addressed to companies and purpose of financial statements and the major principles lying behind their auditors when preparing financial statements in accordance with IFRSs. preparation. One of the key components of the framework is the definition of the The framework suggests that the main pur pose of fi nancial five main elements of financial statements. In the statement of statements is to give information to users (particularly investors) so financial position, t hree elements can be found: that they can make financial decisions. The most useful information An asset is a resource controlled by the enterprise as a result of would therefore be that which enables the prediction of future cash flows. past events and from which future economic benefits are expected It is clear from this that the purpose of financial statements is little to do to flow to the enterprise with taxation or management accounting. The context is that companies A liability is a present obligation of the enterprise arising from past and users are presumed to be living in an international world so that events, the settlement of which is expected to result in an outflow comparisons need to be made across national borders. This also implies from the enterprise of resources embodying economic benefits that national laws including tax laws have to be ignored when Equity is the residual interest in the assets of the enterprise after international standards are being drafted. . deducting all its liabilities •

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Equity does not need to be defined separately because it is just the arithmetical difference between total assets and total liabilities.




The Conceptual Framework for financial Reportin g The framework s tresses the definitions of asset and liability suc h that the definitions of incom e and expense are secondary i.e. for example, an expense is defined as an increase in a liability or a decrease in an asset. This is different from conventional accounting in most countries where in practice accounting is focused on the definitions of income and expenses based upon the accruals concept. To help explain this, let’s take a look at an example. Imagine that a business needs to repair a piece of equipment on the 20th February 2008. The company has a financial year running from 1st January to 31st December.

Is the repair bill an expense of financial year 2007 or of 2008? Some accounting systems would treat this as an expense of 2007, as the wear and tear that caused the equipment to breakdown was in 2007. Not only this, but the repair is tax deductible in 2007 if so charged. The conventional definition of an expense of year X is that it is a payment made in any year that relates to year X.


In this case, it coul d be argued that th e expense relates to 2007. If this is the case, then at the end of financial year 2007, a debit has to appear in the accounts for the repair expense, and a credit as a provision for the repair. This will mean that the balance sheet on 31st December 2007 will show a liability for the “provision for repair”. While it is difficult to say that this way is “ wrong” , it is certainly different from curr ent practice. The framework suggests that you should ask the question “Is there a liability?” on the 31st December 2007. The answer is “no”. Therefore there is no need for a double entry and so no expense. This is clearer.

The application of the asset/liability framework underpins conventional accounting practice.



The Conceptual Framework for financial Reportin g Summary of position International accounting guidance exists in the IASB’s framework, IFRS and Interpretations . The IASB published the framework to outline the concepts that underlie the financial reporting process. The framework is used as a guide by both international and national standard setters to set consistent and logical accounting standards. It also assists preparers and auditors in interpreting standards and dealing with issues that the standards do not cover.

The following hierarchy, in decreasing authority of guid ance within IFRS, is followed in developing and applying an accounting polic y where no IFRS specifically deals with the transaction: The requirements and guidance in the International Financial Reporting Standards and IFRIC Interpretations dealing with similar and related issues The framework The most recent pronouncements from other standard setting bodies that use a similar conceptual framework to develop accounting standards, other accounting literature and accepted industry practice to the extent that these do not conflict with (a) and (b) above. •

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The Standards provide gui dance for preparers to deal with the recognition, measurement, presentation and dis closure requirements for transactions and events. Most IFRS are intended for application across industries. A second tier of guidance comes from the Interpretations developed by the IFRIC. These pronouncements clarify or interpret the standards where there is a need for improved guidance. .




The future of accounti ng standards

In September 2009 the G20 leaders st ated “ We call on our international accounting bodi es to redouble their efforts to achieve a single set of high qualit y, global accounting standards within the context of their independent standard setting process, and complete their con vergence project by Jun e 2011.” .

Under the original understanding the aim was to achieve full convergence i.e. a set of common standards, by June 2011. Following concerns raised regarding the volume of draft standards due for issue in a short time though, the IASB and FASB announced jointly in 2010 that the scope of the project would be reduced. By June 2011 a converged solution would be found for all the areas identified by the original MoU, plus for other issues not in the MoU where a solution was urgently required. This project has largely been completed on time. Still outstanding remains final publication of new standards for leasing and revenue recognition, now due in 2012.

Since publication of a memorandum of understanding (MoU) in 2006, the IASB has been committed to a joint work pr ogramme with the FASB (the board responsible for issuing accounting standards in the US) to bring IFRS and US GAAP in line.


The Securities and Exchange Commission (SEC) in the US is expected to announce towards the end of 2011 whether and how to incorporate IFRS into the US financial system. In August 2011, in response to the SEC’s request for comments, the American Institute of Certified Public Accountants (AICPA) recommended that the SEC allow optional adoption of IFRS by US public companies.



Frequently Frequently asked questions 1. Are International Financial Financial Reporting Standards Standards recognised in all financial capital markets in the world? 2. What are accounting standards and and what is the difference between between IAS and IFRS?

1. Internatio Internatio nal Financial Reporti ng Standards (IFRSs) have have achieved achieved recognition universally as a highly in fluential set of accounting standards. The IASB says that over 100 countries have required or permitted the use of IFRSs since 2001. 2. Accounting standards are authoritative statements statements of how particular types of tr ansactions and other events events shoul d be reflected in financial statements. Accordingly, compliance with accounting standards will normally be necessary for the fair presentation of financial statements. Standards Standards i ssued by the International Accounting Standards Standards Board are designated International Financial Reporting Standards (IFRSs). Standards originally issued by the Board of the International Accounting Standards Committee (1973-2001) continue to be designated International Accounting Standards (IASs).




Frequently Frequently asked questions 1. 2. 3. 4.

What is IOSCO, and what is its link with with the IASB? How does the IASB decide what what subjects to add to its agenda? Is the framework framework anything like the UK’s Statement of Principles? Principles? Are the IASBs standards standards always in line with the framework? framework?

1. The International Organisation of Securities Commissions (IOSCO) is the representative body of the world’s securities markets regulators. High quality financial information information is vital to the operation of an efficient capital market, and differences in the quality of the accounting policies and their enforcement between countries leads to inefficiencies between markets. IOSCO has been active in encouraging and promoting the improvement and quality of IFRSs for over ten years. 2. Board members, members of the IFRS Advisory Council, national standard-setters, standard-setters, securities regulators, other organisations and individuals and the IASB IASB staff are are encouraged to submit suggestions for new topics that might be dealt with in the IASB’s standards. 3. Yes, Yes, the IASB’s IASB’s framewor k is cl osely in line wit h that of the US standard setter and and the UK’s Statement of Principles. 4. Not exactly. The framework was written after some of the standards. Also, sometimes, practical or political necessity forces the Board to stray from the framework. f ramework.




Quick Quiz

Module 1 quick quic k quiz qui z . Click next to continue


Module 1 quick quiz

Question 1 What is the role of the IFRS Interpretations Committee? A. To promote generally the acceptability acceptability of International Accounting Standards and enhance the credibility of the IAS. B. Advise the IASB board on technical issues in specific projects C. To consider, on a timely basis, accounting issues that are are likely to receive divergent or unacceptable treatment in the absence of authoritative guidance D. To work generally for the improvement and harmonisation of regulations, accounting standards and procedures relating to the presentation of financial statements



Module 1 quick quiz

Question 2 Which of the following is not one of the four enhancing qualitative characteristics? A. Understandability B. Materiality C. Comparability D. Timeliness



Module 1 quick quiz

Question 3 The definition of an asset includes which of the following terms: 1. Control 2. Future economic benefits 3. Ownership 4. Past transaction A. All of the above B. 1, 2, and 4 C. 2, 3, and 4 D. 1, 2, and 3



Module 1 quick quiz

Question 4 The principle of commercial substance over legal form is being applied when: A. An asset is depreciated on the straight-line basis B. The costs of a patent are capitalised C. An asset bought under a leasing contract is capitalised by the buyer D. Provision is made for doubtful debts



Module 1 quick quiz

Question 5 The monitoring board is responsible for: A. Approving IFRSs before publication B. Deciding on a work plan for the IASB C. Providing a link between the IFRS foundation and public authorities D. All of the above



Module 2: The status and use of IFRSs around the world


Module 2: What you will learn: t he status and use of IFRSs around the world This module will cover the following: •

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A brief summary of the development of International Financial Reporting Standards (IFRSs) and their adoption The growth of the International Accounting Standards Board (IASB) The recommended publication for this course.



Table of co ntents Select a topic to study or click next.

Module 2: What you will learn: the status and use of IFRSs around the world. Introduction: Where have IFRSs been adopted Growth of the IASB and IFRSs: a roadmap IFRSs for Small and Medium Enterprises (SMEs) IFRS for SMEs The annual IASB bound volume and its use Frequently asked questions





Introduction: Where have IFRSs been adopted In many countries, stock exchange listing r equirements or national securities legislation permits for eign companies that issue securities in thos e countries to pr epare their consolidated financial statements using IFRSs. The principal capital markets in this category are Australia, Germany and the United Kingdom. From 1 January 2005, all publicly listed companies in the European Union were required to prepare their financial statements in conformity with IFRSs. From the same date, Australia adopted IFRSs as its national accounting standards. New Zealand required IFRSs from 2007.

On 27 August 2008, the US Securiti es and Exchange Commiss ion voted to publish for public comment a proposed ‘roadmap’ that could lead to the use of International Financial Reporting Standards (IFRSs) by US issuers beginning in 2014. Currently, US issuers must use US GAAP, though foreign registrants (of which there are around 1,100 from 52 jurisdictions) may elect to use IFRSs. The proposal suggests mandatory adoption by US registrants could be phased in from 2014 to 2016 depending on company size: Large accelerated filers in 2014 Accelerated filers in 2015 Non-accelerated filers in 2016 • •

In 2007, Brazil, Canada, Chil e, India, Japan and Korea all est ablished timelines to adopt o r converge with IFRSs. In the USA, the Securities and Exchange Commission (SEC) removed the reconciliation requirement In 2011, the Commission will evaluate the progress of IFRSs against for non-US companies reporting under IFRSs, and consulted on IFRSs for certain defined milestones and make a decision on whether to go ahead domestic companies. with adoption starting in 2014, later, or not at all.. . •




Growth of th e IASB and IFRSs: a roadmap The IASB, the board responsible for issuing IFRSs, has come a long way since its inception in 1973. Here is a brief list of the major developments that have marked the life of the IASB:

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the IASC was founded in by accountancy bodies from nine countries 1970’s-80’s the codifying of best practice, including many national options 1989 publication of the first version of the Conceptual Framework for Financial Reporting and initial discussions with IOSCO 1990’s gradual adoption of IASs as national standards, particularly by Commonwealth countries 1993 ten revised standards, in force in 1995 1994+ adoption of IASs by a number of continental companies for consolidated statements. •

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laws to permit use of IASs in France, Germany and Italy and the IASC passes last major core standard (IAS 39, financial instruments)

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the IASC decides on reform; welcomed by SEC, etc.

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agreement between the IASC and IOSCO on list of core standards

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IOSCO recommends use of IAS to its members and the EU Commission proposes compulsory use of IAS for listed companies’ consolidated statements by 2005

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European Commission presents legislation to require use of IASC Standards for all listed companies no later than 2005 Trustees bring new structure into effect – 1 April 2001 – “IASC” now becomes “IASB” and assumes responsibility for setting accounting standards, designated International Financial reporting Standards (IFRSs).



Growth of th e IASB and IFRSs: a roadmap 2002

The IASB meets the US Financial Accounting Standards Board After extensive consultation with the SAC, national accounting (FASB). They conclude the Norwalk Agreement, a memorandum standard-setters, regulators and other interested parties, the IASB of understanding that commits the boards to work together to announces new programme of technical projects remove differences between IFRSs and US GAAP and to coordinate their future work programmes The IASB meets the US Financial Accounting Standards Board (FASB). They conclude the Norwalk Agreement, a memorandum of 2005 understanding that commits the boards to work together to remove The Trustees publish an amended Constitution for the IASC differences between IFRSs and US GAAP and to co-ordinate their (IFRS) Foundation future work programmes European commissioner supports “roadmap” development by staff 2003 of US SEC towards the removal by 2008 of the requirement for The Trustees launch review of the IASC( now IFRSF) Foundation’s companies to reconcile from IFRS to US GAAP when listing in the Constitution US 2006 The IASB completes its general improvements project by issuing 13 revised IASs, and revised versions of the two standards on IASB and FASB agree roadmap for convergence between IFRSs financial instruments and US GAAP 2004 China adopts accounting standards substantially in line with IFRSs By issuing four IFRSs, two revised IASs and an amendment to the 2007 financial instruments standard by the end of March, the IASB Brazil, Chile, Canada, India, Japan agree timelines for brings to completion its “stable platform” of standards for use by convergence companies adopting its standards from January 2005. 2011 US SEC to decide whether to go ahead with adoption starting in 2014, later, or not at all. •

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IFRSs for Small and Medium Ent erpri ses (SMEs) Public ation o f a new IFRS for SMEs

Because full IFRSs were designed to meet the needs of investors in public companies, they are very detailed and fairly burdensome to implement for smaller companies. In July 2009 the IASB published an International Financial Reporting Standard (IFRS) designed for use by small and medium-sized entities (SMEs). This new standard is designed for non-publicly accountable entities, and reflects an important development in international reporting, since SMEs are estimated to represent more than 95 per cent of all companies. The IFRS for SMEs is derived from full IFRSs with appropriate modifications based on the needs of users of SME financial statements and cost-benefit considerations (simplifications generally allow only more straightforward accounting policy options and a more concise written style is used throughout)..





IFRS for SMEs Implementation of the IFRS for SMEs in the UK

In August 2009, the UK Accounting Standards Board announced a draft policy for implementation of IFRS by non-publicly accountable UK companies (publicly accountable companies are required to prepare financial statements in accordance with f ull IFRS already). Under the latest draft of these proposals, the ASB will publish the Financial Reporting Standard for Medium Sized Entities (FRSME). This will be based upon the IFRS for SMEs, modified as little as is feasible to ensure compliance with UK and EU legal requirements.

The result will be a three-tier approach: 1. Publicly accountable entities prepare financial statements in accordance with full IFRS 2. Non-publicly accountable entities which are not small prepare financial statements in accordance with the FRSME (based upon the IFRS for SMEs). 3. Small entities continue to comply with the UK FRSSE

UK GAAP will be phased out and non-publicly accountable companies will Any entity could choose to adopt the policy of a higher tier i.e. a small be required to prepare financial statements in accordance with the company could choose to comply with the FRSME. FRSME for accounting periods beginning on or after 1 July 2013. Companies qualifying as small under the UK Companies Act 2006, and preparing accounts in accordance with the UK Financial Reporting Standard for Smaller Entities (FRSSE) will not be affected by these changes. The ASB intends to retain the FRSSE for the foreseeable future for small companies as defined by the Companies Act 2006.

For further information and a summary of this st andard please click on the followi ng hyperlink t o Deloitte’s IAS Plus website where a summary of the standard can be accessed: http://www.iasplus.com/standard/ifrsforsmes.htm



The annual IASB bound volume and its use It would be useful for reference purposes to have with you a copy of the bound volume of International Financial Reporting Standards 2011. You can purchase this direct from the IASB web site. This contains the text of t he current international standards and the interpretations. It also contains the text of the framework and a glossary of terms used in IASB documents. From time to time, this course will direct you towards particular standards to carry out short exercises.





Frequently asked q uestions 1. Which national standards are closest to the IASBs? 2. Is it necessary to adhere to all requirements of IFRS for financial statements to state compliance? 3. What version of the English language is used by the IASB: British or American?

1.In terms of subjects covered and level of detail, the UK’s standards used to be very close to IFRS , but since the roadmap for convergence with US accounting there are now signifi cant differences emerging.. 2. Yes, in order to claim compliance with IFRSs, all the requirements of th e IFRS must b e met. There are no exceptions. Use of local GAAP and IFRS together is not allowed. 3. The terminology is largely British. However, there are some exceptions, such as the use by IASB of “inventory” rather than “stock”, because the latter word means “share” in some countries


Module 3: Presentation and profit

Module 3: What you will learn: pr esentation and prof it This module begins the process of looking at IFRSs on a topic -bytopic basis. It deals with three introductor y standards: Presentation of financial statements - IAS 1 Revenue - IAS 18 Accounting policies, changes in accounting estimates, and errorsIAS 8. • • •




Table of co ntents Presentation of financial statements - IAS 1 Exercise - IAS 1 Question 1 Exercise - IAS 1 Answer 1 Exercise - IAS 1 Question 2 Exercise - IAS 1 Answer 2 Exercise - IAS 1 Question 3 Exercise - IAS 1 Answer 3 Revenue - IAS 18 Accounting policies, changes in accounting estimates and errors - IAS 8 Frequently asked questions Quick Quiz





Presentation of financial statements - IAS 1 The following represent the key points that you should take from the standard: 1. This standard contains several aspects taken from the framework, including that the purpose of financial reporting is to give useful information to investors for the purposes of making economic decisions. 2. The objective of general purpose financial statements is to provide information about the financial position, financial performance, and cash flow s 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 para 7] a. Assets. b. Liabilities. c. Equity. d. Income and expenses, including gains and losses. e. Other changes in equity. f. 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.


