The Objective, underlying Concepts and Use of IFRS
and the IFRS for SMEs
Overview
»General purpose financial reporting frameworks
»Concepts underlying general purpose financial information
» Objective of general purpose financial information
» Qualitative characteristics
» Elements
» Element recognition (and derecognition)
» Measurement
» Presentation and disclosure
2
General purpose financial reporting
frameworks
Aims
»Understand the purpose of general purpose financial
statements (GPFS) and how GPFS differ from special purpose
financial statements
»Create awareness of a range of frameworks in accordance
with which GPFS can be prepared
4
Financial reporting
»General purpose financial reporting
» aims to provide useful financial information about the reporting entity to
primary users who cannot require the reporting entity to provide
information directly to them.
»Special purpose financial reporting
» responds to the requirements of users that have the authority to require
the reporting entity to provide the information that they need for their
purposes directly to them. Examples include:
» prudential regulation reporting requirements
» tax reporting requirements
5
General purpose financial reporting frameworks
»International Financial Reporting Standards (IFRS)
» standard-setter = International Accounting Standards Board (IASB)
»IFRS for Small and Medium-sized Entities (SMEs)
» standard-setter = International Accounting Standards Board (IASB)
»Local financial reporting frameworks (eg US GAAP)
» various national standard-setters
»International Public Sector Accounting Standards (IPSAS)
» standard-setter = International Public Sector Accounting Standards
Board (IPSASB)
6
International Financial Reporting Standards (IFRS)*
» Designed for general purpose financial reporting by profit-oriented
entities
» might be found to be appropriate for not-for-profit activities too
» Focused on information needs of (primary users) existing and
potential investors, lenders and other creditors who cannot
require information from the entity
» information to enable primary users to make their own assessments of the
reporting entity’s prospects for future net cash inflows
» as a basis for their decisions to buy, hold, sell equity and debt instruments or
to provide a loan or to require settlement of a loan
* source: Preface to IFRSs and Chapter 1 of IASB Conceptual Framework
7
Primary user as envisaged in IFRS
Test your understanding
» For each user below choose one of:
» 1) the user is a primary user; or 2) the user is not a primary user.
» A retail investor deciding whether to buy shares in Company A.
» A retail investor deciding whether to sell their insignificant holding of Company A
shares.
» The controlling shareholder deciding whether to hold or sell her shares in Company A.
» The tax authority that requires Company A’s IFRS financial statements be submitted
in support of its tax filing.
» The prudential regulator that requires Company A to reconcile the numbers in its
financial statements to the prudential regulators regulatory capital requirements.
8
The IFRS for SMEs*
» Designed for general purpose financial reporting by entities that are
not ‘publicly accountable’
» An entity has public accountability if:
» its debt or equity trades (or is being prepared to trade) in a public market; or
» it holds assets in a fiduciary capacity for a broad group of outsiders as one of
its primary businesses.
» Focused on economic decision-making information needs of a broad
range of users who cannot require information from the entity
» also shows the results of the stewardship of management
* source: Chapters 1 and 2 of the IFRS for SMEs
9
Public accountability as envisaged by the IASB
Test your understanding
» For each unlisted entity below choose one of:
» 1) the entity is publicly accountable; or 2) the entity is not publicly
accountable.
» Entity A operates an airline. Customers pay for tickets in advance of flying. Flexible
tickets are refundable. Other tickets are non-refundable.
» Entity B retails clothing that has a very small commercial deposit taking operation.
» Entity C extracts gold. It is the biggest company in the country.
» Entity D’s sole business is lending the funds of its two owner-manager billionaires.
10
Selected IFRS/IFRS for SMEs differences
» Research and development: IFRS recognises an asset for qualifying development expenditure.
The IFRS for SMEs does not. Both expense research expenditure.
» Borrowing costs: IFRS recognises an asset for qualifying borrowing costs. The IFRS for SMEs
recognises an expense as borrowing costs are incurred.
» Investment property: IFRS requires an entity to choose either the cost model (and disclose fair
value) or the fair value model. The IFRS for SMEs requires use of the fair value model when fair
value can be determined without undue cost or effort and, failing which, defaults to the cost model.
» Indefinite life intangible assets and goodwill: IFRS requires cost-impairment model. The IFRS
for SMEs requires cost-depreciation-impairment model.
» Biological assets in agricultural activity: IFRS requires fair value model (except for bearerplants). The IFRS for SMEs requires fair value but with an ‘undue cost or effort’ default to the cost
model.
» What are the likely effects of each difference?
11
IFRS - Existing Ethiopian Reporting selected differences
» Fair value measurement
» IFRS and the IFRS for SMEs require (or permit) fair value measurement for a
number of assets and liabilities.
» Existing Ethiopian Reporting does not permit use of fair value measurement
except in financial institutions.
» Revaluation model
» IFRS and the IFRS for SMEs allow (an accounting policy choice) use of the
revaluation model for specified assets
» Existing Ethiopian Reporting does not permit the revaluation model
» What are the likely effects of each difference?
12
IFRS - Existing Ethiopian Reporting selected differences
» Depreciation
» IFRS and the IFRS for SMEs require depreciation to reflect the consumption
of the item’s service potential
» Existing Ethiopian Reporting requires use of depreciation rates specified by
proclamation no. 286/2002
» Deferred taxes
» IFRS and the IFRS for SMEs requires recognition of deferred taxes for
temporary differences and tax losses
» Existing Ethiopian Reporting does not require recognition of deferred taxes
» What are the likely effects of each difference?
13
International Public Sector Accounting Standards*
» Designed for the general purpose financial reporting by public sector
entities other than Government Business Enterprises (GBEs)
» primary users = service recipients, resource providers and their representatives (eg
legislature and members of parliament)
» assessments = accountability and decisions (eg provide or settle a loan)
» Current public consultation on the applicability of IPSASB to GBEs
proposes
» deleting definition of GBEs and hence the explicit scope exclusion from IPSAS
» describing the characteristics of the public sector entities for which IPSAS are
intended, including “do not have a primary objective to make profits” (see IPSASB
Exposure Draft 56 The Applicability of IPSASs)
* source: Preface to and Chapter 2 of IPSASB Conceptual Framework
14
Selected IFRS/IPSASs differences
» Borrowing costs: IFRS recognises an asset for qualifying borrowing costs. IPSAS allows
choice, recognise borrowing costs incurred either as an expense or as an asset (see
IPSAS 5 Borrowing Costs)
» Heritage assets: IPSAS neither requires nor prohibits the recognition of heritage assets
(see IPSAS 17 Property, Plant and Equipment)
» Asset impairment: IPSAS provides specific guidance on how to determine the value-inuse of non-cash-generating assets (see IPSAS 21 Impairment of Non-cash-generating
Assets):
» depreciated replacement cost approach; restoration cost approach; or service units approach
» Lag time from new IFRS: There can be considerable delay between the time of the
publication of a new or amended IFRS and when the IPSASB consider whether to make
similar changes to the equivalent IPSAS
» What are the likely effects of each difference?
