Kaplan IFRS Summary

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KAPLAN PUBLISHING: SUMMARY OF IAS AND IFRS STANDARDS

Summary of IAS & IFRS Standards September 2017 – June 2018 examinations You should refer to your ACCA Paper F7 Financial Reporting and P2 Corporate Reporting study materials for further detailed information. You should not rely upon this document for knowledge and understanding of all aspects of these reporting standards and other examinable documents. It is intended to be used as an aid or as a prompt to your studies.

Conceptual Framework for Financial Reporting Objectives of financial reporting • To provide information of use to investors, lenders and other creditors o To provide information about economic resources and claims (and changes in these) o Qualitative characteristics: • fundamental characteristics of relevance and faithful representation o enhancing characteristics of comparability, verifiability, timeliness and understandability o Elements of financial statements: • Assets – resources controlled by an entity from a past event that will give rise to future o economic benefits Liabilities – obligations to transfer economic benefits as a result of a past transaction or o event Equity – residual interest in an entity’s assets after deduction of all liabilities o Income – the increase in economic benefits during an accounting period o Expenses – decreases in economic benefits during an acc ounting period o Recognition of elements in financial statements: • o Recognise if it meets the definition of an element, it is probable that there will be an inflow or outflow of economic benefits and it c an be reliably measured. Measurement in financial statements • Usually historic cost or realisable value, but could be curre nt cost or present value o

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IAS 1 – Presentation of financial statements Provides formats for classification and presentation of financial information • • Items of OCI must be classified as either items that may be reclassified to profit or loss in future periods, or those items which w ill not be reclassified in future periods

IAS 2 - Inventories Valued at lower of cost and estimated selling price less selling costs (i.e. NRV) for each • separate item or product The ‘cost’ of inventory includes all costs of getting the item or product to current location • and condition

IAS 7 – Statement of cash flows Reconciles cash and cash equivalents year-on-year • A cash equivalent is short-term, highly liquid and readily convertible to a known amount o of cash. Three standard headings • Operating activities o Investing activities o Financing activities. o Cash generated from operations can be derived using the direct method or the indirect • method The indirect method begins with profit before tax and then adjusts it for non-cash items, o as well as for items that relate to investing or financing activities.

IAS 8 – Accounting policies, changes in accounting estimates and errors Accounting policies should be appropriate and relevant, be consistently applied and be • disclosed Changes in estimates are taken to statement of profit or loss in current and future periods – • e.g. change in depreciation method Changes in accounting policy and the correction of prior period errors require the • restatement of comparative information and opening reserves

IAS 10 – Events after the reporting period Definition – those events between the reporting date and date of approval of financial • statements Adjusting events – those which provide additional evidence of the situation existing at the • SOFP date e.g. insolvency of major debtor notified shortly after the reporting date • Non-adjusting events – those which do not provide evidence of the situation at the SOFP date e.g. share issue after the reporting date. Disclose only, but may become adjusting event if going concern basis threatened.

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IAS 12 – Income Taxes Deferred tax is accounted for on temporary differences between carrying amount and tax • base of assets and liabilities Permanent differences are ignored o If the tax base is higher than the carrying amount = deferred tax asset o If the carrying amount is higher than the tax base = deferred tax liability o Temporary differences include: • The timing difference between accounting and t ax depreciation o The timing difference between the amortisation of development assets and the period o in which tax relief for development activity is obtained. Deferred tax is calculated by applying the applicable tax rate to the temporary difference • Deferred tax is not discounted to present value o Deferred tax assets can only be recognised if probable benefits are expected o The deferred tax charge (or credit) is recorded in the same statement as the underlying • transaction Most deferred tax is recorded in profit or loss o Deferred tax on transactions in OCI (such as PPE revaluations) is recorded in OCI o

IAS 16 – Property, plant & equipment Initially recognised at cost • Cost is all expenditure attributable to bringing the asset into working condition as well o as directly attributable borrowing costs. Subsequent expenditure is capitalised if it enhances the economic benefits of the asset. • Depreciation starts when the asset is available for use • May be possible not to charge depreciation if it is immaterial due to very long expected • useful life of asset and/or high residual values. If this is the case, asset to be maintained to a high standard and is unlikely to suffer from economic or tec hnical obsolescence. PPE may be revalued • gains are recorded in other comprehensive income. o Losses are recorded in OCI until the reval reserve is reduced to nil. Any excess loss is o recorded in P/L.