Under the revised IAS 1, publis hed in September 2007 and effective for accounti ng periods beginning on or after 1 January 2009, a complete set of financial statements should include: [IAS 1 para 10] a. A statement of financial position at the end of the period, b. A statement of comprehensive income for the period, c. A statement of changes in equity for the period d. A statement of cash flows for the period, and e. Notes, comprising a summary of accounting policies and other explanatory notes. The revised IAS 1 introduced a change to the titles of the financial statements as us ed in the IFRSs: a. ‘Balance sheet’ became ‘statement of financial position’ b. ‘Income statement’ became ‘statement of comprehensive income’ c. ‘Cash flow statement’ became ‘statement of cash flows’.

Entities are not required to use the new titles in their financial statements, but all existing Standards and Interpretations have been amended to reflect the new terminology.



Presentation of financial statements - IAS 1 3. In addition to changing the titles of the financial statements, the revised IAS 1 also requires that an entity must: Present all non-owner changes in equity (that is, ‘comprehensive income’ – see below) either in one statement of comprehensive income or in two statements (a separate income statement and a statement of comprehensive income). Components of comprehensive income may not be presented in the statement of changes in equity. Present a statement of financial position (balance sheet) as at the beginning of the earliest comparative period in a complete set of financial statements when the entity applies an accounting policy retrospectively or makes a retrospective restatement. Disclose income tax relating to each component of other comprehensive income. Disclose reclassification adjustments relating to components of other comprehensive income. •

4. The statement of changes in equity must be of the same status as the other three statements. The statement must show: (IAS1 para 106). total comprehensive income for the period for each component of equity, the effects of changes in accounting policies and corrections of errors recognised in accordance with IAS 8 for each component of equity, a reconciliation between the carrying amount at the beginning and the end of the period • •

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Comprehensive income for the period includes profit or loss for the period plus other income recognised including changes in revaluation surplus, actuarial gains and losses, and gains or losses from translating overseas operations.


5. IAS 1 requires that financial statements should present fairly the financial position, p erformance, and cash flows of an enterprise . It is said that nearly always this will be achieved by compliance with the requirements of the standards. However, in what are said to be extremely rare circumstances, it may be necessary to depart from such a requirement in order to achieve a fair presentation. IAS 1 requires departure in such circumstances, but with extensive disclosures, including the financial impact of the departure from the standard.



Presentation of financial statements - IAS 1 6. The two main requirements of accounting infor mation are that it should be relevant and reliable. As part of being reliable, financial statements should: - represent faithfully the results and financial position, - reflect economic substance and not merely legal form, - be free from bias, - be prudent, and - be complete in all material respects. Several other principles are said to be normally required, such as going concern, accruals, consistency and materiality. 7. The off-setting of assets and liabili ties is not allowed except where another standard requires or permits it. Income and expense items should not be offset except where a standard permits or requires it. 8. IAS 1 generally requires that comparative information for the previous period should be disclosed for all numerical information in financial statements.


9. It is necessary to present assets and liabilities on the basis of t he distincti on between current i tems and non-current items except where a presentation based on liquidity is reliable and more relevant. 10. IAS 1 does not lay down particular formats for financial statements but does have minimum requirements for the presentation of items on the face of the financial statements.

11. In June 2011 an amendment to IAS 1 was issued to improve the consistency and clarity of the presentation of items in other comprehensive income.



Exercis e - IAS 1 Questi on 1 Please review the following exercise:

Should the going concern convention be dropped when a significant part of the reporting entity is thought not to be a going concern?

Consider your answer to the question, when you are ready click next to enter it into the course blog. You may wish to discuss this with a colleague before finally submitting it.

You should refer to the text of the standard when answering all exercises. You can then review the ideas of other students on this subject.





Is consistency of accounting policies from year to year required?







Can a loan which is expected to be paid back in four months be a noncurrent liability?






Revenue - IAS 18 The following represent the key points that you s hould take from the standard: 1. Revenue is to be measured at the fair value of the consideration received. This includes, where material, discounting, if the consideration will be received in the future (paragraphs 9 and 11).

3. When the outcome of a process of revenue earning can be reliably measured, revenue should be recognised by stage of completion, otherwise only to the extent of expenses recoverable (paragraphs 20 and 26). 4. Where there are several components to a transaction (e.g. a company sells goods and services together), then the revenue recognition rules should be applied to each component separately i.e. revenue attributable to the sale of goods will be recognised immediately whilst the revenue associated with provision of services will be deferred and recognised over the period during which the service is performed (paragraph 13).

2. Revenue arising fr om the sale of g oods shoul d be recognised when all the followi ng cri teria have been satisfied (paragraph 14): a. The seller has transferred to the buyer the significant risks and rewards of ownership b. The seller retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over 5. There are also general rules for the recognition of interest, the goods sold royalties and dividends. None of these rules would be surprising in c. The amount of revenue can be measured reliably d. It is probable that the economic benefits associated with the most countries (paragraph 30). transaction will flow to the seller e. The costs incurred or to be incurred in respect of the transaction can be measured reliably.




Revenue - IAS 18 Revenue measurement – a wor ked Example

IAS 18 states that if consideration will be received in the future then, where material, it should be discounted to present value. The following example illustrates this point with some figures. Supersofas Limited, a furniture company, launches a promotional offer that allows customers to ‘buy now, pay two years later’ with no interest charged. On 31 August 2009 Supersofas Limited sell two sofas to Judy for $1,000. Judy takes advantage of the offer of interest-free credit and will pay in August 2011. If interest rates are currently 5% per annum, how should this transaction be recorded by Supersofas Limited in the year ended 31 December 2009?

Because the consideration is receivable in the future, it should be discounted back two years at 5% to find the revenue recognised: $1,000 x (1/1.052) = $907 Supersofas will recognise revenue in the income statement and a receivable on the statement of financial position equal to $907. Over the two year period of interest-free credit, the discount unwinds, and this will create investment income in the income statement and increase the receivable on the statement of financial position. In 2009, Supersofas will recognise investment income for four months (September to December inclusive): $907 x 0.05 x 4/12 = $15 The receivable balance will also increase by $15 to stand at $922 at 31 December 2009.



Acco un ti ng po li cies, c hanges in accou ntin g es ti mates and er ro rs - IAS 8 The following represent the key points that you s hould take from the standard: 1. In the absence of a Standard or an Interpr etation, management must use its judg ement in developing and applying an accounting policy t hat results in i nformation that is relevant and reliable. Management must refer to, and consider the appli cability of, the following sources in descending order: a. The requirements and guidance in IASB standards and interpretations dealing with similar and related issues b. The definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the framework (paragraph 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 paragraph 11.





Acco un ti ng po li cies, c hanges in accou ntin g es ti mates and er ro rs - IAS 8 2. An entity shall select and apply its accounting policies consistently for similar transactions, other events and conditions . 3. An entity is permitted to change an accounting polic y only if the change: a. Is required by a standard of interpretation; or b. Results in the financial statements providing reliable and more relevant information 4. The effect of a change in an accounting estimate shall be recognised prospectively by including it in profit or loss in: a. The period of the change, if the change affects that period only; or b. 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 (paragraph 37)..


5. The general principle in IAS8 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 (paragraph 42): a. Restating the comparative amounts for the prior period(s) presented in which the error occurred; or b. 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.



Frequently asked questions 1. Click here to enter text Is there a “true and fair override” in IASs? 2. What is the status of interpretations? 3. Suppose that a company has entered into a binding contract to sell an asset soon for a fixed amount. Can any implied gain be recorded?

1. IAS 1 talks of fair presentation rather than true and fair view. However, there is an override, which is said to be necessary only in very rare circumstances. Substantial disclosures are required. 2. IAS 1 gives interpretations the same status as standards. That is, they must be complied with. 3. The framework would appear to suggest that the gain is both relevant and reliable information. However, IAS 18 requires control to be passed, so it seems that the gain cannot be recorded yet.




Quick Quiz

Module 3 quick quiz Click next to continue



Question 1 During the year to 30 September 2008, the following events occurred in relation to Pipe, a limited liability company. All were material to the company’s accounts: 1. A claim for tax relief, relief, submitted in 2005, 2005, was rejected by the Tax authorities. No appeal will be made. The resulting liability of $15,000 was not provided at 30 September 2007, since the company had expected the claim to succeed. 2. The company had decided to include attributable attributable overheads in its inventory valuation for the first time in 2008. The effect at 30 September 2007 would have been $5,000. 3. A cut-off error on inventory at 30 September 2007 was discovered which would have reduced the value of inventory by $24,000. 4. Obsolete inventory which had had been written down to its estimated estimated net realisable value of $17,000 at 30 September 2007 was sold for $7,000. How much should be accounted for as a prior period adjustment in the accounts to 30 September 2008? A. $10,000 B. $19,000 C. $29,000 D. $34,000




Question 2 Which of the following does not have to be included in the Statement of Changes in Equity (SOCIE)? A. Total comprehensive income for the period period B. A reconciliation between the carrying carrying amount at the beginning and the end of the period for each component of equity C. Each item of income and expense which which is recognised directly in equity D. The cumulative effect of changes in accounting accounting policy and the correction of fundamental errors




Question 3 Which item must be shown separately on the face of the SOFP? A. Intangible assets B. Work in progress C. Trade receivables D. Taxation




Question 4 Balances under the following headings are extracted from the books of Ego, a limited liability company: 1. Changes in inventories of finished goods and work in progress progress 2. Raw materials materials and consumables used 3. Consulting expense The accountant wishes to use a Format 2 “type of expenditure” income statement. Which of the above balances may be included without further analysis on the face of the income statement/ statement of comprehensive income? A. 1 and 2 B. 1 and 3 C. 2 and 3 D. 1, 2 and 3




Question 5 ‘ Does the Job Ltd’, a software company, make a sale for $500,000 at the end of their reporting period. The amount charged to the customer includes $470,000 for software and $30,000 for support s ervices for the next two years. How much revenue should ‘Does the job Ltd’ recognise in the current reporting period?

A. $500,000 B. $485,000 C. Nil D. $470,000



Module 4: Accountin g for assets and liabilities – part 1


Module 4: What you will learn: accounting for assets and liabilities – part 1 In this module you will look at the following standards: Property plant and equipment - IAS 16 Intangible assets - IAS 38 Investment property - IAS 40 Impairment of assets - IAS 36 Borrowing costs - IAS 23 Accounting for government grants and disclosure of government assistance - IAS 20 Inventories - IAS 2 Construction contracts - IAS 11 Leases - IAS 17 Noncurrent assets held for sale and discontinued operations – IFRS 5 • • • • • •

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Introduction Property plant and equipment - IAS 16 Exercise - IAS 16 Question 1 Exercise - IAS 16 Answer 1 Exercise - IAS 16 Question 2 Exercise - IAS 16 Answer 2 Intangible Assets - IAS 38 Exercise - IAS 38 Question 1 Exercise - IAS 38 Answer 1 Exercise - IAS 38 Question 2 Exercise - IAS 38 Answer 2 Investment property - IAS 40 Impairment of assets - IAS 36 Exercise - IAS 36 Question Exercise - IAS 36 Answer Case study - Impairment of assets Borrowing costs - IAS 23 Accounting for government grants and disclosure of government assistance - IAS 20 Exercise - IAS 20 Question Exercise - IAS 20 Answer Inventories - IAS 2 Construction contracts - IAS 11 Exercise - IAS 11 Question Exercise - IAS 11 Answer Leases - IAS 17 © 2012 Association of Chartered Certified Accountants

Exercise - IAS 17 Question Exercise - IAS 17 Answer Noncurrent assets held for sale and discontinued operations - IFRS 5 Exercise - IFRS 5 Question Exercise - IFRS 5 Answer Frequently asked questions Quick Quiz



Introduction

“ The definition of asset is: ‘a resource controll ed by the enterprise as a result of past events and from whi ch future economic benefits are ex ected to flow to the entit .’”

The treatment of assets involves a three-stage process: 1. Is the item an asset? 2. Should the item be recognised (recorded) in the statement of financial position? 3. How should the asset be valued?


It should be noted that an asset is not necessarily something whi ch is owned but which is cont rolled. One example of an implication of this is that a lessee might treat an item as an asset even though it is not owned by the lessee. Of course, for an item to be an asset at all, it must produce some future benefit to the entity. However, not all of an entity’s assets should be recognised in the statement of fi nancial position. Some of them cannot be measured with sufficient reliability to be included. It is necessary to have some measure of either cost or value. Having decided to recognise an asset there might then be several ways in which it could be valued, such as depreciated cost or current market value. Each IFRS on the subject of assets deals with both recognition and measurement. There are also usually many requirements relating to disclosures of these issues.



Property plant and equipment - IAS 16 The main elements of thi s standard are as follows: An ass et s ho ul d i ni ti all y be r eco gnis ed at it s c os t, which includes all those costs of bringing it to its present condition and location, ready for productive use (paragraph 15). Capitalisation of su bsequent expenditure should oc cur when it is probable that the asset will produce future benefits in excess of the originally assessed standard of performance. Subsequently the entity can conti nue using cos t (with depreciation, see below) but assets may be revalued to fair value. This alternative must be used continually at each reporting date and must be applied to a whole class of assets rather than to an individual asset only. A class of assets is a heading on a statement of financial position, such as “land and buildings”. Fair value is defined by IFRS 13 as 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 This i s different from net realisable value because that amount is net of various items including cost of sale (paragraphs 29, 30 and 31).


Revaluation gains and losses should be recorded in other comprehensive income and taken to equity under the heading of revaluation surplu s. There are some special rules where a revaluation loss occurs in cases where there has previously been a revaluation gain (paragraphs 39 and 40). The carrying amount of an asset should be depreciated over its useful life. The depreciable amount takes account of the residual value expected at the end of the useful life. This value should be measured at the price level ruling when the cost or value of the asset was determined (paragraphs 6). The gain or loss on the disposal of an asset is calculated as the difference between the proceeds and the carrying amount. Since the latter could be based on either cost or revaluation, the gain on sale would be lower if an asset had been revalued upwards.



Exercis e - IAS 16 Question 1 Please review the following exercise:

A company bought some land for $15m in 2000, revalued it at various dates up to $23m in 2007, and sold it for $21m in 2007, but did not receive any cash until 2008. Ignoring tax, the gain/loss recorded in 2007 should be:

Consider your answer to the question, when you are ready click next to enter it into the course blog. You may wish to discuss this with a colleague before finally submitting it. You can then review the ideas of other students on this subject.

a. b. c. d.

zero +$6m -$2m +$21m

You should refer to the text of the standard when answering all exercises.





A company owns five properties, all capitalised and held at cost within property, plant and equipment. Two of these properties are office buildings in central London. Market information suggests that these two properties have increased in value significantly and management would like to book a revaluation in the accounts to reflect this gain at the year end. They believe this will provide more relevant information to shareholders and others reviewing the financial statements. Would IAS 16 permit this treatment? You should refer to the text of the standard when answering all exercises.





Intangib le Assets - IAS 38 The main elements of thi s standard are as follows: As wi th any other ass et, i ntang ib le i tems s ho ul d be rec ogni sed where there is a probable future benefit that can be measured reliably (paragraph 21). With intangibles this may be more difficult than for tangible assets. Certain items are therefore not recognised. For example, internally generated goodwill cannot easily be traced back to a transaction and therefore the cost or value is difficult to measure; it is not even clear that the enterprise has control over it, consequently it is not to be recognised as an asset (paragraph 48). Also research expenditure cannot be capitalised for similar reasons (paragraph 54). The same applies to several other internally generated assets, such as brands (paragraph 63). Development expenditure that meets certain criteria should be capitalised. One of the conditions is that there is a technically feasible project that can be separately measured (paragraph 57). .


In some countries items such as the legal and other expenses of setting up a company are capitalised, but this is not allowed under IAS 38 because there is not an asset (paragraph 66). Just as tangibl e assets are allowed to be revalued by IAS 16, so intangibles may be revalued, but there are some restrictions . Intangibles can only be revalued with reference to an active market that involves many buyers and sellers and publicly available prices (paragraph 75). This makes it difficult in practice to re-value most intangibles. Intangible assets are classified as (paragraph 88): a. Indefinite life: no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the entity b. Finite life: a limited period of benefit to the entity.



Intangib le Assets - IAS 38 The cost less r esidual value of an intangible asset with a fini te useful life should be amortised over that life (paragraph 97): a. The amortisation method should reflect the pattern of benefits b. If the pattern cannot be determined reliably, amortise by the straight line method c. 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 (paragraph 104).

An in tan gi bl e ass et wi th an i ndefi ni te us eful l if e sh ould not b e amortised (paragraph 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 (paragraph 109). The asset should also be assessed for impairment in accordance with IAS36 (paragraph 111).

The asset shoul d also be assessed for i mpairment in accordance with IAS 36 (paragraph 111).

For further information and a summary of this s tandard please click on the followi ng hyperlink to Deloitte’s IAS Plus website where a summary of the standard can be accessed: http://www.iasplus.com/standard/ias38.htm





Can brand names be capitalised?

Consider your answer to the question, when you are ready click next to enter it into the course blog.


You may wish to discuss this with a colleague before finally submitting it. You can then review the ideas of other students on this subject.





Can development expenditure be revalued upwards?







Investment property - IAS 40 IAS 40 deals with investment property, which is p roperty held to earn r entals o r capital gain, rather than being owner occupi ed. Paragraphs 8 and 9 expand on this definition by providing examples of what would constitute investment property. The standard does not apply to biological assets and mineral rights (paragraph 4).

For those enterprises that choose th e cost model, there must be disclos ure in the notes of fair value (paragraph 75). An ent it y mus t ap pl y i ts ch os en model t o all i ts in vestm ent pr op ert y.