15
Use of IFRS and the IFRS for SMEs
General purpose financial reporting
Who decides who uses which framework?
»Decisions on which entities are required or permitted to use
particular financial reporting frameworks rest with legislative and
regulatory authorities in individual jurisdictions.
»For example in Ethiopia see:
»Financial Reporting Proclamation 847/2014; and
»Council of Ministers Regulation 332/2014.
17
Some jurisdictions’ decisions
domestic publicly accountable entities (eg listed companies)
» 119 (83%) require use of IFRS for all or most
» 2 (Ethiopia and Thailand) are in the process of adopting IFRS
» 12 permit rather than require IFRS: Bermuda, Cayman Islands, Guatemala,
Honduras, India, Japan, Madagascar, Nicaragua, Panama, Paraguay, Suriname
and Switzerland
» 2 require IFRS for financial institutions but not listed companies: Saudi Arabia
and Uzbekistan
» 1 (Indonesia) is converging substantially with IFRS
» 8 use national GAAP: Bolivia, China, Egypt, Guinea-Bissau, Macao, Niger, US,
Vietnam
» Sources: IFRS Foundation jurisdiction profiles covering 143 countries (see
http://www.ifrs.org/Use-around-the-world/Pages/Analysis-of-the-IFRS-jurisdictional-profiles.aspx); and for
Ethiopia (see Proclamation no. 847/2014)
© Michael JC Wells
18
Some jurisdictions’ decisions
domestic entities that are not ‘publicly accountable’
19
» 80 require or permit use of the IFRS for SMEs
» Anguilla, Antigua and Barbuda, Argentina, Armenia, Azerbaijan, Bahamas, Bahrain,
Bangladesh, Barbados, Belize, Bermuda, Bhutan, Bosnia and Herzegovina, Botswana,
Brazil, Cambodia, Cayman Islands, Chile, Colombia, Costa Rica, Dominica, Dominican
Republic, Ecuador, El Salvador, Fiji, Gambia, Georgia, Ghana, Grenada, Guatemala,
Guyana, Honduras, Hong Kong, Iraq, Ireland, Israel, Jamaica, Jordan, Kenya,
Kosovo, Lesotho, Macedonia, Madagascar, Maldives, Mauritius, Montserrat, Myanmar,
Nicaragua, Nigeria, Pakistan, Palestine, Panama, Peru, Philippines, Qatar, Rwanda, Saint
Lucia, Saudi Arabia, Serbia, Sierra Leone, Singapore, South Africa, Sri Lanka, St Kitts and
Nevis, St Vincent and the Grenadines, Suriname, Swaziland, Switzerland, Tanzania,
Trinidad & Tobago, Uganda, Ukraine, United Arab Emirates, United Kingdom, Uruguay,
Venezuela, Yemen, Zambia, and Zimbabwe
» 1 Ethiopia is in the process of adopting
» 11 future use is currently under consideration
» Sources: IFRS Foundation jurisdiction profiles covering 143 countries (see
http://www.ifrs.org/Use-around-the-world/Pages/Analysis-of-SME-profiles.aspx;
and for Ethiopia (see Proclamation No. 847/2014)
© Michael JC Wells
19
Some jurisdictions’ decisions
public sector entities
20
»The adoption of IPSAS is being considered by a number of
jurisdictions and the current period can best be described as a
process of transition.
»The situation continues to evolve as governments around the
world make decisions about their financial reporting.
»Source: Deloitte IPSAS in your pocket (2013)
» see http://www.iasplus.com/en-gb/publications/public-sector/dt-ipsassummary-2013
© Michael JC Wells
20
Ethiopian GPFS framework decisions
21
IFRS implementation road map: 3 phase transition over 3 years:
» Phase 1: Significant Public Interest Entities (Financial Institutions and
public enterprises owned by Federal or Regional Governments- Adoption
of IFRS)
» starting at the start of EFY 2009 (ie specifically July 8, 2017);
» Phase 2: Other Public Interest Entities (ECX member companies and
reporting entities that meet PIE quantitative thresholds) adoption of IFRS
and for Charities and Societies adoption of IPSAS
» start adoption of the standards at the start of EFY 2010 (ie specifically
July 8, 2018)
» Phase 3: Small and Medium-sized Entities adoption of the IFRS for SMEs
» start adoption of the standards at the start of EFY 2011 (ie specifically
July 8, 2019)
© Michael JC Wells
21
Ethiopian GPFS framework decisions
Test your understanding 3
22
For each company below, once the IFRS implementation roadmap is
implemented in full, which financial reporting framework is it required or
permitted to use when preparing its financial statements? Choose:
1) if it uses IFRS; 2) if it uses IFRS for SMEs; and 3) if it uses IPSAS
1 (IFRS) 2 (SMEs) 3 (IPSAS)
Company
Company A: Ethiopian Airlines
Company B: Raya Brewery S.C.
Company C: Menshen for Menshen
Company
D: Ambassador
© Michael
JC Wells
Retailers PLC
22
The objective/s of general purpose
financial reporting
Aim
»Understand the objective of IFRS
»Understand how the IFRS objective differs from the objective/s
of other general purpose financial reporting frameworks
» IPSASs
» IFRS for SMEs
» Ethiopian GAAP
»Understand proposed changes to the IFRS objective
24
Objective: General purpose financial reporting
IFRS
IPSAS
IFRS for
SMEs
Designed for which entities?
Profit-oriented
Public sector
Not publicly
accountable
Targeting whose information
needs that cannot require
information from the entity?
Existing and
potential investors,
lenders, creditors
Service recipients and
resource providers
Broad range
As a basis for assessing
what?
Prospects for
future net cash
inflows
Stewardship, compliance, Broad range
sustainability, adaptability
For informing what actions?