IAS 19 (revised) – Employee benefits • Not in F7 Financial Reporting syllabus Defined contribution scheme recognises annual cost of pension contribution • Defined benefit scheme: • o Net interest component charged to profit or loss in the year apply discount rate to net obligation at start of year The service cost component is charge d to profit or loss in the year and includes: o current year service cost past service costs recognised in full when announced gains and losses on curtailments and settlements remeasurement component taken to other comprehensive income in the year o 

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IAS 20 – Accounting for government grants Match revenue grants against expense to which they relate • • Match capital grants with assets to which they re late in one of two ways: Recognise the grant as deferred income and then release it to profit or loss over the o useful life of the asset Reduce the cost of the asset by the grant received o

IAS 21 – The effects of changes in foreign exchange rates •

Functional currency is the currency of the primary economic environment where the entity operates Determined based on currency of sales, purchases and financing. o

Rules in individual financial statements • • •

Use exchange rate ruling at date of transaction to record transactions in overseas currencies Monetary items are re-translated at SOFP rate with gain or loss to profit or loss Non-monetary items (e.g. PP”, inventory) are not restated

Rules in group financial statements (not in F7 syllabus) • • •

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Translate assets and liabilities at closing rate Translate incomes, expenses and OCI at average rate Exchange gains and losses arise on the retranslation of: o Goodwill Opening net assets and profit o The current year exchange gain/loss is recorded in OCI

IAS 23 – Borrowing costs Entities must capitalise directly attributable borrowing cost during construction of a • qualifying non-current asset

IAS 24 – Related party disclosures Not in F7 Financial Reporting syllabus • Definition of a related party • Relationships of control or significant influence o Entities under common control o Directors o Must disclose related party transactions, outstanding balances (e.g. receivables) and write• offs.

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IAS 27 (revised) – Separate financial statements In separate (non-consolidated) financial statements, subsidiaries, associates and joint • arrangements can be accounted for: at cost, or o as a financial instrument, or o using the equity method o

IAS 28 (revised) – Investment in associates and joint ventures Associate – an entity over which an investor has significant influence but not control (usually • Indicated by 20%-50% of equity shares in another entity) Joint venture – an entity over which an investor has joint control (see IFRS 11) • Associates and joint ventures are accounted for using the equity method in the consolidated • financial statements: Profit or loss = group share of associate’s profit after tax less curre nt year impairment o OCI = group share of associate’s OC I o SFP = cost PLUS group share of post-acquisition reserves LESS dividends o

IAS 32 - Financial Instruments – Presentation IFRS 7 – Financial Instruments – Disclosures IFRS 9 - Financial Instruments Financial liabilities classified as: • o Fair value through profit or loss - this includes derivatives for speculation and financial liabilities held for trading o Amortised cost – for all other financial liabilities Note – entities can opt to measure liabilities at fair value through profit or loss to o eliminate or reduce an accounting mismatch Split compound instruments (those with characteristics of liabilities and equity) into liability • and equity elements at inception. Liability = present value of repayments o Equity = cash proceeds less liability o Classification of financial assets: • Investments in shares can be categorised as: o Fair value through profit or loss Fair value through other comprehensive income – as long as they are not for shortterm trade and have been designated as such Investments in debt can be categorised as o Amortised cost – if the business model is to hold to maturity Fair value through other comprehensive income – if the business model involves holding financial assets to maturity and selling them Fair value through profit or loss if business model is to sell or if the contractual cash flow characteristics test is failed  

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Impairments of financial assets: A loss allowance should be recognised for all investments in debt measured at o amortised cost or fair value through othe r comprehensive income If credit risk has not increased significantly, the loss allowance should be equal to 12 o month expected credit losses If credit risk has increased significantly, or for trade receivables, the loss allowance o should be equal to lifetime expected c redit losses If the asset is credit impaired, the loss allowance should equal the difference between o the asset’s gross carrying amount and the present value of the expected future cash receipts Hedge accounting: Must be formally documented at inception o Must be regularly reviewed to ensure it meets the effectiveness criteria o FV hedge – take changes in FV of hedged item and hedging instrument to profit or loss o (unless the hedged item is an investment in e quity measured at FVOCI) Cashflow hedge – take changes in FV of hedging instrument to OCI (any excess FV o movement is taken to profit or loss)

IAS 33 – Earnings per share Basic EPS = •

Profit after tax attributable to the parent – irredeemable preference dividends Weighted average number of equity shares •

Consider: Market issue at full price – calculate the weighted average number of e quity shares o Bonus issue– treat as if these had always been in issue and restate the comparative EPS o Rights issue – treat partly as bonus issue and partly as issue at full market price o Diluted EPS – relevant if there is convertible debt or share option schemes o