An entit y s houl d d eci de whet her it wi shes t o fol low a c os t m odel or a fair value model for all its i nvestment property (paragraph 30). The fair value model includes taking gains and losses to income (paragraph 35). In the fair value model, individual properties whos e fair value cannot be reliably measured should also be measured at cost (paragraph 53). When a property changes from i nvestment property to owner occupied or to inventory, the property’s cost for subsequent accounting should be its fair value at the date of its change of use. (paragraph 74).





Impairm ent of assets - IAS 36 The main elements of thi s standard are as follows: This standard applies to most assets, but not to inventories because they are already valued at the lower of cost and net realisable value, which takes into account any loss of value (paragraph 1).

The value in use is t he discounted present value of the futur e net cash flows expected to relate to the asset or cash generating uni t. A cash generating unit is simply the smallest element of a company that can independently generate revenue/cash flow (paragraph 6).

The process of applying this standard begins by looking at each asset at the end of each reporting period for any indication of For many assets it may be impossibl e to measure specific c ash impairment such as physical damage or fall in selling price of the product flows relating to them, so it becomes necessary to do the exercise with made with the asset (paragraph 9). the smallest group of assets for which independent cash flows can be measured. Normally one would expect no indication o f impairment, but in cases This group of assets is called a “cash generating unit” (paragraph 6). where there is, an entity must then test whether there is an impairment. There is a series of rules on cash flow projections designed to stop This involves comparing the “carrying amount” of the asset with its “recoverable amount”, which is the higher of its fair value less cost to sell an enterprise from being too opt imistic (paragraphs 33, 39, 44, 50 and and value in use. 52). The cash flows should, of course, be discounted and the discount rate should be pre-tax and asset-specific (paragraph 55).




Impairm ent of assets - IAS 36 The extent to which the carrying value is in excess of the recoverable amount is the measure of the i mpairment loss. This should be charged immediately to the income statement (paragraph 60). However, there are some special rules relating to assets that have previously been revalued upwards. The allocation of an impairment loss to the various elements of a cash generating unit shoul d first be against any goodwill and then pro rata to other assets in the unit (paragraph 104). Impairment losses should be reversed if there has been a change in the estimates used to determine the recoverable amounts (paragraph 99). This does not apply to goodwill.





Exercis e - IAS 36 Questi on Please review the following exercise:

Will an asset’s recoverable amount usually be fair value less costs to sell or value in use?





Case study - Impairment of assets This case study is loosely based on a real example. Suppose that a Malaysian company, Goodtimes Co, prepares its statements according to IFRSs. It has a flow of net profit as follows: Year 2006 2007 2008 2009 2010 Net Profit 570 630 102 610 590 (RMB (estimate) (estimate) million)

In the 2008 Annual Report, the following was noted: “In December 2008 a review of our assets indicated that the value of the oil and gas operations in our Sector B production area was lower than we had previously been estimating. Management carried out an impairment test of our oil and gas pipelines by comparing their carrying value with the present value of the expected net cash flows. This resulted in a write down of RMB650 million, and an impairment loss of that size was charged to income”.





Case study - Impairment of assets What sor t of estimates are involved in impairment tests? The impairment is being calculated under the rules of IAS 36, which requires annual impairment review, followed by tests where there is any indication of impairment. The test requires a comparison of carrying value with recoverable amount, which is the higher of fair value less costs to sell and value in use. The former is unlikely to be relevant because there is no market and no intention to sell. It would normally be lower than the value in use, which is measured as the discounted expected net cash flows. It is presumed here that the “cash generating unit” is the pipeline system. However, the estimates of value in use rely on knowing the life of the pipeline to the present owner, the disposal pr oceeds, the cash flows in and out over the future li fe, and a suitable pre-tax discount rate. IAS 36’s discusses this, but there is still considerable room for manoeuvre.


Do you think that there is any inc entive for management to overstate or understate the impairment loss? The impairment loss for 2008 is so large in the context of the five year run of profits th at analysts woul d probably have to ignore it on the grounds of “ unusual” / “abnormal” / “non-recurring”. Once the management realises this, they might as well make the loss as big as possible so that future depreciation expenses are lower and gains on disposal higher.

This answer is written in the context of countries where impairment losses are not treated as tax deductible expenses. Of course if they are tax deductible, then a company would usually want to maximise them.



Borrow ing cos ts - IAS 23 The main elements of thi s standard are as follows: This standard examines the issues of whether the costs of borrowing should be added to the capitalised cost of an asset. For example, if an enterprise is constructing its own office building, what are the “costs”? It is clear from IAS 16 (above) that these costs would include the bricks, the labour to put the bricks on top of each other, the architect’s fees, and so on. However, do they include the interest cost on money borrowed to build the building? Borrowing costs that are directly attributable to the acquisiti on, constructi on or producti on of a qualifying asset form part of the cost of that asset and, therefore, should be capitalised whilst other borrowing costs are recognised as an expense (paragraph 8). This reflects the revision to IAS 23 that prohi bits i mmediate expensing of borrowing costs and therefore aligns the treatment under IFRS with th at under US GAAP. The revision to IAS 23 became effective for borrowing costs relating to assets for which the commencement date for capitalisation was on or after 1st January 2009.

Where a business borrows specifically to fund a project, the borrowing costs that may be capitalised will be those actually incurred (paragraph 12). Where an entity borrows funds generally, the amount that may be capitalised re the construction of a specific asset should be calculated by applying the weighted average cost of borrowing to the expenditure on that specific asset (paragraph 14). IAS 23 contains detailed guidance around when an entity should commence and cease capitalising borrowing costs (paragraphs 17, 20 and 22).





Acco un ti ng fo r g overn men t g ran ts and di sc losu re of g overn men t as si stance - IAS 20

“ The objective of IAS 20 is to pr escribe the accounting for, and disclosur e of, government grants and other form s of g overnment assistance.”

The main elements of thi s standard are as follows: IAS 20 requires that government grants should be recognised only when there is reasonable assurance that the entity will comply wi th any conditions attached to them and that the grants will be received (paragraph 7). Grants should be recognised as income over periods that enable them to be matched against the costs being compensated and should not be credited direct to equity (paragraph 12). Grants related to assets should be presented in the statement of financial position either as deferred income or as a deduction fro m the related assets (paragraph 24).






An enterprise has received a government grant relating to an asset which is expected to last for ten years. It is highly probable that the conditions of the grant will continue to be met. Does the framework suggest the same recognition requirement as IAS 20?






Inventor ies - IAS 2

“ The objective of IAS 2 is to prescribe the accounting treatment for inventori es. It provi des guidance for determinin g the cost of inventories and for subs equently recognis ing an expense, including any write-down to net realisable value. It also provides guidance on the cost for mulas that are used to assign costs to inventori es.”

The main elements of thi s standard are as follows: IAS 2 requires the age-old rule of the lower of cost and net realisable value (paragraph 9). Net realisable value (NRV) is the estimated selling price in the ordinary course of business less any estimated costs of completion and sale (paragraph 6). IAS 2 allows a choic e of ways of determining cos t where the specific cost is not obvious. FIFO or weighted average are the recommended treatments. However, IAS2 excludes certain inventories from it s scope: w ork in process arising under constructi on contracts, financial instruments and biological assets. .




Inventor ies - IAS 2 Cost should incl ude all: a. costs of purchase (including taxes, transport, and handling) net of trade discounts received b. costs of conversion (including fixed and variable manufacturing overheads) and c. other costs incurred in bringing the inventories to their present location and condition.

The LIFO formula, which had been allowed prior to the 2003 revision of IAS2, is no longer allowed.

Inventory cos t should no t include abnormal waste, storage costs or administrative overheads unrelated to production.

An y w ri te-d own to NRV sho ul d be rec ogni sed as an expens e in the period in which the write-down occurs.

The same cost formul a should be used for all inventories with similar characteristics as to their nature and use to t he enterprise. For groups of inventories that have different characteristics, different cost formulas may be justified.

The standard cos t and retail methods may be us ed for the measurement of c ost, provided that the results approximate actual cost.





Construction contracts - IAS 11 The main elements of thi s standard are as follows: This standard relates to specifically negotiated contracts f or the constructi on of assets. It requires that when the outcome of the contract can be estimated reliably, then the revenues and costs should be recognised at each reporting date by reference to the stage of completion of the contract (paragraph 22). Stage of completion can be measured with reference to value of work certified to date, costs incurred to date compared to total estimated costs or physical proportion of work completed. An y l os s ex pec ted sh ould be r ecogn is ed immedi atel y. There are criteria to help determine whether these estimates can be reliably made, including that the costs and revenues of the contract must be separately identifiable (paragraphs 23, 24). When the outcome of a contract cannot be estimated reliably, revenue should be recognised only to the extent of contract costs that will probably be recoverable, and contract costs should be recognised when they are incurred. Again, expected losses should be recognised immediately (paragraph 32).






Buildahouse Ltd is a construction company that uses costs incurred to date to measure stage of completion. At the end of the reporting period, the following information is available regarding project A:


Contract value $5,000,000 Value of work certified to date $3,000,000 Costs incurred to date $2,600,000 Estimated costs to complete $1,400,000

You can then review the ideas of other students on this subject.

Assuming that the outcome of the project can be estimated reliably, how much revenue and profit should be recognised for project A in the current reporting period? You should refer to the text of the standard when answering all exercises.


You may wish to discuss this with a colleague before finally submitting it.



Leases - IAS 17 “IAS 17 applies to all leases other than lease agreements for m inerals, oil, natural gas, and similar regenerative resources and l icensing agreements for films, vi deos, plays, manuscript s, patents, copyright s, and simi lar items.”

The main elements of thi s st andard are as follows: IAS 17 requires the capitalisation of finance lease assets and liabilities at the lower of the fair value of the asset and the discounted minimum lease payments (paragraph 20). A fin anc e leas e is one that t ran sf ers su bs tanti all y all t he r is ks and rewards associated with the leased asset to the lessee (paragraph 4). There are a number of suggestions about how it is possible to identify a finance lease but no numerically based criteria of the proportion of value or life. As a general ru le, t he depr eci ati on per io d for the cap it ali sed leased assets is to be cons istent with any other assets as under IAS 16 (paragraph 27). Unless it is reasonably certain that the lessee will retain ownership of the asset at the end of the lease term though, the asset should be depreciated over the shorter of the lease term and the useful economic life.




Leases - IAS 17 Operating leases (i.e. those leases which are not f inance leases) should be treated as r entals. Operating lease rental payments should be recognised on a straight-line basis over the life of the lease, even where the lease is written with low rentals at the beginning and high rentals later (paragraph 33). Lessors shoul d recognise a lease as finance or operating in a mirror image way. Consequently, although the lessor owns the assets involved in a finance lease, the statement of financial position shows a receivable rather than the leased asset. Lessors shoul d recognise income as a constant return on the net investment in the l ease (paragraph 39). If a sale and lease back transaction results in a finance lease, in substance there has been no sale. Rather than recognising a profit on dis posal of the asset, any income shoul d be deferred and amortised over the lease term (paragraph 59).






Is the definition of a finance lease consistent with the Framework’s definition of asset and liability?


You should refer to the text of the standard when answering exercises. You can then review the ideas of other students on this subject.




Noncurrent assets held f or s ale and di scontinu ed operations - IFRS 5 IFRS 5 sets out the accounting treatment and disclosure requirements when part of a company is either ‘for sale’ or has already been disposed. In the statement of financial position IFRS 5 establishes a classification for non-current assets “ held for sale” . In general, the following conditions must be met for an asset (or “disposal group”) to be classified as held for sale (paragraphs 6-8): a. management is committed to a plan to sell b. the asset is available for immediate sale c. an active programme to locate a buyer is initiated d. the sale is highly probable, within 12 months of classification as held for sale (subject to limited exceptions) e. the asset is being actively marketed for sale at a sales price reasonable in relation to its fair value f. actions requires to complete the plan indicate that it is unlikely that the plan will be significantly changed or withdrawn.


A “ di sp os al g ro up ” is a gr ou p of as sets, possibly with some associated liabilities, which an entity intends to dispose of in a single transaction. Immediately before the initial classifi cation of the asset as held fo r sale, the carrying amount of the asset should be measured in accordance with applicable IFRSs (e.g. if the asset is held in PPE at revalued amount under IAS 16, then it should be revalued before applying IFRS 5).

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 (paragraph 15).



Noncurrent assets held f or s ale and di scontinu ed operations - IFRS 5 Impairment must b e considered both at the time of classification as held for sale and subsequently: a. noncurrent assets or disposal groups that are classified as held for sale are not to be depreciated (paragraph 25) b. 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 A dis co nt in ued op eratio n i s a c om ponent of an entit y that eit her has been disposed of or is classified as held for sale and (paragraph 32): a. represents a separate major line of business or geographical area of operations b. is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations, or c. is a subsidiary acquired exclusively with a view to resale. Detailed disclosures of discontinu ed operations are required (paragraph 33). The main requirement is that in the statement of comprehensive income the result for the discontinued operation, combined with any gain or loss on disposal, or on remeasurement of assets held for sale, be disclosed separately from the results of continuing operations..


For further information and a summary of this s tandard please click on the followi ng hyperlink to Deloitte’s IAS Plus website where a summary of the standard can be accessed: http://www.iasplus.com/standard/ifrs05.htm



Exercis e - IFRS 5 Questio n Please review the following exercise:

If shares are sold such that a subsidiary becomes an associate, can that be a discontinued operation?






Frequently asked questions 1. Click here to enter text What is the difference between “fair value” and “net realisable value” (NRV)? 2. Because revaluation increases subsequent depreciation and decreases gain on sale, would this not discourage revaluation? 3. IAS 16s rule on the calculation of the gain on revalued assets seems to mean that some realised gains never appear as income. Can this be right?.

1. NRV is a market price net of selling costs. Fair value is a market price with costs neither deducted or added. For some assets (e.g. buildings) in some countries, transaction costs could be a large percentage. 2. It is not the IASB’s intention to disc ourage the use of relevant current values. A transfer can be made from revaluation reserve to accumulated reserves of the increase in the depreciation charge. This maintains ‘realised’ profits at the same level. 3. That is, ind eed, the impl icatio n. However, the gain does appear in the “ statement of comprehensive income” which if the company chooses can be published directly beneath the main income statement.




Quick Quiz



Module 4 quick quiz

Question 1 Sandy Limited enters into an operating lease agreement on 1 July 2009. The lease term is 5 years. Annual rental payments in advance are $1,500. To incentivise Sandy to enter into the lease, the lessor has agreed to a six-month rent-free period, so that the first rental payment will be made on 1 January 2010. What should be recorded in the income statement for the year ended 31 December 2009? A. An expense of $750 B. An expense of $675 C. Income of $750 D. No income or expense



Module 4 quick quiz

Question 2 During the year Project Co constructed a new head office building costing $2m. It took 6 months to complete and the work was funded from existing loan finance: • • •

$1m loan at an interest rate of 6% $1.5m loan at an interest rate of 4% $0.5m loan at an interest rate of 5%

Under IAS 23, what borrowing costs should be capitalised? A. $48,333 B. Nil C. $42,500 D. $96,667




Module 4 quick quiz

Question 3 Crazy Constructing Plc are in the process of preparing year end accounts and have the following information regarding a project to build a bridge: Costs to date $5,000,000 Estimated costs to complete $3,000,000 Contract price $7,000,000 The project is accounted for under IAS 11. What should be recorded in the income statement for revenue and overall result for this project at the year end? Revenue Result A. $7,000,000 Loss of $1,000,000

B. $5,000,000

Nil profit or loss

C. $4,375,000

Loss of $1,000,000

D. $7,000,000

Profit of $2,000,000



Module 4 quick quiz

Question 4 New Designs Limited is working on a groundbreaking piece of machinery for use in toy manufacture. If successful the new machinery should improve efficiency ten-fold, and New Designs are in no doubt that it would be sought after by all of the major toy manufacturers. They began work on the project on 1 February 2009. At this point they set aside money to fund the project and set up a new laboratory where the work would take place. By 31 July they had produced a prototype and by 30 September had completed successfully a rigorous testing process to check the product conformed to safety requirements etc. They launched the product onto the market on 1 December 2009. Costs incurred on the project were as shown below: $'000s

$'000s

February

450

July

450

March April May June

450 450 500 550

August September October November

600 650 200 100

How much, if any, of the expenditure should be capitalised in the year ended 31 December 2009? A. B. C. D.

$100,000 $1,550,000 Nil $300,000


Module 4 quick quiz

Question 5 Zone Ltd, a company specialising in provision of sports equipment, purchase a property which they decide to rent out for two years to Partition Limited for $5,000 per calendar month. Which of the following is true? A. The property should be capitalised under property, plant and equipment and depreciated over an appropriate useful life. B. The rental income should be recorded as revenue by Zone Ltd. C. The property should be classified as an investment property and either recorded at cost less depreciation or revalued to fair value each year. D. Zone Limited should not record the purchase of the property as they will not occupy or use it.