Buy, hold, sell
decisions and
advance or
withdraw loan
Service delivery planning, Economic
including advancing or
decisionwithdrawing resources
making
25
Assessing prospects for future net cash inflows
»To assess an entity’s prospects for future net cash inflows,
existing and potential investors, lenders and other creditors
need information about:
» the resources of the entity;
» claims against the entity; and
» stewardship — how efficiently and effectively the entity’s management
and governing board have discharged their responsibilities to use the
entity’s resources
» for example, protecting the entity’s resources from unfavourable effects of
economic factors such as price and technological changes
26
Assessing prospects for future net cash inflows
»Information about an entity’s financial performance in a
period, reflected by changes in economic resources and
claims other than by obtaining resources from (distributing
resources to) owners, is useful in assessing the entity’s ability to
generate net cash inflows
»(see paragraphs OB18 and OB19 of the IASB Conceptual
Framework)
27
Objective
test your understanding
The objective of IFRS reporting is to provide financial information
about the reporting entity that is useful to? Choose 1 of:
1) existing and potential service recipients and their representatives, and resource
providers;
2) existing and potential investors (including the controlling shareholder), lenders and
other creditors in making resource allocation decisions (buy, sell, hold, provide
loan/settle);
3) existing and potential investors, lenders and other creditors who cannot require
reporting entities to provide information directly to them in making resource
allocation decisions;
4) same as 2) PLUS a second equal objective—stewardship; or
5) a broad range of users who are not in a position to demand reports tailored to meet
their particular information needs.
28
Objective
test your understanding
The objective of IFRS for SMEs reporting is to provide financial
information about the reporting entity that is useful to? Choose 1 of:
1) existing and potential service recipients and their representatives, and resource
providers;
2) existing and potential investors (including the controlling shareholder), lenders and
other creditors in making resource allocation decisions (buy, sell, hold, provide
loan/settle);
3) existing and potential investors, lenders and other creditors who cannot require
reporting entities to provide information directly to them in making resource
allocation decisions;
4) same as 2) PLUS a second equal objective—stewardship; or
5) a broad range of users who are not in a position to demand reports tailored to meet
their particular information needs.
29
Objective
test your understanding
The objective of IPSAS reporting is to provide financial information
about the reporting entity that is useful to? Choose 1 of:
1) existing and potential service recipients and their representatives, and resource
providers;
2) existing and potential investors (including the controlling shareholder), lenders and
other creditors in making resource allocation decisions (buy, sell, hold, provide
loan/settle);
3) existing and potential investors, lenders and other creditors who cannot require
reporting entities to provide information directly to them in making resource
allocation decisions;
4) same as 2) PLUS a second equal objective—stewardship; or
5) a broad range of users who are not in a position to demand reports tailored to meet
their particular information needs.
30
Stewardship
What do you think?
»Stewardship is best satisfied with?
»Choose 1 of:
1)
2)
3)
4)
5)
6)
cash accounting (no accruals; no remeasurements);
historical cost accounting (no depreciation; no impairment);
cost-impairment accounting (no depreciation);
cost-depreciation-impairment accounting;
fair value accounting (without some assets, e.g. brands); or
fair value accounting (with all assets).
31
Recent developments: IASB ED/2015/3 Conceptual Framework for
Financial Reporting
»Proposal: give more prominence, within the objective of
financial reporting, to the importance of providing information
needed to assess management’s stewardship of the entity’s
resources.
»Do you support the proposal?
»Choose 1 of:
1) Yes, stewardship should be more prominent in the objective; or
2) No, stewardship should NOT be more prominent in the objective.
32
The qualitative characteristics
Aim
»Understand the qualitative characteristics that underpin the
decision-usefulness of general purpose financial information
»Understand proposed changes to the qualitative characteristics
34
Qualitative characteristics: General purpose financial reporting
IFRS
IPSAS
IFRS for
SMEs
Relevance: capable of making a difference
fundamental
✔
✔
Faithful representation: complete, neutral and
free from error
fundamental
✔
Similar called
reliability
Understandability
enhancing
✔
✔
Timeliness
enhancing
✔
✔
Comparability: like things look alike; different
things look different
enhancing
✔
✔
Verifiability (direct or indirect): consensus, but
not necessarily complete agreement, that a
depiction is a faithful representation
enhancing
✔
✔
35
Fundamental qualitative characteristics
» If financial information is to be useful, it must be relevant and
faithfully represent what it purports to represent (ie fundamental
qualities).
» Financial information without both relevance and faithful representation is not
useful, and it cannot be made useful by being more comparable, verifiable,
timely or understandable.
» Relevance: capable of making a difference in users’ decisions
» predictive value (input to process to predict future cash flows)
» confirmatory value (confirm/disconfirm prior cash flow expectations)
» materiality (entity-specific—could affect a user’s decision)
36
Judging relevance
37
Applying IFRS requires relevance judgements. For example when:
» applying the ‘IAS 8 hierarchy’ (see paragraph 10 of IAS 8)
» voluntarily changing an accounting policy (see paragraph 14(b) of IAS 8)
» voluntarily changing presentation of financial statements (see paragraph
46 of IAS 1)
» determining whether to make the current-noncurrent distinction (see
paragraph 60 of IAS 1)
» determining whether to present its analysis of expenses by their nature or
their function within the entity (see paragraph 99 of IAS 1)
Judging relevance requires primarily determining which alternative provides
information that better enables primary users to make their own projections
of the reporting entity’s future cash flows?
37
37
Judging relevance: example
Day 1: you pay $1,000,000 to construct a car manufacturing
plant in Country A (A).
Day 2: the market value of your plant quadruples when vast
quantities of oil are unexpectedly discovered in A
Day 3: your competitor builds a plant in A: cost = $4,000,000.
38
Judging relevance
The cost of each car that you build is:
- $100 if you use the cost model; or
- $300 if you use the revaluation model.
The cost of your competitor’s cars = $300 each.
Cars sell at $250 each in A.
Question 1: for each car sold economically are you ‘making’
(1) $150 profit; or (2) $50 loss
Question 2: which model provides more relevant information?
(1) cost model; or (2) revaluation model
39
Comparability
What do you think?
»Which of the following measurements achieves greatest
comparability?
»Choose 1 of:
1)
2)
3)
4)
5)
6)
cash accounting (no accruals; no remeasurements);
historical cost accounting (no depreciation; no impairment);
cost-impairment accounting (no depreciation);
cost-depreciation-impairment accounting;
fair value accounting (without some assets, e.g. brands); or
fair value accounting (with all assets).
40
Cost constraint
»Reporting financial information imposes costs, and it is
important that those costs are justified by the benefits of
reporting that information.
» In applying the cost constraint, the standard-setter (IASB or IPSASB)
assesses whether the benefits of reporting particular information are
likely to justify the costs incurred to provide and use that information.
41
Undue cost or effort*
»The IFRS for SMEs specifies a number of undue cost or effort
exemptions.
