Financial Reporting Standards Update
Tony Sweetman
Kaplan Publishing
February 2012
tony.sweetman@kaplan.co.uk
GROUP ACCOUNTING
New and revised reporting
standards
• IFRS 10 - Consolidated Financial Statements
– replaces most of IAS 27
• IFRS 11 - Joint Arrangements
– replaces IAS 31
• IFRS 12 – Disclosure of Interests in Other Entities
– replaces parts of IAS 27
• IAS 27 – Separate Financial Statements (revised)
• IAS 28 – Investments in Associates and Joint
Ventures (revised)
• Effective from 1 January 2013
IFRS 10 – Consolidated
Financial Statements
• Provides single definition for control that
must be subject to continuous
assessment:
– Power over the investee
– Exposure of rights to variable returns
– Ability to use power to affect those returns
• Does not change basic mechanics of
consolidation
Accounting for associates &
joint ventures
• IAS 28 (revised) does not change
accounting for associates using the
equity method
• It now includes accounting for joint
arrangements which comply with the
definition of a joint venture per IFRS 11
IFRS 11 – Joint Arrangements
• Joint arrangements - arrangements
where two or more parties have joint
control, and that this will only apply if
the relevant activities require
unanimous consent of those who
collectively control the arrangement
• Joint arrangements may be either:
– joint ventures, or
– joint operations
IFRS 11 – Joint Arrangements
• Joint ventures are defined as joint
arrangements whereby the parties have
joint control of the arrangement and
have rights to the net assets of the
arrangement. The equity method of
accounting per IAS 28 (revised) should
be used in this situation.
IFRS 11 – Joint Arrangements
• Joint operations are defined as joint
arrangements whereby the parties that
have joint control have rights to the
assets and obligations for the liabilities.
Normally, there will not be a separate
entity established to conduct joint
operations.
THE FINANCIAL REPORTING
FRAMEWORK
IFRS 13 – Fair Value
Measurement
• Issued in 2011, and effective for
accounting periods commencing on or
after 1 January 2013, with early
adoption permitted
• Single source of guidance when a FVM
is required by a reporting standard
• Common framework for FVM in both US
GAAP and IFRS
IFRS 13 – Fair Value
Measurement
• IFRS 13 does not apply to:
– Share-based payments covered by IFRS 2
– Lease transactions covered by IAS 17
• IFRS 13 does not apply where a
different measure is required by a
reporting standard, e.g.:
– Net realisable value
– Value in use
IFRS 13 – Definition of fair
value
• “...the price that would be received to
sell an asset or transfer a liability in an
orderly transaction between market
participants at the measurement date.”
IFRS 13 para 9
• May apply to an individual asset or
liability, or to a collection of assets
and/or liabilities, depending upon
requirements of a particular reporting
standard
IFRS 13 – Definition of fair
value
• Comments on definition:
– It is an exit price based upon an active
market, or otherwise based upon a
valuation technique
– It is not the result of a distress transaction
– Presumed to take place in principal market
or, failing that, the most advantageous
market
– Transactions costs ignored – they are not a
characteristic of the asset or liability to be
measured
IFRS 13 – Fair value hierarchy
• Established by IFRS 13 to categorise
inputs to measure fair value
• An asset or liability is regarded as
having been measured using the lowest
level of inputs that is significant to its
measurement:
– Level 1 inputs – “observable” quoted prices
in an active market for an identical asset or
liability at the measurement date
IFRS 13 – Fair value hierarchy
– Level 2 inputs – observable inputs, other
than those included in level 1 above. This
may include:
• prices in active markets for similar, not
identical, assets or liabilities
• prices in inactive markets for identical assets or
liabilities
– Level 3 inputs – unobservable inputs,
based on the best information available:
• internally produced forecasts and data
PERFORMANCE REPORTING
IAS 1 – Presentation of financial
statements
• Amended to require OCI to be separately classified
between:
– Items which will not be reclassified (i.e. recycled)
through profit or loss in a later period
• e.g. changes in revaluation surplus
– Items that may be reclassified through profit or
loss in a later period
• e.g. foreign exchange gains and losses on
retranslation of a foreign subsidiary
• Effective from 1 July 2012
EMPLOYEE BENEFITS
IAS 19 - Employee benefits
• Radical revision in 2011
• Effective from 1 January 2013
IAS 19 - Employee benefits
Defined benefit schemes
• Service cost component includes:
– Current service cost
– Past service cost
– Curtailments and settlements
• Net interest component includes:
– Finance cost on plan obligation, less
interest return on plan assets
Defined benefit schemes
• Remeasurement component comprises:
– Actuarial gains and losses on the plan
obligation
– Actuarial gains and losses on the plan
assets
– Income received on plan assets, less any
amount included within net interest
component
Defined benefit schemes
• Impact of revision in 2011:
– Actuarial gains and losses now renamed
and included within remeasurement
component
– Remeasurement component now taken to
OCI – previously three alternative
treatments
– Simplification of accounting for past service
costs
IAS 19 - Other issues
SEGMENT REPORTING
FINANCIAL INSTRUMENTS
IFRS 9 - Financial Instruments
• Piecemeal updating to replace IAS 39
• Initially issued November 2009 to deal
with financial assets
• Updated October 2010 to deal with
financial liabilities
• Effective date 1 January 2015
• IAS 39 still relevant for impairment,
hedging and derivatives until withdrawn
IFRS 9 - financial assets –
recognition and measurement
Impairment of financial assets
• Financial assets at fair value through profit
or loss - the accounting treatment includes
accounting for the effect of any impairment
• Financial assets at fair value through other
comprehensive income – the effect of any
impairment is taken to OCI
• Financial assets at amortised cost – need
annual assessment of whether there is
evidence of impairment – if so, do
impairment test
Financial liabilities
• Effectively transferred IAS 39
requirements to IFRS 9:
– Financial liabilities at fair value through
profit or loss
– Other financial liabilities at amortised cost
– Fair value option for financial liabilities
TAX
IAS 12 – Income taxes
• Amended December 2010 re
investment property measured at fair
value – normal presumption that
carrying value will be recovered through
sale – this presumption can be rebutted
• Consequence – may change tax rate to
apply on temporary difference based
upon when expected to reverse
• Effective from 1 January 2012
NON-FINANCIAL REPORTING
PS1 – Management Commentary
• Practice Statement 1 – issued December
2010 and can be adopted any time thereafter
• Provides broad non-binding framework for
use when an entity prepares a management
commentary relating to IFRS-compliant FS
• Provides management’s view of performance,
position and progress
• Should supplement and complement
information in the FS – not merely repetition
PS1 – Management Commentary
• Elements of a management
commentary:
– nature of the business
– objectives, and strategies to achieve the
objectives
– significant resources, risks and
relationships
– operational results, and future prospects
– critical performance measures and
indicators, together with commentary
SPECIALISED ENTITIES
Small and medium-sized
entities (SME)
A SME is typically defined as:
• owner-managed by a relatively small
group of shareholders,
• relatively small in terms of revenues
generated and assets and liabilities
under control of the entity,
• relatively small number of employees,
• undertake less complex transactions.
IFRS for SME
• Issued by the IASB in July 2009 and
adopted by many countries
subsequently
• Provides a framework for preparation of
financial statements for eligible entities
• Substantially reduced financial reporting
compliance burden in comparison with
full IFRS compliance
IFRS for SME
Omitted subject matter from IFRS for
SME:
• EPS (IAS 33)
• Interim reporting (IAS 34)
• Segmental reporting (IFRS 8)
• Assets held-for-sale (IFRS 5)
• No size criteria for eligibility – only
public accountability criteria
IFRS for SME
Simplified reporting under IFRS for SME:
• R&D always expensed
• Goodwill amortised over 10 years
• No revaluation of PP&E
• Finance costs never capitalised
IFRS for SME
Expected benefits of adoption:
• Improved comparability for users of
accounts of SME
• Reduced financial reporting compliance
costs for preparers of accounts
• IFRS for SME may provide a platform
for progression towards adoption of full
IFRS GAAP as entities grow
IFRS for SME
• In principle, approved for use in the UK,
subject to appropriate legal and
regulatory issues dealt with
UK FRSSE (2008)
• Introduced 1997 and periodically
updated
• Current version updated previous
version for effect of CA2006
• Size criteria – small per CA2006
Net
Gross
Turnover (£m)
6.5
7.8
Balance sheet (£m)
3.26
3.9
50
50
Employees (max)
UK FRSSE (2008)
• Does not apply to:
– Listed entities
– Large or medium-sized entities or groups
– Entities complying with IFRS
– Entities undertaking excluded activities
• Use only limited specified headings in
BS and P&L as applicable plus reduced
and simplified disclosures
UK Developments
• Possible multi-tier development of
corporate reporting in UK:
– Listed entities – apply IFRS
– Unlisted entities could apply:
•
•
•
•
•
Full IFRS
Full UK GAAP
Abbreviated accounts as small/medium*
UK FRSSE*
FRS for SME (when approved)*
*if applicable
Financial Reporting Standards Update
Tony Sweetman
Kaplan Publishing
February 2012
tony.sweetman@kaplan.co.uk