Module 5: What you will learn - Account ing fo r assets and liabilities – part 2 This module deals with a number of IFRSs that give rise to the recognition of liabilities: • •

• • • • • • •

Fair value measurement - IFRS 13 Financial Instruments: Presentation – IAS 32, Recognition and measurement – IFRS 9 and IAS 39, Disclosure IFRS 7 Provisions, contingent liabilities and contingent assets - IAS 37 Events after the reporting period - IAS 10 Employee benefits - IAS 19 Income taxes - IAS 12 Shared-based payment - IFRS 2 Agriculture – IAS 41 Exploration for and evaluation of mineral resources – IFRS 6





Fair value measurement – IFRS 13 Financial Instruments Exercise – IFRS 9 Question Exercise – IFRS 9 Answer Provisions, contingent liabilities and contingent assets - IAS 37 Exercise - IAS 37 Question Exercise - IAS 37 Answer Case study - provisions, contingent liabilities and contingent assets Case study Question - provisions, contingent liabilities and contingent assets Case study Answer - provisions, contingent liabilities and contingent assets Events after the reporting date - IAS 10 Exercise - IAS 10 Question Exercise - IAS 10 Answer Employee benefits - IAS 19 Exercise - IAS 19 Question 1 Exercise - IAS 19 Answer 1 Exercise - IAS 19 Question 2 Exercise - IAS 19 Answer 2 Income taxes - IAS 12 Exercise - IAS 12 Question Exercise - IAS 12 Answer Case study Question - deferred tax Case study Answer - deferred tax © 2012 Association of Chartered Certified Accountants

Share-based payment - IFRS2 Agriculture – IAS 41 Exploration for and evaluation or mineral resources - IFRS 6 Frequently asked questions Quick Quiz



Fair Value Measurement – IFRS 13 IFRS 13 was publ ished i n May 2011 and establi shed for the firs t time a single sourc e of guidance for fair value measurement of assets and liabilities under IFRS. It is effective for accounting periods beginning on or after 1 January 2013, with early application permitted. It should be applied prospectively from the period in which it is adopted (i.e. there is no need for entities to go back to prior periods and restate fair values for the new requirements of IFRS 13).

The key points from the standard are as follows: Fair value is defined by IFRS 13 as 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 (appendix A). In order to measure fair value the entity must determine (paragraph B2): • •

It does not prescribe when fair value should be used, only how to apply it when required by another standard. This standard is applicable to all transactions and balances requiring measurement at fair value under another standard, with the exception of share-based payments accounted for under IFRS 2 and leases falling within the scope of IAS 17.


•

•

The asset or liability to be measured The principal market for the asset or liability (i.e. the one with the greatest volume and level of activity) The appropriate valuation technique to use (to reflect the assumptions market participants would use when valuing the asset or liability) For a non-financial asset, the highest and best use



Fair Value Measurement – IFRS 13 Measurement Guidance

Valuation Techniques

Fair value measurement should then

IFRS 13 outlines three valuation techniques that may be applied (paragraph 62):

•

•

•

•

•

•

Take account of any characteristics that might be relevant to a market participant (e.g. condition and location of an asset) Assume an orderly transaction between market participants at the measurement date under current market conditions Assume the transaction takes place in the principal market (or failing this the most advantageous market) Take account of highest and best use re a non financial asset (even if this is not its current use) Assume transfer of a liability or own equity instrument (i.e. assume the liability remains outstanding but is passed to a 3rd party, not that the liability is paid off or settled) Reflect non-performance risk where a liability is concerned (including the entity’s own credit risk).


1. Market approach – uses prices and other relevant information generated by market transactions involving identical or similar assets or liabilities 2. Cost approach – current replacement cost 3. Income approach – discounted future cash flows or income and expenses Either one, or where appropriate a combination, of these valuation techniques should be selected and consistently applied..



Fair Value Measurement – IFRS 13 Disclosure

The standard outlines a ‘fair value hierarchy’. Inputs used to measure fair value are divided into three categories, with each fair value measurement fitting into the category of the lowest level input that is significant to the overall measurement in that case. The three categories are: Level 1 – quoted prices in active markets for identical assets and liabilities Level 2 – observable inputs other than those classified in level 1 Level 3 – unobservable inputs Detailed disclosure requirements are prescribed by the s tandard, for the most part following the fair value hierarchy described. The disclosures are both qualitative and quantitative For further information and a summary of this s tandard please click on the followi ng hyperlink to Deloitte’s IAS Plus website where a summary of the standard can be accessed: http://www.iasplus.com/standard/ifrs13.htm




Financial instruments The topic of financial instruments is s ufficiently complic ated that it was necessary to split it int o three standards. Originally these were: •

•

•

IAS 32 dealing with presentation issues (i.e. where to record items in the income statement and statement of financial position). IAS 39 dealing with recognition and measurement issues (i.e. when to record an item in the financial statements and at what value) IFRS 7 looking at disclosures (all the extra information that should be supplied about financial instruments in addition to the numbers that appear in the primary financial statements).

However the IASB has been wor kin g on a new s tandard, IFRS 9 Financial Instr uments (‘IFRS 9’) that will ultimately replace IAS 39 entirely in dealing with recognition and measurement issues. It was originally intended to be effective for accounting periods beginning on or after 1 January 2013. However the IASB are currently proposing to defer this to 1 January 2015. Early application is permitted though.

IFRS 9 is not yet complete. However in response to requests that the accounting for financial instruments be improved quickly, the IFRS 9 project has been split into phases. As each phase is completed the relevant portions of IAS 39 are deleted and chapters in IFRS 9 are created.

So far, the IASB has issued the chapters of IFRS 9 relevant to all areas except impairment and hedging. These sections will follow with the aim that IAS 39 will be replaced in its entirety in 2012. For the purposes of th is cour se, the main standard examinable is IFRS 9. All questions in the assessment will test IFRS 9 unless specifically s tated otherwise. Therefore if there is no specific reference to a standard, you should assume that the question is testing IFRS 9.

A summary of the key points from the remaining chapters of IAS 39 on impairment and hedging are included and this is part of the examinable material of the course. If a question is testing IAS 39 this will be specifically stated. Following the key definitions on the next page, IAS 32, IFRS 7, IFRS 9 and the relevant remaining chapters of IAS 39 will each be covered in turn.



Financial instruments Definitions

Key elements of definitions are provided below. For full definitions refer to paragraph 11 of IAS 32. Financial asset – cash, an equity instrument of another entity (i.e. an investment) or a contractual right to receive cash (e.g. trade receivables). Financial liabilit y – a contractual obligation to deliver cash or another financial asset to another entity. Equity – any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Financial i nstrument – any contract that gives rise to a financial asset in one entity and a financial liability or equity instrument of another entity (e.g. debentures are a financial instrument as the issuing company has a liability and the investing entity has a financial asset, or right to receive cash).

Note that investments in subsidiaries, associates and joint ventures and employee benefit obligations are excluded from the scope of IAS 32, 39 and IFRS 7.





Financial instruments IAS 32 - Presentation Financial instr uments of an issuer should be classified on the basis of w hether their subs tance is that they are equity or liability. For example, if an enterprise has issued some preference shares that contain elements that f it the definition of liability (the shares could be redeemable on a specified date such that the entity has an obligation to deliver cash) then the share is to be treated as a liability despite its legal classification.

Offsetting of financial assets against fi nancial liabilities is onl y allowed when there is a legally enforceable right of set off which the enterprise intends to use..

Compound instruments should be split into their component parts. For example, a convertible debenture is in economic substance partly a debt and partly a share. Its price in the market will depend on the relative importance of these two parts. According to IAS 32 such a debenture should be presented as partly debt and partly equity. The presentation of the returns on such instr uments should follow the above classifications. For example, any instrument shown as debt should have a return shown as an interest expense even if it is legally called a dividend..





Financial instruments IAS 32 - Presentation Convertible debt: Worked example On 1 January 20X9, an entity issues convertible loan notes totalling $500,000. Interest is payable annually in arrears at 6%. The market rate of interest for similar loan notes with no conversion rights attached is 7%. The loan notes are redeemable on 31 December 20Y2. Show how they should be treated in the financial statements when issued. IAS 32 states that compound instruments shoul d be split into their components parts. The liability component should be valued as if it were a similar liability with no conversion rights attached. The difference between this figure and the value of the compound instrument as a whole is the value of the equity part. Liability component: Date 31 Dec 20X9 31 Dec 20Y0 31 Dec 20Y1 31 Dec 20Y2

Cash Flow $30,000 (w) $30,000 (w) $30,000 (w) $30,000 (w) + $500,000

Discount Factor 1/1.07 1/1.07 1/1.073 1/1.074 Total value of Liability component:

(w) ($500,000 x 6%) = $30,000.


Present value $28,037 $26,203 $24,489 $404,334 $483,063

Equity component: The equity component = (5,000 x $100) - $483,063 = $16,937 Comment: On 1 January 20X9, the entity will record a liability equal to $483,063 and in a separate reserve in equity the amount $16,937, which represents the value of the option to convert to shares at a later date.

Subsequently the discount of 7% will unwind, creating a finance charge each year in the income statement and increasing the value of the liability in the statement of financial position. Each annual payment of interest at 6% (i.e. $30,000) will reduce the liability..



Financial instruments IFRS 7 - Disclo sures An entit y mus t g ro up it s f in anc ial in st ru ments in to cl ass es o f sim il ar instruments and, when disclosures are required, make disclosures by class. The two main categories of disclosures required by IFRS 7 are: a. Information about the significance of financial instruments b. Information about the nature and extent of risks arising from financial instruments.





Financial instruments IFRS 9 - Financial Instru ments The main elements of thi s standard are as follows: 1. An entity shall recognise a financial asset or financial liability when the entity becomes a party to th e contractual provisions of the instrument (note this differs from the standard recognition criteria laid down in the Conceptual Framework for Financial Reporting).

2. All financial assets are initially measured at fair value plus transaction costs with the exception of ‘financial assets at fair value through profit or loss’, which are held at fair value only (no transaction costs). 3. Subsequent measurement is determined by cl assification of the financial asset either at amortised cost or fair value on the basis of: • •

The entity’s business model for managing the financial assets The contractual cash flow characteristics of the financial asset

4. A financial asset shall be measured at amortised co st if both of the following c onditions are met: •

•

The asset is held within a business model whose objective is to hold assets in order to collect contractual cash flows 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

5. Financial assets not measured at amortised cost as described in point 4 above shall be measured at fair value. 6. Aside from the guidance as outlined in point s 3 to 5 above, an entity may also, at ini tial recognition , decide to designate a financial asset as measured at fair value through profit or loss 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. 7. Gains and losses on both categories of financial asset described above are recognised in pr ofit or loss , except for an investment in equity instruments that is not held for trading where, at initial recognition, an entity chooses to make an irrevocable election to present gains and losses through other comprehensive income where a hedging relationship exists (hedging rules from IAS 39 still apply).




Financial instruments IFRS 9 - Financial Instru ments 8. There are two categories of financial liability: •

•

those held for trading or designated ‘at fair value through profit or loss’ (FVTPL) any other financial liability

9. An entity can only choose to d esignate a liability at FVTPL if doing so eliminates or significantly reduces an accounting mismatch. The result is that most financial liabilities will fall into the second ‘default’ category of the two listed above. 10. Financial liabilities are initially measured at fair value plus transaction costs with the exception of those held for trading or designated ‘at fair value through profit or loss’, which are held at fair value only (no transaction costs). 11. After initial recognition liabilities held for trading or those designated at FVTPL are held at fair value. All other financial liabilities are held at amortised cost..





Financial instruments IAS 39: Recogniti on and measurement

Whilst IFRS 9 remains incomplete, IAS 39 offers the only guidance in relation to impairment of financial assets and hedging rules..RS 9 remains incomplete, IAS 39 remains th e only sou rce of gui dance relating to impairment of financial assets and hedging rules. A fi nanc ial asset is on ly i mpai red wh ere ther e is objec tive evid ence resulting fr om one or more events that occurr ed after the initial recognition of the asset. Such objective evidence could include the counterparty defaulting on repayments of interest or capital, or going into liquidation, such that the full value of the financial asset may not be recoverable.

12. Hedge accounting constitutes an extra, special set of rules that can be applied to financial ins truments when an entity enters a hedging arrangement. An entity can designate a hedging instrument so that its change in fair value is offset against the change in fair value of a hedged item. For example, if an enterprise has committed to pay an amount of foreign currency in six months time, it might buy the currency in advance in order to avoid the risk of the foreign currency rising in value before the date of payment. Hedge accounting involves designating the advance purchase as designed to fulfil the future obligation. It is allowed when certain conditions are met (e.g.. formal documentation, hedge is effective)..

Financial assets should be reviewed for o bjective evidence of impairment at each reporting date and a full impairment review performed where evidence is identified (paragraph 58).

The amount of impairment loss is measured as the difference between the carrying amount and the present value of estimated future cash flows recoverable (discounted at the financial asset’s original effective interest rate – paragraph 63).





Exercis e - IFRS 9 Questi on Please review the following exercise:

How can an auditor tell whether a financial asset should be held at fair value through profit or loss or at amortised cost?


You should refer to the text of the standard when answering all exercises..




Provisions, con tingent liabili ties and contin gent assets - IAS 37 Key definitions of IAS 37: 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 nonoccurrence of one or more uncertain future events not wholly within the control of the enterprise. • •





Provisions, con tingent liabili ties and contin gent assets - IAS 37

“ This standard excludes certain items co vered by other standards such as financial instr uments dealt with by IAS’s 32 and 39 and IFRS 7 and also exclud es executory contracts where both sides of the contract are equally unperformed (paragraph 1).”

Basic feature of IAS 37 It defines provisi ons as liabilities of uncertain timing or amount. That is, a provision must meet the definition of liability as found in the framework that there should be an expectation of an outflow of: resources, a past event • •

and at the reporting date: a legally enforceable obligation to a third party or a constructive obligation (paragraph 10).. •

.




Provisions, con tingent liabili ties and contin gent assets - IAS 37 Provisions A pro vi si on sh ould be r eco gn is ed i n the stat ement o f fin anc ial position w hen it meets the definition of a liability, where there is a probable outflow of resources and, the extra feature as usual for the recognition of assets and liabilities, is that there should be a reliable estimate (paragraph 14). Once a provision has been recognised it should be measured at the best estimate of the future outflow. This means that it is also required to discount the numbers where this would be material, at pre-tax discount rates assuming that the provision is measured in pre-tax terms (paragraphs 36,45 and 47). An y expec ted gai ns fr om di sp os als of ass ets rel ated to th e setti ng up of provisions sh ould be ignored, but reimbursements, for example from insurance contracts, should be accounted for (paragraphs 51 and 53)..


There should be no provis ion for futu re operating losses, but there may be provision for onerous contracts (paragraph 63). There are a number of explanations about restructur ing provi sions in the context of this standard, but they make it clear that such provision should not be set up unless there is an obligation at the reporting period end date (paragraph 72). .



Provisions, con tingent liabili ties and contin gent assets - IAS 37 Liabilities A c onti ng ent li abi li ty is def in ed in two di ff erent w ays: 1. It includes possible obligations. 2. Existing obligations at the reporting date which are unrecognisable.

This is because they will probably not lead to an outflow or are not able to be measured reliably (paragraph 10). Contingent liabilities should be disclosed where they are material in size and not remote. Contingent gains should not be recognised, but should be noted where material (paragraph 31)..






Consider your answer to the question, when you are ready click next to A provision can only be recognised when there is an obligation at the reporting date. Should one recognise a provision for the possible loss of a enter it into the course blog. law case? You may wish to discuss this with a colleague before finally submitting it. You should refer to the text of the standard when answering exercises..





Case study - provisions , contingent liabilities and contingent assets Newberg is a German company. On the right you can see Newberg’s income statements for 2007and 2008.

Consolidated statements of income (in billions Euro)

Sales

On the following page you can see some accounting policies and notes. The facts are loosely based on a real case, but the company, year and exact numbers have been changed. .

2007

2008

32

38

Cost of goods sold

(10)

(12)

.

------

------

Gross profit

22

26

Marketing and distribution

(8)

(10)

Research and development

(5)

(6)

Administrative

(2)

(2)

Other expenses

(1)

(1)

.

------

------

Operating profit

6

7

Non-operating income

3

3

------

------

9

10

. Results before special charges and taxes Special charges

Acquired in-process research and development

-

(9)

Restructuring

-

(6)

(2) -----7 ------

(2) 3 -----(4) ------

Taxes

On result before special charges Benefit from special charges . Net income (loss)




Case study - provisions , contingent liabilities and contingent assets Extracts from signifi cant accounting policies and notes Basis of preparation of financial statements. The consolidated financial statements of the Newberg Group are prepared in accordance with International Financial Reporting Standards. Consolidation policy. The consolidated financial statements of the Group include the parent and the companies which it controls (subsidiaries). Control is the power to govern the financial and operating policies of an enterprise so as to obtain benefits from its activities. Control is normally evidenced when the Group owns, either directly or indirectly, more than 50% of the voting rights of a company’s share capital. Changes in group organisation. On 24 June 2008, a subsidiary of Newberg entered into an agreement with the shareholders of Orange Limited to purchase all of the issued and outstanding common shares. Completion of the transaction was not possible until certain regulatory clearances had been obtained. In view of the overall materiality of the transaction and the advanced state of the integration planning, the consolidated financial statements of the Group give effect to the acquisition of Orange Limited from 31 December 2008..


Obtaining clearance from the regulatory authorities caused a delay in completing the transaction. These final clearances were received on 24 February 2009 and the purchase of the shares was completed on 10 March 2009. The acquisition was accounted for under the purchase method of accounting. Accordingly, the cost of the acquisition, including expenses incidental thereto, was allocated to identifiable assets and liabilities and to in-process research and development based on their estimated fair values. The portion of the acquisition cost allocated to in-process research and development was charged in full against income. This approach is consistent with the Group’s accounting policy for research and development costs. After consideration of these items, the excess of the acquisition cost over the fair values was recorded as goodwill.

When you have studied the notes and table please go to the next page to see a question relating to the case study..