» the exemption does not apply to other requirements
» management assesses whether obtaining or determining the
information necessary to comply with the specified requirements would
involve undue cost or effort.
» such assessments require judgement
» whenever an undue cost or effort exemption is used the entity
discloses the reasons why applying the requirement would involve
undue cost or effort.
* source: paragraphs 2.14A to 2.14D of the IFRS for SMEs
42
Materiality
» Materiality is an entity specific aspect of relevance based on the
nature or magnitude, or both, of the items to which the information
relates in the context of an individual entity’s financial report.
» Consequently, an entity need not:
» apply its accounting policies to immaterial items; and
» disclose immaterial information.
» Unlike the IASB, IPSASB also considers materiality as a constraint
to be applied when specifying requirements.
sources: paragraph QC11 of the IASB Conceptual Framework; paragraphs 3.32 to 3.34 of the IPSASB Conceptual Framework; and paragraph 2.6 of the IFRS for
SMEs; paragraph 31 of IAS 1 and paragraph 8 of IAS 8.
43
Recent developments: IASB ED/2015/3 Conceptual Framework for
Financial Reporting
» Proposals:
» to reintroduce an explicit reference to the notion of prudence (described as
caution when making judgements under conditions of uncertainty) and to
state that prudence is important in achieving neutrality? and
» to clarify that measurement uncertainty is one factor that can make financial
information less relevant, and that there is a trade-off between the level of
measurement uncertainty and other factors that make financial information
relevant?
» Do you support the proposal?
» why or why not?
44
Elements: financial position
Aim
»Understand the elements that form the fundamental building
blocks of general purpose financial information
»Understand proposed changes to the elements of financial
position
46
Elements of financial position (sometimes called elements of the
balance sheet)
IPSASB
(paragraphs 5.6 and
5.14)
IASB (paragraph 4.4)
An asset
is…
“A resource presently
controlled by the
entity as a result of a
past event”
“A resource controlled by the entity
as a result of past events and from
which future economic benefits are
expected to flow to the entity.”
“a present economic resource
(a right that has potential to
produce economic benefits)
controlled by the entity as a
result of past events”
A liability
is…
“A present obligation
of the entity for an
outflow of resources
that results from a
past event.”
“a present obligation of an entity
arising from past events, the
settlement of which is expected to
result in an outflow from the entity
of resources embodying economic
benefits”
“a present obligation of the
entity to transfer an economic
resource as a result of a past
event.”
Equity =
assets – liabilities
(‘net financial
position’)
assets – liabilities
assets – liabilities
Element
IASB proposed (paragraphs
4.5, 4.6, 4.24 and 4.43)
47
What is an asset?
»Key attributes in the definitions of an asset:
» controlled resource
» potential economic benefits
48
Identifying an entity’s assets
What do you think?
»Is the public road to its factory an asset of the manufacturer?
»Are Ethiopian wolves an asset of a Bale Mountains National
Park-based photographic safari operator?
»Are the hived bees assets of a Roba-based honey farmer?
»Is an unpatented but secret formula for a premium product an
asset of the knowing entity?
49
Identifying an entity’s assets
What do you think?
»Are Ethiopian coffee brands an asset?
» Does your answer depend on whether the brand was internally
generated, purchased or acquired in a business combination?
»Company A owns 60% of Company B; Company B owns 60%
of Company C
» are the assets of Company C assets of Company B?
» are the assets of Company C assets of Company A?
50
Recent developments: IASB ED/2015/3 Conceptual Framework for
Financial Reporting
»Proposal to define an asset including an economic resource as
follows:
» Asset: is a present economic resource controlled by the entity as a
result of past events.
» economic resource: is a right that has the potential to produce economic
benefits.
»Do you support the proposal?
» why or why not?
51
What is a liability?
»Key attributes in the definitions of a liability:
» present obligation
» to transfer economic benefits
52
Identifying an entity’s liabilities
»What do you think: (1) liability; (2) equity; or (3) a part of each?
»On 1 January 2015, three companies (A, B and C) each raise
$100 million cash in exchange for the following:
Company
on 31/12 each year
for 10 years
on 01/01/2025
After 01/01/2025
A
whatever dividend is whatever dividend is
declared, if any
declared, if any
whatever dividends are declared, if any,
and on liquidation a proportionate share
of A’s net assets (i.e. a residual interest)
B
$10 million
$100 million
Not applicable (claim extinguished)
C
$8 million
$100 million or 1
million ordinary
shares
If on 01/01/2025 holders’ chose:
- cash then same as B above.
- shares then same as A above.
53
Identifying an entity’s liabilities
What do you think: does the entity have a liability?
» Does a car assembler have a liability to make good assembly
defects
a)
b)
c)
d)
known to exist in cars sold to customers under warranty?
known to exist in cars sold that are no longer under warranty?
undiscovered/possibly present in cars sold to customers under warranty?
known to exist in cars assembled but yet to be sold?
» For each category above choose 1 of: (1) Yes; (2) No, because no
present obligation; (3) No, because no expected outflow; (4) it
depends…
54
Identifying an entity’s liabilities
What do you think?
»A shaft gold miner has a constructive obligation to, when
completed mining the diagonal seam, fill any shaft excavated
more than 20 meters beneath the surface of the land and to
rehabilitate the mine.
55
Identifying an entity’s liabilities
» When does the miner first have a present obligation (liability) to fill the
shaft and to restore the environment? Choose one of:
1)
2)
3)
4)
01/01/2000 when the miner began excavating the shaft
01/04/2000 when the shaft reached 20 meters in depth
01/07/2000 when the miner reached the gold bearing rock (40 meters down)
31/12/2010 when the miner ceased mining the shaft because all commercially
viable gold recovery had been completed
5) 01/02/2011 when the miner began filling the shaft
6) 31/12/2013 when the miner completed filling the shaft and began restoring the
surface vegetation
7) 31/12/2015 when the miner completed the rehabilitation of the land
56
Identifying an entity’s assets and liabilities
What do you think?
» To visit clients in a distant city you rent a motor vehicle from 15 to 30
September 2015.
» What asset/s or liability/ies, or both, (if any) do you have at each of the
dates below?
»
»
»
»
1 August you enter into fixed price ($1,000), non-cancellable rental agreement
15 September you collect the vehicle from the rental company parkade at the airport
30 September you return the motor vehicle to the rental company
15 October you pay the rental company $1,250 (including $250 reimbursement for a
speeding penalty paid to the local government by the rental company incurred when
you were driving the car)
57
Recent developments: IASB ED/2015/3 Conceptual Framework for
Financial Reporting
» Proposal to define a liability including a present obligation as follows:
» Liability: is a present obligation of the entity to transfer an economic resource
as a result of past events.
