IFRS® Standards
as issued at 1 January 2017
This edition is issued in two parts
PART A
When the International Accounting Standards Board (the Board) issues new Standards, it
generally allows an entity to apply the new requirements before the mandatory effective
date. This text consolidates the most recently issued requirements, assuming that all IFRS
Standards and IFRIC® Interpretations have been applied early. The Standards that these new
requirements are replacing or superseding are not included in this text, even where they
remain applicable. Readers seeking the IFRS Standards and IFRIC Interpretations
consolidated without assuming early application should refer to the 2017 edition of IFRS®
Standards (Blue Book), which was published at the end of 2016.
IFRS® Standards
as issued at 1 January 2017
This edition is issued in two parts
PART A
The Preface to International Financial Reporting Standards, the
Conceptual Framework for Financial Reporting and the
consolidated text of the IFRS Standards (including IAS®
Standards, IFRIC® Interpretations and SIC® Interpretations) as
issued at 1 January 2017
(Glossary and Index included)
For the accompanying documents issued with the
Standards, and other relevant material, see Part B of this
edition
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ISBN for this part: 978-1-911040-45-3
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Contents
page
Changes in this edition
A1
Introduction to this edition
A7
Preface to International Financial Reporting Standards
A15
The Conceptual Framework for Financial Reporting
A21
IFRS Standards
IFRS 1
First-time Adoption of International Financial Reporting Standards
A53
IFRS 2
Share-based Payment
A89
IFRS 3
Business Combinations
A131
IFRS 4
Insurance Contracts
A179
IFRS 5
Non-current Assets Held for Sale and Discontinued Operations
A219
IFRS 6
Exploration for and Evaluation of Mineral Resources
A239
IFRS 7
Financial Instruments: Disclosures
A249
IFRS 8
Operating Segments
A305
IFRS 9
Financial Instruments
A321
IFRS 10
Consolidated Financial Statements
A481
IFRS 11
Joint Arrangements
A539
IFRS 12
Disclosure of Interests in Other Entities
A569
IFRS 13
Fair Value Measurement
A595
IFRS 14
Regulatory Deferral Accounts
A641
IFRS 15
Revenue from Contracts with Customers
A661
IFRS 16
Leases
A719
IAS Standards
IAS 1
Presentation of Financial Statements
A763
IAS 2
Inventories
A801
IAS 7
Statement of Cash Flows
A813
IAS 8
Accounting Policies, Changes in Accounting Estimates and Errors
A829
IAS 10
Events after the Reporting Period
A845
IAS 12
Income Taxes
A855
IAS 16
Property, Plant and Equipment
A893
IAS 19
Employee Benefits
A915
continued...
...continued
IAS 20
Accounting for Government Grants and Disclosure of Government
Assistance
A963
IAS 21
The Effects of Changes in Foreign Exchange Rates
A973
IAS 23
Borrowing Costs
A991
IAS 24
Related Party Disclosures
A1001
IAS 26
Accounting and Reporting by Retirement Benefit Plans
A1013
IAS 27
Separate Financial Statements
A1025
IAS 28
Investments in Associates and Joint Ventures
A1035
IAS 29
Financial Reporting in Hyperinflationary Economies
A1051
IAS 32
Financial Instruments: Presentation
A1061
IAS 33
Earnings per Share
A1099
IAS 34
Interim Financial Reporting
A1123
IAS 36
Impairment of Assets
A1139
IAS 37
Provisions, Contingent Liabilities and Contingent Assets
A1185
IAS 38
Intangible Assets
A1205
IAS 39
Financial Instruments: Recognition and Measurement
A1237
IAS 40
Investment Property
A1271
IAS 41
Agriculture
A1293
Interpretations
IFRIC 1
Changes in Existing Decommissioning, Restoration and Similar
Liabilities
A1307
IFRIC 2
Members’ Shares in Co-operative Entities and Similar Instruments
A1315
IFRIC 5
Rights to Interests arising from Decommissioning, Restoration and
Environmental Rehabilitation Funds
A1327
IFRIC 6
Liabilities arising from Participating in a Specific Market—Waste
Electrical and Electronic Equipment
A1335
IFRIC 7
Applying the Restatement Approach under IAS 29 Financial
Reporting in Hyperinflationary Economies
A1341
IFRIC 10
Interim Financial Reporting and Impairment
A1347
IFRIC 12
Service Concession Arrangements
A1353
IFRIC 14
IAS 19—The Limit on a Defined Benefit Asset, Minimum Funding
Requirements and their Interaction
A1365
IFRIC 16
Hedges of a Net Investment in a Foreign Operation
A1373
continued...
...continued
IFRIC 17
Distributions of Non-cash Assets to Owners
A1387
IFRIC 19
Extinguishing Financial Liabilities with Equity Instruments
A1395
IFRIC 20
Stripping Costs in the Production Phase of a Surface Mine
A1403
IFRIC 21
Levies
A1411
IFRIC 22
Foreign Currency Transactions and Advance Consideration
A1419
SIC-7
Introduction of the Euro
A1427
SIC-10
Government Assistance—No Specific Relation to Operating Activities
A1431
SIC-25
Income Taxes—Changes in the Tax Status of an Entity or its
Shareholders
A1435
SIC-29
Service Concession Arrangements: Disclosures
A1439
SIC-32
Intangible Assets—Web Site Costs
A1445
Glossary
Index
Changes in this edition
Changes in this edition
This section is a brief guide to the changes since the 2016 edition that are incorporated in
this 2017 edition of IFRS® Standards (the Red Book).