Case study Question - provisi ons, contingent li abilities and contingent assets Please review the following case study question:

Do you think that a provision for restructuring costs should have been set up at 31 December 2008? (Other questions on this case will be asked in Module 6).





Events after th e reporti ng date - IAS 10 The main elements of thi s standard are as follows: The standard deals with two types of event that occur after the reporting date. First, adjusting events, which are those that provide information concerning conditions which did exist at the reporting date. These should lead to recognition changes, that is changing the numbers in the statement of financial position. The second type of events after the reporting date are non-adjusting events. These give information about conditions that did not already exist at the reporting date and they should not lead to changes to the numbers in the statement of financial position, but, if material, to disclosures in the notes (paragraphs 3, 8 and 10). Examples of adjusting events are better infor mation about the status of customers at the reporting date, enabling an entity to measure the size of its receivables more accurately. An example of a non-adjusting event would be the destruction of some of an entity's assets accidentally, perhaps by fire, after the reporting date (paragraph 22 for more examples). If dividends on or dinary shares are proposed, but not declared, after the reporting date then these should not be recognised as liabilities (paragraph 12).

Whether or not an enterprise is a going conc ern should be assessed at the stage at which the financial statements are being prepared, which is, of course, after the reporting date. If it is determined that an enterprise is not a going concern, then the accounts shoul d be prepared on the break up basis (even if the events leading to the conclusi on occur red after the reporting date). This of course does not apply if only part of the enterprise is not a going concern. The reporting unit is the whole of the enterprise and the status of going concern should be assessed for that whole reporting enterprise (paragraph 14).





Exercise - IAS 10 Question Please review the following exercise:

Can proposed dividends be a liability?


You should refer to the text of the standard when answering exercises.





Emplo yee benefits - IAS 19 The main elements of thi s standard are as follows: This standard applies to all employee benefits not just to pensions except those to which IFRS 2 “Share Based Payment” applies (paragraph2).

Defined benefit plans are much more complicated, and a large part of the standard deals with them. Constructive obligations as well as written contractual ones should be accounted for (paragraph 61).

The standard deals with suc h issues as accounting for accumulating An entit y reco gnises the net defi ned benefit l iability in the statement of paid absences and for bon us plans. In each case the standard requires financial position (paragraph 63). an enterprise to establish whether there is a liability at the reporting date and to account for any liability (paragraphs 16 and 19). Where an entity has a s urplus in a defined benefit plan, the net defined benefit asset can be recognised but there are limits on the size In a country with special forms of employee benefit systems such as of this asset (paragraph 64). . multi-employer plans and government plans, these should be accounted for as other plans on the basis of their legal and institutional arrangements (paragraphs 32 and 43). Defined contributi on plans (where the entity’s obligation for each reporting period is simply the amount to be contributed for that period) present few difficulties for accounting but the standard does cover them (paragraph51).




Emplo yee benefits - IAS 19 “ The Basic Princi ple of IAS 19: The cost of pro viding emplo yee benefits shou ld be recognised in the period in which the benefit is earned by t he employee, rather than w hen it is paid or payable.”

Actuarial gains and losses for retirement benefits are recognised in full immediately thro ugh other c omprehensive income (i.e. outside profit or lo ss) (paragraph 57). Past service costs, which are caused, for example, if the benefits in the plan are inc reased, should be recognised in the period they were granted, with no reference to vesting criteria (paragraph 103).

When calculating th e value of the obligation, the projected unit credit method should be used and a discount rate measured by reference to interest rates on high quality corporate bonds (paragraphs 67 and 83). Until recently actuarial gains and losses were allowed to be recognised i mmediately or could remain unrecognised to the extent that they fell within a “corridor” which is equal in size to 10% of the larger of the obligation or the fund. To the extent that gains and losses fell out side the corridor they were recognised over the remaining average service lives of the employees in the plan. Under the latest revision of the s tandard (published June 2011) this “ corridor” method is no longer permitted.






Do possible future pay rises give rise to a present liability for pensions?





Module 5: Accounti ng for assets and liabilities – part 2


Exercise - IAS 19 Questio n 2 Please review the following exercise:

When a defined benefit plan is enhanced, when should the cost of improving the benefits for existing pensi oners be recognised?







Income t axes - IAS 12 The main elements of thi s standard are as follows: This standard largely concerns accounting for deferred tax. It changed the basis of calculation to “temporary differences”, which are calculated by reference to the difference between the tax basis and the financial reporting basis of assets and liabilities, instead of “timing differences”, which are based on tax and book differences for revenues and expenses (paragraph 5).

There are also special rules for investments in s ubsidiaries, associates and joint ventures. They amount to saying that temporary differences that are unlikely to reverse where the investor is in control of that process (for example, by being able to stop the payment of dividends) need not be accounted for (paragraphs 39 and 44).

The measurement of deferred tax assets and liabilities should be Deferred tax liabilities shoul d be recognised for all temporary based on tax rates that are expected to apply, but that generally differences, except those relating to non-deductible goodwill amortisation means current tax rates, although future rates can be used where they and the initial recognition of certain assets and liabilities in transactions have been enacted (paragraphs 47 and 51). that affect neither accounting profit nor taxable profit. Deferred tax amounts should not be disco unted. At first sight, this Deferred tax assets should s imilarly be recognis ed assuming that seems surprising because other liabilities are required to be discounted future taxable profit is pr obable. Deferred tax assets include, of course, (see IAS 37). However, discounting would require knowledge of when those arising on tax loss carry forwards (paragraphs 24 and 34). temporary differences would reverse, which would require a large amount of guesswork (paragraph 53).


Module 5: 5: Accountin g for assets and liabilities – part 2


Income t axes - IAS 12 “ Te Temporary mporary difference: A d if fer enc e bet ween th e car ry in g am ou nt of an asset asset or liabilit y and its t ax base. base. “ Ta Taxable xable temporary difference: A t emp or ary di ff eren ce t hat wi ll res ul t i n t axab axable le amounts in the futu re when the carrying carrying amount of the asset is recovered or the liabilit y is s ettled. “ De Deductibl ductibl e temporary difference: A t emp or ary di ff eren ce t hat wi ll res ul t i n am ou nt s that are tax deductibl deductibl e in the futur e when the carrying amount of the asset is recovered or the liability is settl ed.”

The double entry for the creation of deferred tax assets and liabilities should be charged to profit or loss or di rectly in equity (and (and dis closed in the statement statement of comprehensive income) (paragraphs 58 and 61). Deferred tax assets should be presented on the statement of financial position separately separately from deferred tax liabilities (paragraphs 69 and 74).





Exercise - IAS 12 Question Please review the following exercise:

A deferred tax liability is recognised on the revaluation of an asset that is intended for continuing use in the business. Does this meet the framework’s definition of liability?








Case study Question - deferred tax Please review the following exercise: Suppose that a British company, Acrobat, applies IFRS. It purchases a machine for $10,000 in early 2008. The machine is expected to last for ten years and to have no residual value. The accounting year is the calendar year. The company is fairly small and is able to claim 40% tax depreciation (capital allowances) in the year of purchase. Suppose also, that Acrobat buys land at $3m in early 2008, and revalues it to fair value of $5m at 31 December 2008. What are the “temporary differences” in 2008?





Share-based payment - IFRS 2 The main elements elements of thi s standard are as follows: A s har e-bas ed paym p ayment ent is a transaction in which the company received goods or services in exchange for share capital or a liability based on the company’s shares, i.e. a cash payment based on the change in the company’s share price. Examples are share appreciation rights, employee share purchase plans, employee share ownership plans and share option plans. IFRS2 applies to all entities and there is no exemption for private or small companies. It is important to differentiate between shares issued to acquire a company which is accounted for under IFRS3 ‘Business Combinations’ and shares issued for employee services accounted for under IFRS2. The issue of shares or rights to acquire shares requires an increase in equity and the debit entry wi ll be an expense when the goods or services are cons umed. If the share issue is linked to past services, then the value of the shares given to the employees will be expensed immediately. If the issue of shares relates relates to a future vesting period, then the value of the shares should be expensed over that period. .

For example, if a company grants a director 200 share options on 1 January 2006, and these vest after two years, and assuming each option has a value of $3 at the date of the grant, then at 31 December 2006, the accounting entry would be: $ Debit Share Option expense (1 year) 300 Credit Equity 300 IFRS2 IFRS2 appli appli es to all equit y based payments granted after 7 November 2002 which was the date that the exposure draft was issued. Thus any schemes set up earlier than that date are exempt from its requirements.

For further information and a summary of this s tanda tandard rd please click on the followi ng hyperlink to Deloitte’s IAS Plus website where a summary of the standard can be accessed: http://www.iasplus.com/standard/ifrs02.htm




Agri cult ur e - IAS 41 The main elements of thi s standard are as follows: It covers all biologi cal assets to the point of harvest (paragraph 1). Biological assets are measured at each reporting period end date at their fair values less poi nt-of-sale costs (paragraph 12). Agri cu lt ur al p ro du ce i s m easu red at h arv est at fair val ue l ess poi nt of-sale costs. This becomes the cost of inventory (paragraph 13). Gains and losses go to in come (paragraphs 26 and 28). If fair value is not reliably determined, then measure at cost (paragraph 30). Government grants are treated as income w hen their condi tions are met (paragraph 34). For further information and a summary of this s tandard please click on the followi ng hyperlink to Deloitte’s IAS Plus website where a summary of the standard can be accessed: http://www.iasplus.com/standard/ias41.htm




Exploration f or and evaluation or min eral resources - IFRS 6 An entit y adopti ng IFRS 6 may c onti nu e to us e th e acc ount in g policies applied immediately before adopting the IFRS. IFRS 6 requires entities recognising exploration and evaluation assets to perform an impairment test on those assets when facts and circumstances suggest that the carrying amount of the assets may exceed their recoverable amount. IFRS 6 requires disc losure of information that id entifies and explains the amounts recognised in its financial statements arising from the exploration for and evaluation of mineral resources, including: a. its accounting policies for exploration and evaluation expenditures including the recognition of exploration and evaluation assets b. the amounts of assets, liabilities, income and expense and operating and investing cash flows arising from those assets. For further information and a summary of this s tandard please click on the followi ng hyperlink to Deloitte’s IAS Plus website where a summary of the standard can be accessed: http://www.iasplus.com/standard/ifrs06.htm




Frequently asked questions 1. If a company’s board of directors has decided on a restructuring, should the company not make a provision for the restructuring, redundancy costs, etc? 2. Surely it gives useful information to the users of financial statements to show a proposed dividend as a liability? 3. Can a deferred tax asset be shown in the financial statements if the company is making losses?

1. It depends on the facts. In some cases, a board decision does not create an obligation to a third party, and the board could change its mind. In such cases, IAS 37 does not allow a provision. This may not be “prudent” but this is overridden by the need to comply with the framework’s definition of a liability. 2. IAS 10 is based on the idea that it is not useful to show something as a liability that is not in accordance with the definition of a liability. The information about the proposed dividend can be given in the notes, and the amount can be shown separately in equity. 3. It is unlikely as it must be probable that taxable profit will be available against which to use the asset.




Quick Quiz



Module 5: quick qui z

Question 1 Dodo Ltd is preparing its financial statements to 31 December 20X3. The accounts are due to be finalised by 31 March 20X4. Which of the following should not be adjusted in the financial statements? A. On 1st February Dodo receives written confirmation that a customer, Looney Bin, has gone into Liquidation. At the year end the balance due from Looney Bin was material. B. On 27th March torrential rain causes one of three warehouses to flood, damaging some of the inventory held there. Dodo continues to trade successfully although at a reduced level. C. Dodo manufactures a specialist component for the computer hardware industry. It costs $3.35 to produce and would normally sell for $5.20. At the year end this component is held in inventory at cost. After the year end, due to the launch of an updated product, this component is only selling for $2.90 D. On 15th March a legal case against Dodo is settled for $300,000. In the draft financial statements a provision is included for substantially more.




Question 2 The management team at Super Safe Ltd try to be as prudent as possible when preparing the annual financial statements. Under IAS 37 which of the following can they provide in the financial statements: A. The overall operating loss they expect the company to record in the following financial year. B. Costs associated with the restructuring of their sales and marketing division. Plans have been drafted by the board but not yet announced. C. The loss they are anticipating on a contract they have in place to buy rubber matting at $15 per metre. The contract runs until the end of next year and they are currently able to sell the matting for $12 per metre. D. All of the above.




Question 3 A company purchased an item of plant for $270,000 on 1 January 20X0. The plant is depreciated in the financial statements straight line over 5 years. For tax purposes the plant is has a life of 3 years. What is the deferred tax balance in respect of the plant on 31st December 20X1? A. Liability of $10,800 B. Asset of $10,800 C. Liability of $21,600 D. Asset of $21,600




Question 4 I C Ltd manufactures fridge freezers and with each one sold offers a free guarantee. In one year the company expects to sell 30,000 fridge freezers. Of these they expect 1% to be returned under the guarantee requiring major repair work costing on average $300. They also expect 5% to be returned requiring minor repairs costing on average $100. How should the company record this guarantee policy in their financial statements? A. Recognise a provision of $240,000 on the statement of financial position and disclose details in the notes. B. Disclose the details of the guarantee policy in the notes to the financial statements C. Disclose the details of the guarantee policy in the notes, including an estimate of the likely cost to the company of fulfilling the guarantee. D. No disclosure of the guarantee policy is required.




Question 5 Sha La La Ltd recently suffered a small fire in one corner of the warehouse. They have placed a claim with their insurer for $220,000 to cover the cost of repairing the damage. They have not had confirmation yet but believe it is more likely than not that they will receive the payout. How should the company treat this in the annual financial statements? A. Nothing should be recognised or disclosed in relation to the claim until the company is certain of the outcome. B. A receivable for the full amount should be recognised on the statement of financial position. C. A receivable for half the value of the claim should be recognised at this stage, as it is not certain that the money will be received and this is more prudent than recognising the full amount. D. The details of the insurance claim should be disclosed in the notes to the financial statements.




Question 6 Under IFRS 9, which of the following financial assets should be held at amortised cost: 1. 2. 3.

A fixed interest rate loan An investment in a convertible loan note A zero coupon bond

A. All of the above B. 1 and 3 C. 1 only D. 1 and 2



Module 6: Group accounting

Module 6: What you will learn - Group account ing This module covers eight IFRSs that concern the pr eparation of consolidated financial statements and covers a few other iss ues relating to investments within groups: • IFRS 10 looks at the preparation of consolidated financial statements • IAS 27 (revised 2011) considers accounting for investments in separate entity financial statements • IFRS 3 looks at the treatment of goodwill in the context of business combinations • IFRS 11 defines joint arrangements (including joint ventures) • IAS 28 (revised 2011) deals with accounting for both associates and joint ventures • IFRS 12 covers disclosure of interests in other entities • IAS 21 and IAS 29 deal with items related to foreign currency and what to do when subsidiaries operate in hyperinflationary environments




Table of con tents Select a topic to study or click next.

Consolidated and separate financial statements - IAS 27 Exercise - IAS 27 Question 1 Exercise - IAS 27 Answer 1 Exercise - IAS 27 Question 2 Exercise - IAS 27 Answer 2 Business combinations - Introduction to revised IFRS 3 Business combinations - IFRS 3 Exercise - IFRS 3 Question 1 Exercise - IFRS 3 Answer 1 Exercise - IFRS 3 Question 2 Exercise - IFRS 3 Answer 2 Exercise - IFRS 3 Question 3 Exercise - IFRS 3 Answer 3 Case study - IFRS 3 Case study - IFRS 3 Question 1 Case study - IFRS 3 Answer 1 Case study - IFRS 3 Question 2 Case study - IFRS 3 Answer 2 Investments in Associates and Joint Ventures- IAS 28 Joint arrangements - IFRS 11 Disclosure of Interests in Other Entities – IFRS 12 The effects of changes in foreign exchange rates - IAS 21 Financial reporting in hyperinflationary economies - IAS 29 Frequently asked questions Quick Quiz © 2012 Association of Chartered Certified Accountants




Consol idated Financ ial Statments – IFRS 10 IFRS 10 was pu blis hed i n May 2011 and supers edes SIC-12 Consolidation and elements of IAS 27 Consolidated and Separate Financial Statements. It is effective for annual periods beginning on or after 1 January 2013. The main elements of this standard are as follows:

A parent should start to consolidate from th e date control is ob tained and cease when control is l ost (paragraph 20). There is just one exemption available to this under IFRS 5. Consolidation is not required where temporary control is acquired because the subsidiary is held exclusively with a view to its subsequent disposal in the near future.

A s ubsi di ary is def in ed as an en ti ty co nt ro ll ed b y ano th er en ti ty. An A part ial dis pos al of an int erest in a subsi diar y in whi ch the parent retains control , does not result in a gain or loss but an increase or investor controls an investee if they have ALL the following (paragraph 7): decrease in equity. Purchase of some or all of the non-controlling interest is Power over the investee; treated as a treasury share-type transaction and accounted for in equity. Exposure, or rights, to variable returns from its involvement with the investee; and The ability to use its power over the investee to affect the amount of the investor’s returns Once an investment ceases to fall within the definition of a subsidiary, the parent company should derecognise the assets and Note that an entity could have power over the investee without holding a liabilities of the subsidiary, derecognise the carrying amount of any non majority of the voting rights. Returns could be either positive or negative and controlling interest and recognise the consideration received. Any could include dividends, change in the value of the investment, management investment retained in the subsidiary should be recognised at fair value, or service fees etc. and treated as an associate under IAS 28, as a joint arrangement IFRS 11 or as an investment under IFRS 9 as appropriate (paragraph B98). A parent prepares cons olidated financ ial statements applying uniform accounting policies throughout (paragraph 19) • •

•




Consol idated Financ ial statements – IFRS10 A parent is exempted fro m the pr eparati on of consoli dated accounts if i t is itself a wholly or partially owned subsidiary and the ultimate or any intermediate parent company produces consolidated financial statements that comply with IFRS (paragraph 4). Any differ ence between the repo rti ng date of the paren t and the reporting date of a subsidiary should not exceed three months (paragraph B93). To coincide with publication of IFRS 10, IAS 27 has been revised such that it now contains guidance for preparation by a parent company of separate single entity financial statements (eg. where they are required by local regulations or the parent company elects to do so). In separate financial statements investments in subsidiaries, associates and join t ventures are accounted for either at cost, or in accordance w ith IFRS 9 (IAS 27 paragraph 10).