» An entity has a present obligation to transfer an economic resource when:
» the entity has no practical ability to avoid the transfer; and
» the entity has received the economic benefits, or conducted the activities, that
established the extent of its obligation.
» Do you support the proposal?
» why or why not?
58
Identifying an entity’s liabilities
»At 31/12/2015 does the entity have a liability?
»Bank’s revenue for 2015 = $100 million. In 2015 government
enacts a law introducing a levy on banks measured at 2% of
revenue earned in 2015. However, the levy is incurred only if
entity is still operating in the domestic market on 01/04/2016.
»At 31/12/2015 the entity’s liability for the levy is? Choose 1 of:
1) Nil (it does not have a present obligation);
2) $2 million; or
3) $100 million.
59
Identifying an entity’s liabilities
» At 31/12/2015 does the entity have a liability?
» Bank’s revenue for 2015 = $100 million. In 2015 government enacts
a law introducing a levy on banks measured at 2% of revenue
earned in 2015. However, the levy is incurred only on 1 April in each
of the next 50 years if operating as a bank domestically on that
date?
» At 31/12/2015 the entity’s liability for the levy is? Choose 1 of:
1) Nil (it does not have a present obligation);
2) $2 million; or
3) $100 million.
60
Identifying an entity’s liabilities
»At 31/12/2015 does the entity have a liability?
»Facts are the same as the previous slide (ie levy = 2% of
2015 revenue for each of next 50 years if operating on 1 April
each year). Except IASB ED/2015/3 has become the IASB’s
new Conceptual Framework?
»At 31/12/2015 the entity’s liability for the levy is? Choose 1 of:
1) Nil (it does not have a present obligation);
2) $2 million; or
3) $100 million.
61
Recognition: assets and liabilities
Aim
»Understand the criteria for recognising assets and liabilities in
general purpose financial information
»Understand the criteria for derecognising assets and liabilities
from general purpose financial information
»Understand proposed changes to the criteria of recognising
and derecognising elements of financial position
63
When to recognise assets and liabilities?
the concepts
» IASB’s Conceptual Framework (see paragraph 4.38)
» It is probable that any future economic benefits associated with the item will flow to or
from the entity; and
» The item has a cost or value that can be measured with reliability (ie complete,
neutral and free from error)
» IPSASB’s Public Sector Conceptual Framework (see paragraph 6.2)
» The item satisfies the definition of an element; and
» Can be measured in a way that achieves the qualitative characteristics and takes
account of constraints of information in GPFRs. However, in rare instances the level
of uncertainty in a single point estimate is so large that the relevance and faithful
representativeness of the measure is questionable even if disclosures are provided to
explain estimation techniques. Under such circumstances the item is not recognised.
(paragraph 6.8)
64
Recognition
test your understanding
65
• What does probable mean?
Is it probable that economic benefits will flow to a hospital that
purchased a backup, backup generator for $10 million when the
hospital expects never to use that generator?
• What does measure reliably mean?
Note: in many cases, cost or value must be estimated; the use of
reasonable estimates is an essential part of the preparation of
financial statements and does not undermine their reliability (see
¶4.41).
65
When to recognise a non-financial asset?
mandatory application guidance
»For internally generated intangible assets
» IFRS expense research; IFRS for SMEs expense research and
development
» expense brands, mastheads, publishing titles, customer lists etc
» qualifying development costs, IFRS ‘capitalise’ but IFRS for SMEs
expense
» use judgement to determine when first satisfy criteria for capitalising
» big issue for pharmaceutical, technology etc.
» However, must recognise these items (including in-process research)
as assets when acquired separately (or when acquired in a business
combination)
66
Non-financial asset recognition
what do you think conceptually?
» Is in-process research an asset? Is an internally generated brand an
asset?
» before adopting IFRS internally generated brands were recognised assets
under Australian GAAP
» Does not recognising as assets internally generated brands etc.
detract from the decision-usefulness of financial information?
» why do these inconsistencies exist: internally generated versus purchased?
» can/does disclosure compensate for such incomplete recognition?
» How do users compensate/adjust for such incomplete recognition?
67
Reliability
test your understanding
Which of the following most closely describes reliability?
Choose 1 of:
1)
2)
3)
4)
complete, neutral and free from error;
the degree of measurement uncertainty associated with an item;
precision; or
different knowledgeable and independent observers could reach
consensus, although not necessarily complete agreement, that a
particular depiction is a faithful representation of what it purports to
represent (verifiability).
(see paragraph 4.38 of the IFRS Conceptual Framework)
68
Unit of account
»The concept—unit of account is the level at which an asset is
aggregated or disaggregated for recognition purposes.
»Most IFRS do not prescribe the unit of account therefore
judgement is required in applying recognition criteria to an
entity’s specific circumstances.
69
Unit of account
test your understanding
Which unit of account would a cattle farmer use for its cows?
Choose 1 of:
1) collection of all herds; 2) each herd; or 3) individual animals
Which unit of account would a honey farmer use for its bees?
Choose 1 of:
1) collection of swarms; 2) each swarm; or 3) individual bees
70
When to derecognise assets and liabilities?
the ‘concepts’
»Derecognition is the removal of all or part of a previously
recognised asset or liability from an entity’s statement of
financial position.
» IASB’s ED/2015/3 Conceptual Framework (see paragraphs 5.25 to
5.32) derecognition is normally when:
» The entity loses control of all or part of a recognised asset or the entity no longer
has a present obligation for all or part of a recognised liability.
» IPSASB’s Public Sector Conceptual Framework (see paragraph 6.10)
» The same criteria are used for derecognition as applied at initial recognition (ie
derecognise when the recognition criteria are no longer satisfied).
71
Recognition and derecognition
what do you think?
» Do recognition criteria beyond the existence of an asset or a liability
improve the relevance of financial information?
» Put another way, would it be more decision-useful to include all of an entity’s
assets and liabilities in its statement of financial position and to take account
of uncertainties in the measurement of items?
» Should derecognition be the mirror image of recognition (as
conceptualised by the IPSASB) or it there conceptual justification for
‘stickiness’ of recognised assets (as proposed by the IASB in
ED/2015/3)?
» Put another way, should some assets continue to be recognised by an entity
when they no longer satisfy the criteria specified for initial recognition?