IAS 34 – Interim financial reporting Not in F7 Financial Reporting syllabus. • Interim reports are not mandatory but are recommended • If prepared, interim reports should include: • A condensed statement of financial position with comparatives dated at end of previous o financial year-end. A condensed statement of profit or loss, plus cumulative for year to date, plus o comparatives A condensed statement of changes in equity and a statement of cash flows, plus o comparatives for each statement Selected explanatory notes – including any change in accounting policy or significant o adjustments from interim to annual financial statements

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IAS 36 – Impairment of assets Definition = the reduction in recoverable amount below carrying amount • Recoverable amount = the higher of fair value less costs to sell and value in use. o Entities normally only perform an impairment review if there is an indication that an asset(s) • is impaired. However, annual impairment reviews are required for: o Goodwill o Intangible assets that are not amortised Impairment losses are normally charged to profit or loss • If an asset has been previously revalued, impairments are charged to OCI until the o revaluation reserve relating to that specific asset is reduced to nil. If an asset does not generate individual cash flows then it may need to be reviewed for • impairment as part of a cash generat ing unit (CGU) CGU = smallest group of assets that generate cash flows independently of other assets. o If a CGU is impaired, then the impairment is allocated to goodwill and then to the other o assets in proportion to their carry ing amounts. An individual asset cannot be written down below recoverable amount. o When conducting an impairment review on a CGU that includes goodwill calculated on a o proportionate basis, the goodwill must be grossed up to include the NCI’s share of the goodwill.

IAS 37 – Provisions, contingent liabilities and contingent assets A provision = a liability of uncertain timing or amount • Provisions are recognised if: • There is an obligation from a past event o There is a probable outflow of benefits o The outflow of benefits can be measured re liably o Provisions are recognised at the present value of the best estimate of the outflow required • The following are not provided for: • Future operating losses o Relocation and retraining of existing employees o Periodic repairs o Contingent liabilities are disclosed if they are possible • Contingent assets are disclosed if they are probable •

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IAS 38 – Intangible assets Definition = an asset without physical substance • • Recognise at cost if: Identifiable o It is controlled by the entity o It is expected to generate future economic benefits o It can be measured reliably o Research and development costs dealt with by IAS 38: • Research expenditure if expensed to profit or loss o Development expenditure is capitalised if the criteria in IAS 38 are met o Apply either cost model or the revaluation model. If the revaluation model is used: • An active market must be available o Any increase in valuation taken to OCI o If the asset has a finite useful life, then amortise over the useful life • If the asset has an indefinite life, then review annually for impairment. •

IAS 40 – Investment property Definition = property (including land) held for rentals or capital appreciation • Initially recognised at cost • • Subsequently measured using either: o Cost model - cost less depreciation o Fair value model – revalued to fair value at year end with gains or losses in profit or loss (no depreciation charged).

IAS 41 – Agriculture Biological assets are living plants and animals • They are Initially valued at fair value less c osts to sell o They are revalued to fair value less costs to sell at the reporting date with the gain or o loss in profit or loss. Agricultural produce is the harvested product on a biological asset • It is initially measured at fair value less costs to sell. o It is subsequently accounted for under IAS 2 Inventories. o

IFRS 1 – First-time adoption of International Financial Reporting Standards Not in F7 Financial Reporting syllabus • When adopting IFRS Standards for the first time, an opening SFP must be produced at the • date of transition in which the entity must: Recognise assets and liabilities in accordance with IFRS Standards o Derecognise assets and liabilities that do not comply with IF RS Standards o Measure assets and liabilities in accordance with IFRS St andards o Classify assets in accordance with IFRS Standards. o Gain and losses arising at the date of transition are recorded in retained e arnings. •

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IFRS 2 – Share-based payment Not in F7 Financial Reporting syllabus • • Equity settled – Recognise equity and an expense over the vesting period based on the number of shares/options expected to vest and the fair value of the equity instrument at the grant date Modifications give rise to an additional expense recognised between the modification o date and the vesting date Cancellation of a share scheme accelerates the expense. Compensation is treated as a o deduction to equity. Cash settled – Recognise a liability and an expense over the vesting period based on the • number of rights expected to vest and the fair value of the rights at the reporting date

IFRS 3 Revised – Business combinations Business combinations apply acquisition accounting • Identify the acquirer o Identify the acquisition date o Measure the identifiable net assets at fair value o Recognise goodwill and the non-controlling interest. o The non-controlling interest at acquisition can be measured at fair value or at its proportion • of the fair value of the subsidiary’s identifiable net assets at the acquisition date. Acquisition costs are expensed to profit or loss. • A gain on a bargain purchase is recognised in profit or loss. •

IFRS 5 – Non-current assets held-for-sale and discontinued activities An asset or disposal group is classified as held for sale if its carrying amount will be mainly • recovered through a sale and the sale is highly probable. To qualify, the following criteria should be met: The asset must be available to sell in its present condition o The asset must be marketed at a reasonable price o The sale is expected within 12 months o Assets held for sale are measured at the lower of carrying amount and fair value less costs • to sell. They are not depreciated. • Separate disclosure of discontinued operation in statement of profit or loss – defined as a component of a business which has either been disposed of or is classified as held for sale and: o represents a separate major line of business or geographical area of business o is part of a single co-ordinated plan to dispose, or o is a subsidiary acquired exclusively with a view to sale.