. For further inform ation and a summary of these standards please click on the followi ng hyperlink to Deloitte’s IAS Plus website where a summary of the standards can be accessed: http://www.iasplus.com/standard/ifrs10.htm http://www.iasplus.com/standard/ias27_2011.htm




Exercise - IFRS 10 Questio n 1 Please review the following exercise:

How should one value a subsidiary that is about to be sold, when there is already a binding sales contract?


You should refer to the text of the standard when answering exercises. You can then review the ideas of other students on this subject.




Exercise - IFRS 10 Questio n 2 Please review the following exercise:

Can non controlling interests be presented inside of shareholders’ funds?







Business combinations - IFRS 3 On 10 January 2008 the International Accounting Standards Board (IASB) published revised IFRS 3 Business Combinations the output of one of the various joint projects undertaken by the IASB and FASB promoting convergence between IFRS and US GAAP. The main elements of this standard are as follows:

The identifiable assets assets acquired and the li abilities assumed should be measured measured at their fair values (paragraph 18). In general the identifiable assets acquired and liabilities assumed must meet the definition of assets and liabilities per the framework (paragraph 11).

A busi bu si ness co combi mbi nati on i s a transaction transaction or other event in which an acquirer obtains control of one or more businesses (appendix (appendix A). A ).

There are are limited exceptions to the general recognition and measurement measurement princi ples above, which will lead to some items being recognised at an amount other than acquisition date fair value, and with results that differ from applying normal recognition principles and conditions (paragraphs 21 to 31). For example, the acquirer in a business combination recognises a contingent liability assumed even if it is not probable that there will be an outflow of economic resources, which is contrary to the guidance given in IAS 37.

All bus ines s comb c omb inat ion s wi thi n the th e scope sco pe of IFRS 3 must be accounted for using the acquisition method (paragraph 4). This requires identification of the acquirer and determination of the acquisition date. The acquirer is the entity that obtains control. The acquirer acquirer recogni ses goodwill at the acquisi acquisi tion date, measured as the excess of consideration transferred plus the amount of any non-controlling interest in the acquiree over amounts of identifiable assets acquired and liabilities assumed (paragraph 32). The consideration transferred shall be measured measured at fair value (paragraph 37).


Under the revised IFRS 3 more intangibles are expected to be recognised . For the purposes of a business combination IFRS 3 eliminates the reliability of measurement as a recognition condition and therefore requires the acquirer to recognise identifiable assets acquired regardless of the degree of probability of an inflow of economic benefits. This will lead, for example, to recognition of internally generated research and development as an asset that had been previously been expensed by the acquiree for failing to meet the recognition criteria laid down in IAS 38.



Business combinations - IFRS 3 Non-controlli Non-controlli ng interests can be measured measured follow ing one of the two alternative alternative methodologies: At fair value This ‘full goodwill approach’ results in the recognition of the whole goodwill of the acquired business and not just the acquirer’s share of goodwill as required by the old version of IFRS 3 At the th e no n-c on tr ol li ng in ter est ’s pr opor op or ti onate on ate share of the acquiree’s identifiable net assets Effectively only the share of “goodwill purchased”, and therefore “owned”, by the acquirer is recognised (as per the methodology under the previous version of IFRS 3). •

•

Goodwill must be tested tested for impairment annually annually in accordance with IAS 36 Impairment of Assets. “ Negative Negative goodwill” must be recognised immediately immediately in the income statement as a gain . Before concluding that negative goodwill has arisen, however, IFRS 3 requires that the acquirer re-assess the situation to ensure the accuracy of the negative goodwill (paragraph 34)..

For further information and a summary of this st anda andard rd please click on the followi ng hyperlink t o Deloitte’s IAS Plus website where a summary of the standard can be accessed: http://www.iasplus.com/standard/ifrs03.htm




Exercise - IFRS 3 Question 1 Please review the following exercise:

Can goodwill be amortised under IFRS 3?








When should negative goodwill be recognised immediately as income?








Missile has acquired a subsidiary on 1 January 2008 for $2,145 million. The fair value of the net assets of the subsidiary acquired were $2170 million. Missile acquired 70% of the shares of the subsidiary. The non controlling interest was fair valued at $683 million. Calculate goodwill based on the partial and full goodwill methods under IFRS 3. You should refer to the text of the standard when answering exercises.





Case study - IFRS 3 This case study once again reviews Newberg and the details that were presented to you in Modu le 5. The company, Newberg, is German. Its income statements for 2007 and 2008 are shown right. On the following page you can see some accounting policies and notes.

Consolidated statements of income (in billions Euro)

Sales

2007

2008

32

38

Cost of goods sold

(10)

(12)

.

------

------

Gross profit

22

26

Marketing and distribution

(8)

(10)

Research and development

(5)

(6)

Administrative

(2)

(2)

Other expenses

(1)

(1)

.

------

------

Operating profit

6

7

Non-operating income

3

3

------

------

9

10

. Results before special charges and taxes Special charges

Acquired in-process research and development

-

(9)

Restructuring

-

(6)

(2) -----7 ------

(2) 3 -----(4) ------

Taxes

On result before special charges Benefit from special charges . Net income (loss)




Case study - IFRS 3 Extracts from signifi cant accounting policies and notes Basis of preparation of financial statements. The consolidated financial statements of the Newberg Group are prepared in accordance with International Financial Reporting Standards. Consolidation policy. The consolidated financial statements of the Group include the parent and the companies which it controls (subsidiaries). Control is evidenced by power over the investee, exposure, or rights, to variable returns from the investee and ability to use that power to affect the amount of return to the investor. Control is normally evidenced when the Group owns, either directly or indirectly, more than 50% of the voting rights of a company’s share capital. Changes in group organisation. On 24 June 2008, a subsidiary of Newberg entered into an agreement with the shareholders of Orange Limited to purchase all of the issued and outstanding common shares. Completion of the transaction was not possible until certain regulatory clearances had been obtained. In view of the overall materiality of the transaction and the advanced state of the integration planning, the consolidated financial statements of the Group give effect to the acquisition of Orange Limited from 31 December 2008.


Obtaining clearance from the regulatory authorities caused a delay in completing the transaction. These final clearances were received on 24 February 2009 and the purchase of the shares was completed on 10 March 2009. The combination was accounted for under the acquisition method of accounting. Accordingly, the cost of the acquisition, including expenses incidental thereto, was allocated to identifiable assets and liabilities and to in-process research and development based on their estimated fair values. The portion of the acquisition cost allocated to in-process research and development was charged in full against income. This approach is consistent with the Group’s accounting policy for research and development costs. After consideration of these items, the excess of the acquisition cost over the fair values was recorded as goodwill.

When you have studied the notes and table please go to the next page to see a question relating to the case study.



Case study – IFRS 3 Question 1 Please review the following case study:

At what date did Newberg start consolidating Orange?







Case study – IFRS 3 Question 2 Please review the following case study:

Is Newberg’s treatment of purchased R&D in line with IFRSs?







Investments i n Ass ociates and Joint Ventures - IAS 28 IAS 28 (revis ed 2011) was publ ished i n May 2011 to coincide with publication of IFRSs 10, 11 and 12 and IAS 27 (revised). The main elements of this standard are as follows: The standard defines an associate as an entity over which the investor has significant influence. This could inc lude the power to participate in policy making process, representation on the Board of directors, or interchange of management personnel or provision of essential technical information (paragraph 6/). This is presumed to exist where the investor owns twenty percent or more of the voting power in the investee.

The investment in an associ ate or joint venture (incorporating any goodwill on acquisition is tested annually for impairment. Unrealised profits and losses should be eliminated to the extent of the investors interest in the associate.

Asso ci ates and jo in t vent ur es ar e to be inc lu ded in co ns ol id ated financial statements by using the equity method (paragraph 11). Under the equity method, an equity investment is initially recorded at cost and is subsequently adjusted to reflect the investor's share of the net post acquisition profit or loss of the associate.(paragraph 10) For further information and a summary of this s tandard please click on the followi ng hyperlink to Deloitte’s IAS Plus website where a summary of the standard can be accessed: http://www.iasplus.com/standard/ias28_2011.htm




Joi nt arr angements - IFRS 11 IFRS 11 was publ ished i n May 2011 and sup ersedes IAS 31. It is effective for annual periods beginning on or after 1 January 2013. The main elements of this standard are as follows: A j oi nt arrangement is o ne in which tw o or mor e parties have, by contractual arrangement, joint control (paragraph 4 and 5). IFRS 11 envisages two types of joint arrangement. In a joint operation the joint operators have rights to the assets, and obligations for the liabilities, relating to the arrangement (paragraph 15). In a joint venture the joint venturers have rights to the net assets of the arrangement (paragraph 16)..

IFRS 11 requires interests i n join t ventures to be equity accounted (eliminating the alternative proport ionate consolidation method allow ed under IAS 31). Joint operators recognise their share of assets, liabilities, revenues and expenses in accordance with applicable IFRSs

To qualify as a joi nt venture, the joint arrangement must be established as a separate legal vehicle. However this fact alone will not be sufficient to meet the definition of a joint venture rather than a joint operation





Disclosure of Interests in Other Entities – IFRS 12 IFRS 12 was published in May 2011 alongside the other new standards covering group accounting. It is effective for annual periods beginning on or after 1 January 2013 but entities are permitted to incorporate any of the new disclosures into their financial statements before that date. The main elements of this standard are as follows:

The standard outlines detailed disclosure provisions in relation to investments in each of subsidiaries, associates, joint arrangements, and unconsolidated structured entities.

Entities should discl ose information that helps the users of its financial statements to evaluate the nature of, and ri sks associated with, its interests in other entities (paragraph 1). In order to achieve this objective the disclosure requirements introduced by IFRS 12 are extensive. However the entity must also make any additional disclosures necessary to meet the overall objective if those required by IFRS 12 and other standards are not sufficient. An ent it y shoul d di sclos e the si gni fic ant judg ements and as sum pti ons it has made in determining whether it controls or has joint control or signifi cant influence over an entity and also in determining the type of joint arrangement where applicable (paragraph 7).





The effects of changes in foreign exchange rates - IAS 21

“ The objective of IAS 21 is to pr escribe how to include foreign curr ency transactions and foreign operations in the financial statements of an entity and how to translate financial statements int o a presentation currency.”

The main elements of thi s standard are as follows:

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 other than that of the reporting enterprise. It is important to distinguish between foreign currency transactions and the translation of foreign currency financial statements of overseas investees. Transactions i nvolving f oreign currencies are recorded at the rate of exchange ruling on the date of the transaction. Subsequently any non-monetary items should continue to be recorded at that exchange rate (paragraphs 20 and 21).

Functional currency. The currency of the primary economic environment in which the entity operates. The term “functional currency” is used in the Monetary items resulting fr om past transactions sh ould be translated at the closing rate at each reporting date, and the resulting 2003 revision of IAS 21 in place of “measurement currency” but with essentially the same meaning. gains and losses should be taken to income immediately (paragraph 23).. Presentation currency. The currency in which financial statements are presented..




The effect s of ch anges in for eign exchange rates - IAS 21 However, exchange differences on the net investment in a foreign entity should be recognised in the group accounts as a separate component of equity, and will be recognised in profit and loss on disposal of the net investment. IAS 21 sets out two definiti ons of ‘ currency’. The currency of the environment in which a company operates is called the ‘functional’ currency and the currency in which the financial statements are presented is called the ‘presentation’ currency. Only one translation method is used for foreign operations. Assets and liabilities are translated at the closing rate. Income and expenses at the rate at the date of the transaction (average rate). Exchange differences go to a separate component of equity and are recognised in the income statement on disposal of the entity. Special rules apply for foreign entities operating in hyper inflationary conditions (IAS29 also applies)..





Financial reporting in hyperinflationary economies - IAS 29 This standard should be applied by any enterprise that reports in the A gain or lo ss on th e net m onetar y po si ti on sh ould be i nclu ded i n currency of a hyperinflationary economy. Hyperinflation is not net income and disclosed s eparately (paragraph 9).. specifically defined, but an indication would be where there is a cumulative inflation rate of one hundred percent or more over three years. For most countries this would not apply at present. However, groups might have a subsidiary in such a country, which is why this s tandard has been included here in this module on group accounting. The main elements of thi s standard are as follows: IAS 29 requires the financial statements of a hyperinflationary enterprise to be restated into curr ent measuring u nits (paragraph 8). If the enterprise is using hi storical cost financial statements, this suggests the application of a general price index to non-monetary items. Even those enterprises using current cost accounting would need to re-express certain numbers using a measuring unit current at the balance sheet date..





Frequently asked questions 1. 2. 3. 4.

When a European company adopts IFRSs for its consolidated statements, does this change its tax bills? If a foreign subsidiary is using non-IFRS policies, what happens on consolidation? What are reclassification adjustments (i.e. recycling) Do the parties to a joint venture each need to own exactly the same proportion of shares?

1. Possibly; in the UK the tax authorities allow IFRSs to be used for tax purposes. 2. The policies have to be c orrected for c onsolidation, usually by consolidation adjustments rather than by changing the foreign statutory accounts. 3. “ Recycling” often refers to the practice of reporting a profit in equity in one period and then “ recycling” or reporting it again in the income statement in another period. An example of this is the reporting of exchange differences on the translation of a foreign subsidiary again in the income statement when it is sold. 4. No. For example, there is nothing to stop a 30/30/40 arrangement. The key point is that to have joint control, decisions regarding the entity must require the unanimous consent of all parties that together control the arrangement.




Quick Quiz





Question 1 Netley, a limited liability company, purchased the whole of the share capital of Orell, a limited liability company, for $2,500,000 cash. Shareholders’ funds of the two companies at the date of the purchase were as follows:

Share capital Retained earnings

Netley $ 5,000,000 600,000

Orell $ 2,000,000 250,000

The fair value of Orell’s tangible assets exceeded their book value by $150,000. What balance should appear in the consolidated statement of financial position of Netley for goodwill at acquisition? A. $400,000 B. $100,000 C. $250,000 D. $500,000



Question 2 One third of the shares, and also voting rights, in Snow White Limited are held by each of Sneezy, Sleepy and Dopey. Which of the following statements is true?

A. The agreement specifies that decision making requires at least 60% of the voting rights. Sneezy therefore has joint control. B. The agreement specifies that decision making requires as a minimum unanimous agreement by Sleepy and Dopey. Due to the equal share in voting rights though, Sneezy has joint control. C. The agreement specifies that decision making requires unanimous consent of Sneezy, Sleepy and Dopey. Sneezy has joint control. D. None of the above





Question 3 Harwich, a limited liability company, holds 70,000 $1 preference shares in Sall, a limited liability company. These are non-voting but rank equally with the ordinary shares in a winding-up. Felixstowe, a limited liability company, holds 20,000 $1 voting ordinary shares in Sall. The share capital of Sall is made up of the following: 100,000 preference shares of $1 each 30,000 ordinary shares of $1 each Sall is a subsidiary undertaking of: A. Both Harwich and Felixstowe B. Harwich C. Felixstowe D. Neither Harwich and Felixstowe


$ 100,000 30,000 130,000


Question 4 What is disclosed in the statement of financial position of an investing group under the equity method of accounting for associates? A. Receivables but not share of net assets of the associate B. Investment in associate at cost plus /minus the group’s share of the associate’s post acquisition profits or losses’. C. Share of net assets of the associate and receivables. D. Cost of investment plus goodwill on acquisition less amounts written off but not receivables.




Question 5 Inveresk, a limited liability company, has equity shareholdings in three other companies, as shown below, and has a seat on the board of each. Inveresk Other shareholders Raby 40% No other holdings larger than 10% Seal 30% Another company holds 60% of Seal’s equity Toft 15% Two other companies hold respectively 50% and 35% of Toft’s equity, and each has a seat on its board. Inveresk exerts significant influence over Toft. The associated undertakings of Inveresk, are: A. Raby only B. Raby and Seal C. Raby and Toft D. Raby, Seal and Toft



Module 7: Disclosure standards

Module 7: What you will l earn - Disclosur e standards This module discus ses the eight IASs that relate to disclos ure and presentation: Statements of cash flow - IAS 7 Operating segments - IFRS 8 Related party disclosures - IAS 24 Earnings per share - IAS 33 Interim financial reporting - IAS 34 First-time adoption of international financial reporting standards – IFRS 1 Insurance contracts – IFRS 4. • • • • • •

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Introduction Statement of cash flow - IAS 7 IFRS 8 Operating segments Exercise - IFRS 8 Question Exercise - IFRS 8 Answer Related party disclosures - IAS 24 Earnings per share - IAS 33 Interim financial reporting - IAS 34 Exercise - IAS 34 Question Exercise - IAS 34 Answer First-time adoption of international financial reporting standards - IFRS 1 Insurance Contracts - IFRS 4 Frequently asked questions Quick Quiz




Introduction This module conc erns a number of IFRSs that do not affect the recognition and measurement of items i n the statement of financial position and income statement. However, in the case of certain standards , they do affect the presentation of numbers in the main financial statements. This is particularly obvious for the first standard (IAS 7) which concerns the major statement on cash flows. In most other accounting standards dealt with in the previous modules there are many disclosure requirements which on the whole have not been discussed so far in the course, but which you could examine by going to the end of each accounting standard where there is a section on disclosures. .