72
Elements: financial performance
Aim
»Understand the elements that form the fundamental building
blocks of general purpose financial information
»Understand proposed changes to the elements of financial
performance
74
Elements of performance (sometimes called elements of the income
statement)
Element
IPSASB
(paragraphs 5.29
and 5.14)
IASB (paragraph 4.25)
IASB proposed (paragraphs
4.5, 4.6 and 4.24)
Income
(revenue)
is…
“increases in the net
financial position of
the entity, other than
increases arising
from ownership
contributions.”
“increases in economic benefits
during the accounting period in the
form of enhancements of assets or
decreases of liabilities that result in
increases in equity, other than
those relating to contributions from
equity participants.”
“increases in assets or
decreases in liabilities that
result in increases in equity,
other than those relating to
contributions from holders of
equity claims.”
An
expense
is…
“Decreases in the net
financial position of
the entity, other than
decreases arising
from ownership
distributions.”
“decreases in economic benefits
during the accounting period in the
form of outflows or depletions of
assets or incurrences of liabilities
that result in decreases in equity,
other than those relating to
distributions to equity participants.”
“decreases in assets or
increases in liabilities that result
in decreases in equity, other
than those relating to
distributions to holders of equity
claims.”
75
What are income and expenses?
Key attributes in the definitions of income and expenses:
» changes in assets and liabilities that result in change in equity, for
example:
» transformation of an asset (eg converting raw materials into finished goods;
biological transformation; depleting an asset’s service potential through use)
» change in the value of an asset or liability (eg changes in the price of commodities;
interest rate change effects on value of fixed-rate instruments)
» Question: in economics does exchanging assets (for example, exchanging inventory
for cash or the right to receive cash) result in a change in equity?
» other than those relating to contributions from (distributions to) holders of
equity claims in their capacity as equity claimants.
76
Reporting financial performance:
the concepts
» Information about an entity’s financial performance in a period, reflected
by changes in economic resources and claims other than by obtaining
resources from (distributing resources to) owners is useful in assessing the
entity’s ability to generate net cash inflows (see paragraphs OB18 and
OB19 of the IASB Conceptual Framework)
» The relevance of income and expenses are enhanced by separate
presentation of:
» items that arise in the course of ordinary operations (for example, revenue from
customers); and
» those that do not (for example, incidental disposals of assets)
(see paragraphs 4.27 and 4.28 of the IASB Conceptual Framework)
77
Income and expenses
test your understanding: elements (slide 1 of 2 slides)
» Does income or expense arise directly from each of the following
transactions?
» Choose one of: 1) income; 2) expense; 3) both income and expense;
or 4) neither income nor expense.
» 01/01/2015: Company receives $20 million from its owners to fund operations
» 02/01/2015: Company buys (and gains control of) manufacturing plant with a
cash cost of $100 million in exchange for a promise to pay $259.374246
million on 31 December 2024 for (effective interest rate = 10% per year)
» to 31/03/2015: Company tests the manufacturing process and modifies it to
operate as intended by management
78
Income and expenses
test your understanding: elements (slide 2 of 2 slides)
» Choose one of: 1) income; 2) expense; 3) both income and expense; or 4)
neither income nor expense.
» 31/03/2015: Company exchanges finished goods from testing phase for $10 million
cash
» Each month April to December:
» Company exchanges $6 million cash for raw materials and $4 million cash for employee
services to convert raw material to finished goods
» Company uses the plant to manufacture goods (management estimates: 10 year useful life
and nil residual value)
» Company exchanges finished goods for $15 million cash
» 31 December 2015: Company declares and pays a dividend of $10 million
» 1 January 2020: Company pays $500 million to buy the one-fifth of its ordinary share
capital
79
When does income arise?
trading
» For each company below choose one of: 1) when the market value of the
inventory changes; 2) when substantially all the risks and rewards of
ownership of the inventory pass from the company to its customer;
3) when control of the inventory pass from the company to its customer;
4) when the customer pays the company for the inventory sold; 5) another
time (specify).
» Company A (a commodity-broker-trader) trades in commodities that trade in deep
and liquid markets (for example: gold and silver).
» Company B trades in shares listed on the world’s largest stock exchanges (its
portfolio includes shares held for as short as one day and as long as 15 years).
» Company C trades in unique artworks (its portfolio includes artworks held for as
short as one day and as long as 15 years).
80
When does income arise?
investment property
» A property company’s shopping mall timeline:
» 1 January 2000: company purchases a new shopping mall to rent to tenants
» 1 July 2014: company sells the mall in response to an unsolicited offer
» When does income arise from the company’s mall?
» Choose one of:
1)
2)
3)
4)
5)
when the company sells the mall;
when the fair value of the mall increases;
when the company earn rent from its tenants;
when the company collects rent from its tenants;
another time (specify).
81
Sub-classifying elements
Aim
»Understand the concepts underpinning the sub-classification of
elements in general purpose financial information
»Develop capacity to make/audit/regulate/analyse the
judgements necessary to sub-classify elements in general
purpose financial information
83
Why sub-classify elements?
»Information about the nature and amounts of a reporting entity’s
economic resources and claims can help users to identify the
reporting entity’s financial strengths and weaknesses.
»That information can help users to:
» assess the reporting entity’s liquidity and solvency
» its needs for additional financing and how successful it is likely to be in
obtaining that financing.
(see paragraph OB13 of the Conceptual Framework)
84
Classification concepts
»Different types of economic resources affect a user’s
assessment of the reporting entity’s prospects for future
cash flows differently.
»Information about priorities and payment requirements
of existing claims helps users to predict how future cash
flows will be distributed among those with a claim
against the reporting entity (CF.OB13)
• For some assets and for some liabilities significant
judgement is required to determine their classification
85
IFRS and the IFRS for SMEs asset types
defined categories (slide 1 of 3 slides)
Classification
Property, plant
and equipment
Intangible asset
Non-current
asset held for
sale
Purpose to which put, ie held for…
Nature
…use in production or supply of goods or tangible
services; rental to others; administration +
for IFRS only bearer plants (from 2016)
…use in production or supply of goods or identifiable;
services; rental to others; administration
non-monetary;
intangible
For IFRS only carrying amount will be
non-current
recovered principally through sale
assets
transaction
86
IFRS and the IFRS for SMEs asset types
defined categories (slide 2 of 3 slides)
Classification
Purpose to which put, ie held
for…
Nature
Inventory
…sale in the ordinary course of
business (including work-inprocess and raw materials)
excludes financial
instruments etc
Investment
property
Biological asset
in agricultural
activity
…capital appreciation; rental to
others
…conversion into agricultural
produce or additional biological
assets (for sale) for IFRS only
excluding bearer plants (from
2016)
land/buildings/some
leasehold interests
biological
87
IFRS and the IFRS for SMEs asset types
defined categories (slide 3 of 3 slides)
Classification
Financial asset
Nature
•
cash
•
a contractual right to receive cash or
another financial asset
•
a contractual right to exchange financial
assets or liabilities with another entity
on potentially favourable terms
•
an equity instrument (for example, plain
vanilla ordinary shares of another
entity).