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IFRS 8 – Operating segments Not in F7 Financial Reporting syllabus • • Operating segments based upon internal reporting and decision-making lines within the entity Segments can be aggregated if they have similar economic characteristics • Disclose a segment separately if it re presents 10% or more of any of the following: • Total assets o Total (internal and external) revenues o The greater of the profit or the profit making segments, or the loss of the loss making o segments. Must report additional segments until 75% of external re venue is reported. •

IFRS 10 – Consolidated financial statements Elements of control: • Power over the investee o Exposure, or rights to, variable returns o Ability to use that power to affect returns o Definition recognises that it may be possible for one entity to have control, whilst another • has significant influence, in a third entity. Potential voting rights (e.g. share options and convertible loans) should be considered if • capable of being exercised.

IFRS 11 – Joint arrangements Not in F7 Financial Reporting syllabus • Definition – two or more parties having joint contr ol which requires unanimous consent • Joint venture – where parties have joint control and have rights to net assets of a separate • entity formed for the joint venture – use equity accounting per IAS 28. Joint operation – parties have joint control and have rights to the assets and obligations for • the liabilities of the joint operation – normally will not be a separate entity and parties agree rights and responsibilities or particular activities within the joint operation. Each joint operation party accounts for their own transactions and has amounts due to and from other joint operation partners.

IFRS 12 – Disclosure of interests in other entities Not in F7 Financial Reporting syllabus • Single source of disclosure requirements in financial statements applicable to interests in • subsidiaries, associates and joint arrangements Disclose assumptions and judgements made in determining status of investment(s) • Disclose restrictions on ability to exercise c ontrol or influence •

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IFRS 13 – Fair value measurement Provides single and standardised definition and source of guidance for fair value • measurements. Fair value is defined as the amount received to sell an asset or paid to transfer a liability in • an orderly transaction between market participants at t he measurement date. Fair value should be identified with reference to the principal market or, if there is no • principal market, the most advantageous market IFRS 13 uses a 3-tier hierarchy of inputs for valuation purposes: • o Level 1 – quoted prices for identical assets or liabilities traded in an active market Level 2 – quoted prices not included in level 1 o Level 3 – other data used to determine fair value (unobservable prices) o The fair value of a financial asset is determined based on its highest and best use. •

IFRS 15 – Revenue from contracts with customers Revenue recognition is a five step proce ss: • 1. Identify the contract 2. Identify the separate performance o bligations within the contract 3. Determine the transaction price 4. Allocate the transaction price to the performance obligations in the contract 5. Recognise revenue when (or as) a performance obligation is satisfied

IFRS 16 Leases A lease allows an entity to use an identified asset for a period of time in exchange for • consideration Unless the lease is short-term or of minimal value, lessees recognise a lease liability and a • right-of-use asset at inception of lease Interest on the liability is charged to profit or loss o Depreciation on the right-of-use asset is charged to profit or loss. o Lessors must assess if the lease is a finance lease or an operating lease • A finance lease transfers substantially all of the risks and rewards of the asset to the o lessee If a finance lease, the lessor dercognises the asset and recognises a lease receivable o If an operating lease, the lessor continues to recognise the asset and recognises the o lease rental income in profit or loss on a straight line basis. For sale and leaseback transactions, need to assess if transfer is a ‘sale’ (per IFRS 15) • o If not a sale, the seller-lessee continues to recognise the transferred asset and will recognise a financial liability equal to the transfer proceeds. o If a sale, the seller-lessee must measure the right-of-use asset as the proportion of the previous carrying amount that relates to the rights retained

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IFRS for SMEs Standard SME defined as unlisted entity and each county able to add additional or excluding criteria • such as banking financial services activities, charities, size criteria e tc. Some topics excluded completely from IFRS for SMEs Standard: • o Earnings per share o Interim financial statements o Segmental reporting o Assets held for sale Some topics simplified for IFRS for SMEs Standard: • Research and development always expensed o Goodwill amortised over its useful life (if the life cannot be estimated reliably then o management should use a best estimate that does not exceed ten years) Borrowing costs never capitalised o No revaluation model for intangible assets o Can only measure NCI using proportionate method (fair value met hod not allowed) o

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Kaplan IFRS Summary

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