Statement of cash flow - IAS 7 The main elements of thi s standard are as follows: This standard requires an enterprise to present cash fl ow statements as an int egral part of its financial statements (paragraph 1). Cash flows should be reported classified into t hree main headings (paragraph 10): operating investing financing activities The statement should reconcile to “cash and cash equivalents”. Cash equivalents are somewhat vaguely defined as short-term highly liquid investments that are readily convertible to known amounts of cash, but there is no exact limit on maturity dates on such investments. • •

Ac tual o r averag e exc hange r ates sh ould be used fo r c ash fl ows from a foreign subsidiary (paragraph 26). Cash flows from interest or dividends either received or paid can be classified as either operating, investing or financing (paragraph 31). Non-cash transactions should not be included in the statement of cash flows, but should be disclosed in the notes (paragraph 43).

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Cash flows can be calculated either directly by o bserving cash receipts and payments, or indirectly by adjustments for such items as non-cash amounts (paragraph 18).





IFRS 8 Operating segm ents The main elements of thi s standard are as follows: This standard concerns note disclo sures on a segmental basis. It is compulsory for those enterprises with securities that are publicly traded (paragraph 2), but is only required for consolidated financial statements in those cases where parent and consolidated statements are in the same document (paragraph 4). The standard requires entities to report financial information for those parts of the busi ness whose operating results are regularly reviewed by the chief operating decision maker (paragraph 13). It is intended that this ‘management approach’ to identification of segments will lead to entities reporting information that is used regularly internally for evaluating segment performance and deciding how to allocate resources to operating segments. A s egment must be r eport ed i f i t c om pr is es at leas t t en per cen t of total revenue or total result or total assets (paragraph 13). In addition the total revenue of all reported operating segments should constitute at least 75% of the entity’s total revenue (paragraph 15). Some operating segments may therefore be added as reportable even if they do not meet the ten percent threshold..


For each segment, the entity must report a measure of profit or loss and total assets . A measure of liabilities, plus various other key figures including revenue and interest expense, should be reported if regularly reviewed by the chief operating decision maker (paragraph 23).

In addition to the disclosures on operating segments described above, an entity should disclose revenue and non-current assets split by geographical area (paragraph 33)..



IFRS 8 Operating segm ents Segment disclos ures are based on i nformation used i nternally, which may differ f rom what is used to prepare the income statement and statement of fi nancial position . IFRS 8 therefore requires explanations of the basis on which the segment information is prepared and reconciliations to the amounts recognised in the income statement and statement of financial position (paragraph 28). IFRS 8 became effective fr om 1 J anuary 2009. It supersedes IAS 14 and aligns segment reporting with the requirements of the equivalent US accounting standard.





Exercis e - IFRS 8 Questio n Please review the following exercise:

How is a reportable segment defined under IFRS 8?


You should refer to the text of the standard when answering exercises..





Related part y disc los ures - IAS 24 The main elements of thi s standard are as follows: A r elat ed p art y i s d efi ned in ter ms of co ntro l o r s ig ni fi cant i nf luenc e, but several types of exemption are granted, particularly for relationships within a group (paragraphs 5 to 7). The standard requires the di sclosure of transactions between related parties. Transactions include those that are carried out at arm’s length (paragraphs 12 to 22). Relationships between parents and subsi diaries shall be di sclosed irrespective of whether there have been transactions between them (paragraph 12)..





Earning s per sh are - IAS 33 The main elements of thi s standard are as follows Like IFRS 8, this standard is o nly mandatory for those enterprises with publicl y traded securities, and parent company reports can be exempted (paragraphs 2 and 3). “ Earnings” is defined as the net profit fr om the income statement but after deduction of dividends on preference shares (paragraph 11).

Diluted earnings per s hare is calculated by dividing earnings by the number of shares adjusted for all dil utive potential ordinary shares (paragraphs 26 to 29). Shares are dilutive when their conversion would decrease net profit per share (paragraph 41). Earnings per share should be disclosed even if the amount is negative (paragraph 69)..

The disclosure of earnings per share should be done on th e basis of a “ basic” and a “ diluted” calculation. For the “basic” calculation the earnings should be divided by the weighted average number of ordinary shares outstanding during the period (paragraph 19). This should be adjusted for such things as bonus issues which change the number of shares (paragraphs 21).





Interim financial reporti ng - IAS 34 The main elements of thi s standard are as follows: This standard is not mandatory and no frequency of reporting is prescribed (paragraph 1). The standard is designed to be used by those companies that are required by regulatory authorities or stock exchanges to present interim reporting on a half yearly or quarterly basis. If reporting is to be described as in compliance with international standards then the rules of IAS 34 should be followed. IAS 34 requires condensed versions of all four pr imary statements (see IAS 1) to be disclo sed, and earnings per share (paragraphs 8 and 11).

The same accounting polici es are required in the int erim reporting as for annual reporting, although changes in accounting policy might be made at the interim stage rather than waiting for a year end. The frequency with which interim reporting is carried out must not be allowed to affect the annual result (paragraph 28). For interim reporting, the use of year end practices with respect to whether items should be anticipated or deferred is required (paragraphs 37 and 39). That is, interim reports should largely be seen as periods in their own right..

The minimum content of these condensed financial statements is specified (paragraph 16). Comparative figures for previous interim periods and previous full years are specified. This is fairly complicated in the case of quarterly reporting (paragraph 20).






Once development expenditure has been expensed it cannot subsequently be capitalised (see IAS 38). Does this fit with IAS 34, paragraph 29?


You should refer to the text of the standard when answering exercises..






First-time adoption of international financial reportin g standards - IFRS 1

“ IFRS 1 applies if an entity’s fi rst IFRS financial statements are for a period beginnin g on or after 1 January 2004. Earlier application is encouraged.”

The main elements of thi s standard are as follows: IFRS 1 sets out the procedures that must be followed when a company IFRSs for the first time. A fir st -ti me ad opter mak es an exp li ci t and unres erv ed s tatement t hat its g eneral purpose financial statements comply w ith IFRSs for the first time. The company should eliminate previous GAAP assets and liabilities from the opening statement of fi nancial position if they do not qualify for recognition under IFRSs.


For example, if the company’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 should be eliminated in the opening IFRS statement of financial position. The company should r ecognise all assets and liabilities that are required to be recognised by IFRS even if they were never recognised under previous GAAP. For example, IAS 37 requires recognition of provisions as liabilities including a company’s obligations for restructurings, onerous contracts, decommissioning, etc. The company should reclassify previous GAAP opening statement of financial position items into the appropriate IFRS classification. For example IAS 10 does not permit classifying dividends declared or proposed after the reporting date as a liability at that date. In the opening IFRS statement of financial position these would be reclassified as retained earnings.



First-time adoption of international financial reportin g standards - IFRS 1 The company should apply IFRS in measuring all recognised assets and liabilities. Any adjustments should be recognised directly in retained earnings or equity at the date of transition to IFRSs. There are some important exceptions to the general restatement and measurement principl es set out above. In preparing IFRS estimates retrospectively, the company must use the transactions and assumptions that had been used to determine previous GAAP estimates in periods before the date of transition to IFRS, provided that those transactions and assumptions are consistent with IFRS.




Insur ance Contract s - IFRS 4 The main elements of thi s standard are as follows: IFRS 4 is the first guidance from the IASB on accounting f or insurance contracts – but not the last. A second standard is being developed. The Board iss ued IFRS 4 because it saw a need for impr oved disclos ures for insurance contracts, and improvements to recognition and measurement practices, in time for the adoption of IFRS by listed companies throughout Europe and elsewhere in 2005. The improvements to recognition and measurement are ones that will p robably not be reversed when the IASB completes the second phase of the project..





Frequently asked questions Why did the IASB issue IFRS 4 “Insurance Contracts”?.


Many insurance companies had accounting polic ies which were in conflict with IFRSs. In order to ensure compliance with IFRS for the purpose of the 2005 deadline, the IASB had to issue a “stop-gap” standard which allowed insurance companies to follow more or less their existing policies so that they could state compliance with IFRSs..



Quick Quiz



Module 7 quick quiz

Question 1 In accordance with IFRS 8 Operating segments which of the following must be disclosed for a reportable segment? 1. 2. 3. 4.

Revenue - external Segment result Total assets Non-current assets

A. All of the above B. 2 and 3 C. 1, 3 and 4 D. 2, 3 and 4



Module 7 quick quiz

Question 2 In accordance with IFRS 8 Operating Segments which of the following must be disclosed by geographical area? 1. 2. 3. 4.

Revenue - external Segment result Total assets Non-current assets

A. All of the above B. 1, 2 and 3 C. 1 and 4 D. 2, 3 and 4.



Module 7 quick quiz

Question 3 A segment should be treated as reportable under IFRS 8 when its reported internal and external revenue is what percentage of the combined revenue (internal and external)? A. 5% or more B. 10% or more C. 15% or more D. 20% or more.



Module 7 quick quiz

Question 4 Which of the following would not be classed as a potential ordinary share? A. Convertible debt B. Redeemable preference shares C. Share options D. Shares which will be issued subject to certain conditions being met



Module 7 quick quiz

Question 5 A company, whose shares currently sell at $75 each, plans to make a rights issue of one share at $60 for every four existing shares. What is the theoretical ex-rights price of the shares after the issue? A. $75.00 B. $72.00 C. 467.50 D. $63.00



Module 7 quick quiz

Question 6 On 1 January 2008 a company has 10m $1 ordinary shares in issue. On 1 April 2008 it issues a further 2m shares in a share for share exchange deal. What is the number of ordinary shares to be used in the basic EPS calculation for the year ended 31 December 2008? A. 10m B. 10.5m C. 11.5m D. 12m



Module 7 quick quiz

Question 7 At 31 December 2008 a company has 1200 share options in issue. The exercise price of these options is $5 per share. The average fair value of shares for the period was $6 per share. What is the number of shares that will be added to the basic EPS share figure for the diluted EPS calculation? A. 200 B. 240 C. 1000 D. 1200



Module 7 quick quiz

Question 8 At 31 December 2008 a company has in issue 10% $1,000,000 convertible debenture stock. Income tax is at the rate of 30%. By what amount will the profit figure increase in the diluted EPS calculation? A. Nil B. $70,000 C. $100,000 D. $130,000



Module 7 quick quiz

Question 9 Which of the following may not be classed as a prior period error? A. Mathematical mistake B. Mistake in applying accounting policies C. Fraud D. Estimate



Module 7 quick quiz

Question 10 Which of the following conditions is not required for an asset to be classified as held for sale under IFRS 5? A. Management is committed to a plan to sell B. Asset is available for immediate sale C. Asset has not been revalued D. Sale is highly probable



Module 7 quick quiz

Question 11 How should a gain on the disposal of a non-current asset be shown in a company’s cash flow statement and the supporting notes? A. As a reconciling item between operating profit and net cash flow from operating activities B. As an operating cash flow C. As an investing cash flow D. It will not appear at all




Module 7 quick quiz

Question 12 Scaffold, a limited liability company, has increased its bad debts provision by $25,000. How would this be reflected in Scaffold’s cash flow statement? A Reconciliation of operating profit to net cash inflow from operating activities: increase in receivables

Increase in cash

Decrease

No change

Reconciliation of operating profit to net cash inflow from operating activities: increase in receivables

Increase in cash

Decrease

Decrease


Increase in cash

No change

No change


Increase in cash

No chang e

Decrease

B

C

D


Module 7 quick quiz

Question 13 A company incurs expenditure on development during the year which is capitalised. How would this expenditure be shown in a cash flow statement? A. As an operating cash flow B. As a capital expenditure cash flow C. As an item in the reconciliation of operating profit and net cash inflow from operating activities D. It will not appear at all.



Module 8: Princ ipal di fferences betw een IFRS & UK GAAP/US GAAP


Module 8: What you wi ll learn - prin cip al diff erences between IFRS and UK GAAP/US GAAP This module will deal with the following i tems: Principal differences between IFRS and UK GAAP Principal differences between IFRS and US GAAP. • •



Table of con tents Principal differences between IFRS and UK GAAP Principal differences between IFRS and US GAAP Frequently asked questions Quick Quiz





Principal differences between IFRS and UK GAAP The Conceptual Framework for Financial Reporting ASB st atem ent of pr in ci pl es f or fi nan ci al r eport in g: Includes chapters on the reporting entity, presentation and accounting for interests in other entities but there is no direct equivalent in the framework Measurement chapter is more detailed with an emphasis on the “deprival value model” •

FRS 3 reporting financial performance: Specifies certain exceptional items that must be presented on the face of the profit and loss account after operating profit. IAS 1 does not contain the “concept” of exceptional items •

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FRS 18 accounting policies: The disclosure requirements for estimation techniques are not as extensive •

IAS 1 presentation of financial statements ASB st atem ent of pr in ci pl es f or fi nan ci al r eport in g: Under UK GAAP profit and loss account classifications of expenses are similar to IAS 1. However, IAS 1 requires further detail Companies Acts balance sheet (statement of financial position) formats are less flexible than IAS 1 formats Differences in terminology used. •

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FRS 28 corresponding amounts: Does not specifically require comparative information for narrative and descriptive information to be disclosed. •



Principal differences between IFRS and UK GAAP IAS7 statement of cash flow

IAS 8 accounting pol icies, changes in accounting estimates, and errors

FRS 1 cash flow s tatements: Allows certain exemptions from preparing a cash flow statement for FRS 3 reporting financial performance: subsidiaries and small companies. No exemptions in IAS 7 Comparative financial information is restated where a fundamental prior period error has occurred which is more restrictive than IAS 8 The definition of cash is more restrictive and only includes cash which requires restatement for material prior period errors and deposits repayable on demand (within 24 hours). IAS 7 uses the wider terminology of “cash and cash equivalents” FRS 18 accounting policies: Cash flows are classified under eight standard headings rather Impending changes to accounting policies are not required to be than three. There is less flexibility as to where certain cash flows, disclosed such as interest paid are presented. •

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Principal differences between IFRS and UK GAAP IAS 11 construction contracts

IFRS 8 operating segments (superceded IAS 14 segment repor ting

SSAP 9 stocks and long-term contracts: Unlike IAS 11, service contracts may fall within its scope Requires the asset representing the gross amount due from customers for contract work to be split between amounts recoverable on contracts (debtors) and long-term contract balances (stocks)

SSAP 25 segment reporting: Omission of segment information is allowed where disclosure may be seriously prejudicial to the entity’s interests. No exemption exists under IFRS 8 Requires disclosures for both geographic and business segments. IFRS 8 uses a different basis for defining segments by requiring ‘managerial approach’ In addition it then requires disclosure of just two figures (revenue and non-current assets) on a geographical basis.

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IAS 12 income taxes FRS 19 deferred tax: Requires deferred taxation to be recognised on the basis of timing differences rather than temporary differences FRS 19 permits, but does not require, the discounting of deferred tax balances, whereas IAS 12 prohibits this FRS 19 does not normally recognise deferred taxation on the revaluation of assets. •

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Principal differences between IFRS and UK GAAP IAS 16 property, plant and equipment FRS 15 tangible fi xed assets: Where assets have been revalued FRS 15 requires the use of existing use value (EUV) rather than f air value FRS 15 specifies a maximum period of five years between full valuations and an interim valuation every three years. IAS 16 does not specify a maximum period and the timing of revaluations depends on changes in market values FRS 15 requires impairment losses to be debited first against any revaluation surplus in respect of the asset unless it reflects a consumption of economic benefits. IAS 16 does not include such a limitation •

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The residual values of assets are assessed at the date of acquisition and not adjusted for expected future price changes. However, residual values should be reviewed at each reporting date and revised if appropriate. IAS 16 requires them to be reassessed every reporting date taking into account current price changes. This may affect the depreciation expense Annual impairment reviews are required for all assets, which are either depreciated over a period of more than 50 years or not depreciated. IAS 16 does not include such a requirement.