88
IFRS and IFRS for SMEs asset type
test your understanding (slide 1 of 5 slides)
Using IFRS and then again using the IFRS for SMEs; for each of
the following, choose 1 of: (1) financial asset; (2) biological asset
in agricultural activity; (3) investment; (4) inventory; (5) intangible;
(6) PPE; (7) non-current asset held for sale; or (8) other (specify).
»Land held for
» growing crops
» dealing in property (short-term speculation)
» being developed by a property developer
» renting to others
89
IFRS and IFRS for SMEs asset type
test your understanding (slide 2 of 5 slides)
Using IFRS and then again using the IFRS for SMEs; for each of
the following, choose 1 of: (1) financial asset; (2) biological asset
in agricultural activity; (3) investment; (4) inventory; (5) intangible;
(6) PPE; (7) non-current asset held for sale; or (8) other (specify).
»Sugarcane quotas (license necessary to deliver cane to the mill)
» held by a cane grower for the delivery of harvested cane
» held by a cane quota dealer for short-term profit taking
90
IFRS and IFRS for SMEs asset type
test your understanding (slide 3 of 5 slides)
Using IFRS and then again using the IFRS for SMEs; for each of the
following, choose 1 of: (1) financial asset; (2) biological asset in agricultural
activity; (3) investment; (4) inventory; (5) intangible; (6) PPE; (7) non-current
asset held for sale; or (8) other (specify).
» Motor vehicles of an entity that:
» deals in new and second-hand motor vehicles; and
» rents motor vehicles to customers on short-term rentals.
» Hotel building
» Scenario 1: owner operates hotel business
» Scenario 2: rented to a international hotel group (fixed rentals)
» Scenario 3: subject to hotel management agreement (fixed and variable rentals)
91
IFRS and IFRS for SMEs asset type
test your understanding (slide 4 of 5 slides)
Using IFRS and then again using the IFRS for SMEs; for each of the
following, choose 1 of: (1) financial asset; (2) biological asset in
agricultural activity; (3) investment; (4) inventory; (5) intangible; (6)
PPE; (7) non-current asset held for sale; or (8) other (specify).
» An orange farmer’s:
» living trees
» ripening fruit attached to the trees
» harvested fruit
» A cane grower’s growing sugar cane
» Dogs that a firm uses in providing personal security services
92
IFRS and IFRS for SMEs asset type
test your understanding (slide 5 of 5 slides)
Using IFRS and then again using the IFRS for SMEs; for each of the
following, choose 1 of: (1) financial asset; (2) biological asset in
agricultural activity; (3) investment; (4) inventory; (5) intangible; (6)
PPE; (7) non-current asset held for sale; or (8) other (specify).
» Assets that senior management have committed to a plan to sell
» plant (PPE)
» building (investment property)
» beef herds (biological assets in agricultural activity)
» Plant (PPE) in Somalia which the entity has taken the decision to
abandon
» Statutory right to receive a refund of income tax overpaid
93
Entity’s assessment thresholds
Aim
»Understand the hierarchy of assessments management
makes in applying IFRS and the IFRS for SMEs
»Understand when undue cost or effort exemptions apply
»Understand the extremely rare circumstances in which the fair
presentation override applies
»Understand the judgements in assessing materiality, undue cost
or effort assessments and the fair presentation override
thresholds
95
Overview
IFRS for SMEs versus IFRS threshold assessment hierarchy
Assessment
hierarchy
1st assess materiality
2nd undue cost or
effort exemption
applies
3rd fair presentation
override
Threshold
could reasonably be expected to affect
users’ decisions on the basis of that
information
the incremental cost or effort
substantially exceeds the benefits
that those who are expected to use
the financial statements would
receive from having the
information.
compliance is so misleading that it
would conflict with the objective of
financial statements
Applicability IFRS
pervasive
only when
specified
extremely rare
circumstances
IFRS for
SMEs
✔
✔
✘
✔
✔
✔
Note: The assessments management make (as set out above) are separate from the cost constraint that the IASB assesses when setting Standards
96
Assessing materiality
Overview
assessing materiality
» Information is material when its omission or misstatement could
influence the economic decisions of users made on the basis of the
financial statements.
» Materiality depends on the size and nature of the omission or
misstatement judged in the surrounding circumstances.
» An entity need not follow a requirement if the effect of doing so
would be immaterial. Applies to all requirements including:
» recognition;
» measurement;
» presentation; and
» disclosure.
98
Assessing materiality
(non-mandatory) DRAFT application guidance*
»IASB [draft] Practice Statement ED/2015/8 IFRS Practice
Statement: Application of Materiality to Financial Statements
provides guidance in the following three main areas:
a) characteristics of materiality;
b) how to apply the concept of materiality when making decisions about
presenting and disclosing information in the financial statements; and
c) how to assess whether omissions and misstatements of information
are material to the financial statements.
•
source: http://www.ifrs.org/Current-Projects/IASB-Projects/Disclosure-Initiative/Materiality/Exposure-Draft-October-2015/Documents/ED_IFRSPracticeStatement_OCT2015_WEBSITE.pdf
99
PPE: materiality assessment
what do you think?
»Entity A
» manufactures components for the motor vehicle industry. Since 2013
its property, plant and equipment has increased from ETB100 million to
ETB120 million.
» is wholly owned by Ms A and it is funded 80% by bank loans.
» recognises in profit or loss in the year of their acquisition individual
items of PPE that cost less than ETB2,000.
»Is Entity A’s policy of expensing such items of PPE in the year of
its acquisition contravening the IFRS for SMEs?
Choose one of: 1) Yes; or 2) No.
100
PPE: materiality assessment
what do you think?
»Would your answer change if management were deliberately
acquiring more costly items of PPE in components that each
cost less than ETB2,000 so as to recognise the cost of the PPE
as an expense in profit or loss in the year of its acquisition?
Choose one of: 1) Yes; or 2) No.
101
Leases: materiality assessment
what do you think?
» Entity A enters into a lease for the first (and only) time in 2015.
» The terms of the lease:
» Entity A acquires the right of use of a photocopier for three years and, at the end of
the lease term, legal ownership of the photocopier automatically passes to Entity A.