Principal differences between IFRS and UK GAAP IAS 17 leases

IAS 18 revenue

SSAP 21 accounting for leases and hire purchase contr acts: There is no comprehensive UK accounting standard covering revenue. SSAP 21 contains the “90% test” presumption for determining the IAS 19 emplo yee benefits classification of finance and operating leases IAS 17 specifically requires leases of land and buildings to be split FRS 17 retirement benefit s: at inception as a separate lease of the land and a separate lease The scope of IAS 19 is wider and covers different types of of the buildings. Under SSAP 21 they are considered together employee compensation The net cash investment method is used for lessor accounting. IAS IAS 19 allows a similar immediate recognition approach to 17 requires the net investment method actuarial gains and losses as FRS 17. UK GAAP requires operating lease rental incentives to be spread over the shorter of the lease term and the period until the next rent review. IAS requires any incentives to be spread over the whole lease term. •

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Principal differences between IFRS and UK GAAP IAS 20 accounting for go vernment grants and disclosure of government assistance

The Companies Act does not allow government grants to be deducted from cost. Hence there is no option but to show them as deferred income. IAS 23 borrowing costs FRS 15 tangible fi xed assets: FRS 15 limits the capitalisation of borrowing costs to the finance costs incurred on the expenditure i ncurred. •

IAS 24 related party disclosures FRS 8 related party disclosures: Unlike IAS 24, parent company’s individual financial statements are exempt from providing disclosures when consol idated financial statements are presented Unlike IAS 24, UK subsidiaries are exempt from disclosing transactions with the parent entity where 90% or over of the voting rights are controlled within the group Disclosure requirements differ. In general FRS 8 requires the disclosure of the name of the related party where a transaction has occurred whereas IAS 24 does not IAS 24 does not consider the materiality of related party transactions. FRS 8 considers materiality from the perspective of both the company and related party. •

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Principal differences between IFRS and UK GAAP IFRS 10 Consolidated financial Statements IAS 27 Separate financial s tatements

IFRS 11 Joint arrangements IAS 28 Investments in asso ciates and join t ventur es (revised 2011)

FRS 2 accounting for subs idiary undertakings: FRS 9 assoc iates and joint vent ures: Includes an exclusion of a subsidiary from consolidation on the Prescribes detailed format for equity accounting. IAS 28 does not grounds of severe long-term restrictions. No exemption exists prescribe guidance for the income statement presentations. under international standards However, IAS 1 provides limited guidance which uses a pre-tax presentation of the associate’s income after tax. FRS 9 prescribes Under IFRS 10 the existence of potential voting rights should be how the components of the investor’s share of associate income considered in assessing control. No consideration is required should be shown on the profit and loss account under UK GAAP Requires investors to recognise their share of any interest in net Requires the minority interest (i.e. non-controlling interest using liabilities. IAS 28 only requires this where there is a legal or international terminology) to be presented separately from constructive obligation to make good those losses shareholders’ funds. IFRS 10 requires it to be shown as a separate component of equity. For joint ventures requires the use of the gross equity method rather than the equity method allowed by IFRS 11 •

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Principal differences between IFRS and UK GAAP IAS 40 investment property

FRS 7 fair values in acquisit ion accounting: Provides specific guidance on fair value measurement. IFRS 3 only offers brief guidance on fair value measurement Only requires separable intangible assets to be fair valued. Hence, more intangibles could be recognised under IFRS 3 •

SSAP 19 accounting for investment properties: Requires measurement at open market value. IAS 40 allows a choice between cost and fair value. Investment gains and losses are taken to STRGL unless they represent a permanent deficit in fair value. Under IAS 40 all gains and losses are recognised in the income statement. •

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IFRS 3 business combinations

FRS 10 goodwill and intangible assets: Goodwill is often amortised over its estimated useful economic life. There is a presumption that it is not more than 20 years. IFRS 3 prohibits amortisation and requires annual impairment reviews Negative goodwill is capitalised as a separate item within goodwill and amortised over the period over which any related losses are expected and as acquired non-monetary assets are realised. IFRS 3 requires immediate recognition as a gain in the income statement. Full goodwill method, which requires measurement of the noncontrolling interest (introduced by IFRS 3 revised), not allowed under FRS 10. •

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FRS 6 acquisitions and mergers: Merger accounting is required when criteria are met. Not permitted under IFRS Group reconstructions are merger accounted for Common control transactions are not within scope of IFRS 3. •

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Principal differences between IFRS and UK GAAP IFRS 5 non-current assets held for sale and discontinued operations FRS 3 reporting financial performance: Continuing and discontinued activities must be analysed. A more detailed analysis is shown on face of the P&L account under FRS 3 Discontinued classification will often be at a later date than IFRS 5 as disposal must be completed during this reporting period or before the earlier of the approval of the financial statements and three months after year-end •

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FRS 15 tangible fixed assets: Classification and measurement of assets generally continues as normal without regard for the disposal. This includes depreciation until the date of disposal IFRS 5 on the other hand requires depreciation to cease while a non-current asset is held for sale. •





Princ ipal di fferences b etween IFRS and US GAAP The Conceptual Framework for Financial Reporting

No revaluations allowed by US GAAP except for some derivatives and securities at fair value.

IAS 1 presentation of financial statements • • •

General approach

More “rules-based” standards with specific application guidance..


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Specific line items required by IAS 1 One year comparative financial information required by IAS 1 Certain standards require specific presentation of certain items. Public companies are subject to SEC rules and regulations which require specific line items under US GAAP Three years information required for SEC registrants except statement of financial position (2 years) under US GAAP.



Princ ipal di fferences b etween IFRS and US GAAP Extraordinary items • •

Extraordinary items are prohibited by IAS 1 Extraordinary items are permitted, but are restricted to items that are both infrequent in occurrence and unusual in nature. Negative goodwill is an extraordinary item under US GAAP

IAS 7 cash fl ow statement Classification of interest received and paid in the cash fl ow statement: May be classified as an operating, investing or financing activity under IAS 7 Must be classified as an operating activity by US GAAP •

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IAS 2 inventories • •

LIFO is prohibited by IAS 2 LIFO is permitted by US GAAP.

Bank overdrafts included in cash if they form an integral part of an entity’s cash management: Excluded by US GAAP •

IAS 11 construction contracts Method of accounting for cons truction contr acts when the percentage of c ompletion cannot be determined: Cost recovery method used by IAS Completed contract method by US GAAP. • •




Princ ipal di fferences b etween IFRS and US GAAP IAS 12 income taxes Classification of deferred tax assets and liabilities: Always non-current under IAS 12 Under US GAAP classification is split between current and noncurrent components based on the classification of underlying asset or liability, or on the expected reversal of items not related to an asset or liability

IAS 16 property, plant and equipment •

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Impact of temporary differences related to inter-company profits: Deferred tax effect is recognised at the buyer’s tax rate by IAS 12 Deferred tax effect is recognised at the seller’s tax rate, as if the transaction had not occurred under US GAAP • •

Other: •

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Deferred tax not recognised for taxable temporary differences that arise from the initial recognition of certain assets and liabilities under IAS 12 No similar exemption under US GAAP Use enacted or “substantively enacted” tax rate under IAS 12 Use enacted tax rate under US GAAP.


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IAS 16 says may use either revalued amount or historical cost Generally required to use historical cost under US GAAP US GAAP generally does not require the component approach for depreciation There is no requirement for an annual review of residual values under US GAAP.



Princ ipal di fferences b etween IFRS and US GAAP IAS 17 leases Leases may be classified differently under IFRS than under US GAAP Under US GAAP there are quantitative thresholds to apply in determining classification (e.g. whether the present value of minimum lease payments equals or exceeds 90% of the fair value of the lease item) •

Recognition of a gain on a sale and leaseback transaction where the leaseback is an operating lease: Under IFRS the gain is recognised immediately but under US GAAP the gain is amortised over the lease term

IFRS 10 Consolidated financial statements IAS 27 Separate financi al statements Basis for consoli dation is different: Power to control is key under IFRS 10 (defined as exposure or rights to variable returns from involvement with the investee and ability to affect those returns through power over the investee). US GAAP approach depends on the type of entity. For voting interests, entities generally look to majority voting rights. For variable interest entities, look to a risks and rewards model •

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Different accounting po licies of p arent and subsi diaries: Must conform to policies under IFRS No specific requirement to conform to policies under US GAAP. IAS 19 emplo yee benefits Consolidated financial statements generally prepared by using uniform accounting policies for all entities in a group but some Under IFRS, actuarial gains and losses may be recognised immediately in exceptions where a subsidiary conforms with s pecialised industry other comprehensive income; this is not permitted under US GAAP. accounting principles. •

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Princ ipal di fferences b etween IFRS and US GAAP Non-controlli ng interests Under US GAAP, non-controlling interests are measured at full fair value. Under IFRS, there is a choice. The non-controlling interest is either measured as their proportion of the fair value of the identifiable net assets or at full fair value. The use of the full fair value option results in full goodwill being recorded on both the controlling and non-controlling interest.

IAS 33 earnings p er share

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Basic and diluted income from continuing operations per share and net profit or loss per share is disclosed under IFRS Basic and diluted income from continuing operations, discontinued operations, extraordinary items, cumulative effect of a change in accounting policy, and net profit or loss per share is disclosed under US GAAP

IAS 36 impairment of assets IAS 32 financial instruments: presentation Classification of convertible debt instruments: Split the instrument into its liability and equity components and measure the liability at fair value with the equity component representing the residual under IFRS Classify the entire instrument as a liability under US GAAP

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Impairment is recorded when an asset’s carrying amount exceeds the higher of the asset’s value-in-use (discounted present value of the asset’s expected future cash flows) and fair value less costs to sell under IFRS Impairment is recorded when an asset’s carrying amount exceeds the expected future cash flows to be derived from the asset on an undiscounted basis under US GAAP.



Princ ipal di fferences b etween IFRS and US GAAP Measurement of impairment loss for l ong-term assets other than goodwill th at are subject to amortisation is: Based on the recoverable amount (the higher of the asset’s valuein-use and fair value less costs to sell) under IFRS It is based on the fair value under US GAAP Cash generating unit (CGU), the lowest level to which goodwill can be allocated under IFRS Reporting unit – an operating segment of one organisational level below is the lowest level under US GAAP •

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IAS 38 intangi ble assets Development costs are: Capitalised if certain criteria are met under IFRS, but Expensed (except for certain website development costs and certain costs associated with developing internal use software) under US GAAP • •

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IAS 38

Subsequent reversal of an impairment loss is required for all assets, other Revaluation of i ntangible assets is: Permitted only if the intangible asset trades in an active market than goodwill, if certain criteria are met but under US GAAP is prohibited. under IFRS (fairly uncommon) Generally prohibited under US GAAP •

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Princ ipal di fferences b etween IFRS and US GAAP IAS 40 investment property Measurement basis for i nvestment property: Under IFRS is the option of historical cost model or fair value model with value changes through profit or loss Generally required to use historical cost model (depreciation, impairment) under US GAAP IAS 41 agriculture

Measurement basis of agricultural crops, livestock, orchards, forests is at: Fair value with value changes recognised in profit or loss under IFRS Historical cost is generally used. However, fair value less costs to sell is used for harvested crops and livestock held for sale under US GAA.





Princ ipal di fferences b etween IFRS and US GAAP IFRS 1 first ti me adoption of IFRS

IFRS 4 insurance contracts

First time adoption: General principle is retrospective application of IFRSs in force at the time of adoption No specific standard under US GAAP

IFRS 4 addresses recognition and measurement in only a limited way. It is an interim standard pending completion of a comprehensive project.

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IFRS 3 business combinations •

Treatment of contingent consideration; contingent liabilities and intangible assets different in acquisition accounting under US GAAP.


Several comprehensive pronouncements and other comprehensive industry accounting guides have been published under US GAAP



Frequently asked questions 1. Have the differences between the UK, US and IFRS requirements been growing or shrinking recently? 2. What is the difference between “incompatible” and “inconsistent”?

1. On a number of recent standard-setting issues, there has been a conc erted US/IFRS or UK/IFRS effort. For example, IAS 33 (earnings per share) was written jointly with the FASB; and IAS 37 (provisions) was written jointly with the UK. Also, IAS 39 (financial instruments) and IAS 12 (income tax) are based closely on the US rules. The UK influenced the IASB on IAS 36 (impairment) and IAS 38 (intangibles). However, because IFRSs are becoming tighter (with fewer options), the inc ompatibilities have been increasing. Also the differences between UK GAAP and IFRS are growing because of the convergence of US GAAP and IFRS. An example of this is IFRS 3 (Revised). 2. “Incompatible” means that it is impossible to obey both instructi ons at the same time. “Inconsistent” means that the rules allow different choices.




Quick Quiz



Module 8 quick quiz

Question 1 When preparing financial statements under UK GAAP rather than IFRS, which of the following statements is true? A. Under FRS 15 an entity is not permitted to revalue tangible fixed assets. B. FRS 15 permits revaluation of tangible fixed assets if the valuation is updated fully at least every five years. C. FRS 15 permits revaluation of tangible fixed assets but does not specify any minimum requirement for the f requency of valuations D. FRS 15 permits revaluation of tangible fixed assets to fair value



Module 8 quick quiz

Question 2 When considering the differences between US and UK GAAP which of the following statements is true? 1. IFRS does not allow the use of extraordinary items; US GAAP does and includes negative goodwill under this heading 2. The LIFO method of inventory valuation is not permitted under UK or US GAAP 3. In the IFRS statement of cash flows, interest received or paid may be classified under any of the 3 main headings; US GAAP specifies interest as an operating cash flow. A. 1 only B. 2 and 3 C. 1 and 3 D. All of the above



Module 8 quick quiz

Question 3 When preparing consolidated financial statements, which of the following statements are true: 1. Under US GAAP the non controlling interest must be measured at full fair value 2. Under IFRS the non controlling interest may be measured at full fair value or as their proportion of the fair value of the identifiable net assets. 3. Under US GAAP joint ventures are generally accounted using the equity method A. 3 only B. 1 and 3 C. None of the above D. All of the above



Module 9: Forthcoming proposals for change

Module 9: What you will l earn - Forthcoming proposals f or change This last module will look at the following items: Memorandum of understanding between the FASB and the IASB IASB taking steps to assist adoption of IFRS The ASB and future reporting requirements for UK companies IASB workplan Findings from the first IFRS annual reports under UK GAAP. • • • • •




Table of con tents Memorandum of understanding between the FASB and the IASB. The ASB and future reporting requirements for UK companies IASB work plan at 26th July 2011 Findings from the first IFRS annual reports under UK GAAP Course conclusion





Memorandum o f underst anding between the FASB and the IASB Af ter their jo in t m eeti ng in September 2002, the US Fi nanc ial Acco unti ng Stan dar ds Bo ard (FASB) and th e Intern ati onal Acco unti ng Stan dar ds Bo ard (IASB) is su ed the Norw alk Agr eemen t in which they each acknowledged their commitment to the development of high quality, compatible accounting standards that could be used for both domestic and cross-border financial reporting. At that meeting, the FASB and the IASB pledged “to use their best efforts to make their existing financial reporting standards fully compatible as soon as is practicable and to co-ordinate their future work programmes to ensure that once achieved, compatibility is maintained.” In 2006 they produced a joint memorandum of understanding (MoU) outlining the projects that would be addressed as a priority as part of a joint work programme to achieve convergence. More recently the FASB and the IASB reaffirmed their commitment to th e convergenc e of US GAAP and IFRSs , following identification of this work as a priority by the G20 leaders in September 2009.


In 2010, the boards made a joint announcement that by June 2011 they would reach a converged solution in those areas identified as most urgent by the MoU. This deadline has largely been met, with only final publication of the new leasing and revenue recognition standards still to come in 2012..

In meeting this target they will assist the SEC, who have pledged to make an announcement in the latter stages of 2011 concerning if and when IFRS might be adopted in the US.



The ASB and futur e reporting requirements for UK comp anies The current financial reporting model in the UK is that some companies prepare accounts in accordance with IFRS and other companies use UK GAAP. The use of two financial reporting frameworks introduces additional cost and risk and results in a lack of comparability between listed and unlisted companies. The ASB is committed to eliminating differences between UK accounting standards and IFRS and current proposal documents signal that for accounting periods commencing on or after 1 July 2013, UK GAAP will be phased out and all non-publicly accountable entities will comply with the FRSME (a standard based on the new IFRS for SMEs). Publicly accountable entities already comply with full IFRS in the UK.


Companies qualifying as small under the Companies Act 2006 are the only exception; these entities will be able to continue to prepare financial statements in accordance with the UK FRSSE, which will remain in existence for the foreseeable future. .



IASB work plan at 26th July 2011 IASB-FASB collaboration projects: Leases Revenue recognition Financial instruments (impairment and hedge accounting) Insurance contacts Less urgent and so left for consideration as part of 2011 agenda consultation: Emissions-trading schemes Financial statement presentation Income taxes Liabilities (IAS 37 amendments) Conceptual framework


Other projects: Management commentary Three-yearly public consultation re IASB workplan



Findings f rom t he first IFRS annual reports under UK GAAP From 1 January 2005, all publicly listed companies in the European Union have prepared their financial statements in con formity w ith IFRSs. Some trends have emerged upon review of the financial statements of companies that have undergone the transition to IFRS. One of the least surpr ising f indings was the inc reased size of the annual reports: over 50% longer on average with some annual reports (financial services institutions), more than doubling in size compared to previous years. Some of the increase in length can be attributed to IFRS 1 reconciliations. Whilst IFRS includes broad gui delines for the presentation of financial statements, it has lit tle to say regarding which l ine items must be included and hence companies have had to decide on the best way of portraying their results. Many used either extra columns or boxes on the face of their income statements, separating out “exceptional” or “special” items, discontinued operations, acquisitions, re-measurements, fair value adjustments or actuarial gains and losses.


Segmental reporting is one of the more controversial issues for companies, having the potential to reveal commercially sensitive data to competitors and other stakeholders. Many companies have changed their segments in some way compared to previous years to come in line with the requirements of IFRS. Many companies t ook advantage of th e IAS 19 amendment regarding actuarial gains and losses, to allow such gains and losses to go through other comprehensive income. 82% opted to t ake the IFRS 1 exemption n ot to r estate comparatives under IAS 32/39. Many companies in the survey retained local GAAP for their parent company accounts. IFRS at the parent level can impact the tax paid by the entity and its ability to pay dividends to shareholders.


Course conclusion The increased complexity and l evel of disclos ures required by IFRS is here to stay. This challenge affects preparers of financial statements and their users.

The convergence of US GAAP and IFRS continues to present the accounting world with new convergence issues.



Certifr PDF 2012

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