» Obliges Entity A to make, to the lessor, equal monthly cash payments (the present
value of which equal the ETB10,000 cash cost of the photocopier at the inception of
the lease).
» Accounting: Entity A does not recognise the lease in its statement of
financial position. Instead it recognises lease payments as an expense of
the period in which they are paid in accordance with the lease agreement.
» Does Entity A’s expensing of the lease payments when they are paid likely
contravene the IFRS for SMEs?
Choose one of: 1) Yes; or 2) No.
102
Leases: materiality assessment
what do you think?
»Would you answer change if recognising the finance lease in
accordance with Section 20 Leases would have resulted in
Entity A breaching a loan covenant at 31 December 2015?
Choose one of: 1) Yes; or 2) No.
103
Undue cost or effort
Overview
undue cost or effort exemptions*
» The IFRS for SMEs specifies a limited number of undue cost or effort
exemptions
» The exemption does not apply to other requirements
» Management assesses whether obtaining or determining the
information necessary to comply with the specified requirements
would involve undue cost or effort.
» such assessments require judgement
» Whenever an undue cost or effort exemption is used, the entity
discloses the reasons why applying the requirement would involve
undue cost or effort.
» note: alternative disclosures apply for the undue cost and effort exemption
related to the recognition of intangible assets in a business combination.
* source: paragraphs 2.14A to 2.14D of the IFRS for SMEs (2015)
105
Overview
application guidance: undue cost or effort*
»Management uses its judgement in assessing whether
obtaining or determining the information necessary to comply
with the specified requirements would involve undue cost or
effort.
»The judgement depends on:
» the entity’s specific circumstances; and
» management’s judgement of the costs and benefits from applying that
requirement.
»The judgement requires consideration of how the economic
decisions of those that are expected to use the financial
statements could be affected by not having that information.
* source: paragraphs 2.14A to 2.14D of the IFRS for SMEs (2015)
106
Overview
application guidance: undue cost or effort*
»An undue cost or effort exemption is not intended to be a low
hurdle (paragraph BC240 of the IFRS for SMEs)
»A requirement would involve undue cost or effort if:
» the incremental cost (for example, valuers’ fees) or effort (for example,
endeavours by employees)
» substantially exceeds the benefits that those who are expected to use
the SME’s financial statements would receive from having the
information.
* source: paragraphs 2.14A to 2.14D of the IFRS for SMEs (2015)
107
Overview
application guidance: undue cost or effort*
»paragraph 34.6 provides application guidance when
assessing whether the fair value of biological assets in
agricultural activity is readily determinable without undue
cost or effort
» fair value may be readily determinable without undue cost or
effort even though market determined prices or values are not
available for a biological asset in its present condition. Any entity
must consider whether the present value of expected net cash
flows from the asset discounted at a current market determined
rate results in a reliable measure of fair value. (paragraph
34.6(d))
108
Selected IFRS for SMEs undue cost or effort exemptions
» Exemption from the requirement to measure biological assets in agricultural
activity at fair value less costs to sell when the fair value of the asset is not readily
determinable without undue cost or effort. In such cases, the biological assets
are measured using the cost model (historical cost less depreciation less
impairment).
» Exemption from the requirement to recognise a biological asset in agricultural
activity when on contemplating its initial recognition neither the fair value nor the
costs of the item can be measured reliably without undue cost or effort.
» Note: fair value may be readily determinable without undue cost or effort even
though market determined prices or values are not available for a biological asset
in its present condition. Any entity must consider whether the present value of
expected net cash flows from the asset discounted at a current market
determined rate results in a reliable measure of fair value. (paragraph 34.6(d))
109
Selected IFRS for SMEs undue cost or effort exemptions
»Undue cost or effort exemption from the requirement to
recognise separately intangible assets acquired in a business
combination
»Investments in non-convertible preference shares and nonputtable ordinary or preference shares the fair value of which
cannot be measured reliably without undue cost or effort shall
be measured at amortised cost (see paragraphs 11.14(c) and
12.8)
» also relevant to such investments in associates and joint ventures
» also relevant to unconsolidated subsidiaries (the ‘one year’ rule)
110
Selected IFRS for SMEs undue cost or effort exemptions
»When the fair value of equity instruments issued in
extinguishment (or part extinguishment) of debt in a
renegotiation with a creditor, cannot be measured reliably
without undue cost or effort, the equity instruments issued are
measured at the fair value of the liability extinguished.
»Undue cost or effort exemption from the requirement to
measure at fair value the liability to pay a non-cash distribution.
111
Non-cash distribution: undue cost or effort assessment
what do you think?
» Entity D is wholly owned by the Fruity family. Entity D has farmed coffee
for three generations of the Fruity family. It also holds a significant number
of Awash International shares that it carries at historical cost.
» The collapse of the coffee price has significantly shrunk Entity D’s cash
inflows and consequently it is renegotiating its debt and renegotiating
terms of employment with its employees. In particular, it offers its
employees a long-term bonus scheme in compensation for reducing their
short-term employee benefits.
» On 31 December 2015 Entity D distributed all of the shares it holds in
Awash International Bank to the Fruity family as a dividend.
» Entity D’s annual financial statements, prepared in accordance with the
IFRS for SMEs.
112
Non-cash distribution : undue cost or effort assessment
what do you think?
»Question 1: Does measuring Entity D’s holding of the Awash
International shares at their fair value at each balance sheet
date likely involve undue cost or effort?
Choose one of: 1) Yes; or 2) No.
»Question 2: Does measuring the distribution of the Awash
International shares at their fair value likely involve undue cost
or effort?
Choose one of: 1) Yes; or 2) No
»Question 3: Are there any considerations that are different for
making each of the undue cost or effort assessments above?
113
Disclosure
undue cost or effort exemptions
»Whenever an undue cost or effort exemption is used the entity
discloses:
» the fact; and
» the reasons why applying the requirement would involve undue cost or
effort.
»Different disclosures apply for the undue cost and effort
exemption related to the recognition of intangible assets in a
business combination (see paragraph19.25(g)).
» a qualitative description of the factors that make up goodwill
recognised (including, for example, intangible assets not recognised
when the undue cost or effort exemption has been applied)
114
Fair presentation override
Overview
assessing fair presentation override
»In extremely rare circumstances management might conclude
that compliance with a requirement would be so misleading that
it would conflict with the objective of financial statements.
»In such extremely rare circumstances the entity would depart
from the requirement, unless the relevant regulatory framework
prohibits departure.
116