Introduction
This volume includes the latest consolidated versions of all IFRS Standards, together with
the amendments to Standards that have an effective date after 1 January 2017.
Readers seeking only the consolidated text of Standards that are effective on 1 January 2017
should refer to the 2017 edition of IFRS® Standards (the Blue Book).
New requirements since the 2016 Red Book
The 2016 edition of the Red Book contained Standards issued at 13 January 2016 in order to
include IFRS 16 Leases, which was published on that date. The following are the main
changes made since 1 January 2016:
●
amendments to the following Standards: IAS 7 Statement of Cash Flows, IAS 12 Income
Taxes, IFRS 15 Revenue from Contracts with Customers, IFRS 2 Share-based Payment, IFRS 4
Insurance Contracts and IAS 40 Investment Property;
●
an IFRIC® Interpretation: IFRIC 22 Foreign Currency Transactions and Advance
Consideration; and
●
one set of Annual Improvements: Annual Improvements to IFRS® Standards 2014–2016
Cycle.
The following table provides the publication and effective dates of amendments made to the
Standards since the 2016 Red Book was issued. No Standards have been withdrawn.
Standard/Interpretation/
Amendment issued
When
issued
Effective date
Disclosure Initiative
January
2016
1 January 2017
IAS 7
(Amendments to IAS 7)
Recognition of Deferred Tax
Assets for Unrealised Losses
January
2016
1 January 2017
IAS 12
April 2016
1 January 2018
IFRS 15
Classification and Measurement of June 2016
Share-based Payment
Transactions
1 January 2018
IFRS 2
(early application
is possible, unless
noted otherwise)
Standards
amended
(Amendments to IAS 12)
Clarifications to IFRS 15 Revenue
from Contracts with Customers
(Amendments to IFRS 2)
continued...
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A1
Changes in this edition
...continued
Standard/Interpretation/
Amendment issued
When
issued
Effective date
(early application
Standards
amended
is possible, unless
noted otherwise)
September 1 January 2018
2016
IFRS 4
December
2016
1 January 2018
IAS 40
(Amendments to IAS 40)
Annual Improvements to
IFRS® Standards 2014–2016
December
2016
Amendments to IFRS 1
1 January 2018
Amendments to IFRS 12
Amendments to IAS 28
1 January 2017
1 January 2018
IFRS 1, IFRS 7,
IFRS 10, IAS 19
IFRS 12
IAS 28
1 January 2018
IFRS 1
Applying IFRS 9 Financial
Instruments with IFRS 4
Insurance Contracts
(Amendments to IFRS 4)
Transfers of Investment Property
Cycle:
IFRIC® Interpretation 22
Foreign Currency Transactions
and Advance Consideration
December
2016
Earlier application of these amendments and this IFRIC Interpretation are (or were)
permitted except for the annual improvement related to IFRS 1. The annual improvements
to IFRS 1 deleted reliefs that are no longer relevant to first-time adopters of IFRS Standards.
New and revised Standards and Interpretations are available to eIFRS subscribers at:
http://eifrs.ifrs.org/eifrs/PDFArchive?categoryId=71.
The narrative below further explains the amendments listed in the table.
Amendments to Standards issued as separate documents
Disclosure Initiative (Amendments to IAS 7)
The amendments to IAS 7 Statement of Cash Flows made in Disclosure Initiative (Amendments to
IAS 7) respond to investors’ requests for improved disclosures about changes in an entity’s
liabilities arising from financing activities. The amendments require entities to provide
disclosures that enable users of financial statements to evaluate changes in liabilities
arising from financing activities, including both changes arising from cash flows and
non-cash changes.
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姝 IFRS Foundation
Changes in this edition
Recognition of Deferred Tax Assets for Unrealised Losses
(Amendments to IAS 12)
IAS 12 Income Taxes provides requirements on the recognition and measurement of current
or deferred tax liabilities or assets. The amendments in Recognition of Deferred Tax Assets for
Unrealised Losses (Amendments to IAS 12) clarify the requirements on recognition of deferred
tax assets related to debt instruments measured at fair value.
Clarifications to IFRS 15 Revenue from Contracts with
Customers
The purpose of Clarifications to IFRS 15 Revenue from Contracts with Customers was to clarify the
intentions of the International Accounting Standards Board (the Board) when developing
some of the requirements in IFRS 15.
These amendments do not change the underlying principles of the Standard. They arise as
a result of discussions of the Transition Resource Group. The Transition Resource Group
was set up jointly by the Board and the United States national standard-setter, the Financial
Accounting Standards Board, to assist companies with the implementation of IFRS 15.
The amendments clarify how to:
●
identify a performance obligation (the promise to transfer a good or a service to a
customer) in a contract;
●
determine whether an entity is a principal (the provider of a good or service) or an
agent (responsible for arranging for the good or service to be provided); and
●
determine whether the revenue from granting a licence to an entity’s intellectual
property should be recognised at a point in time or over time.
In addition to clarifications, the amendments include two additional reliefs to reduce cost
and complexity for an entity when it first applies IFRS 15.
Classification and Measurement of Share-based Payment
Transactions (Amendments to IFRS 2)
Classification and Measurement of Share-based Payment Transactions (Amendments to IFRS 2) was
developed through the IFRS Interpretations Committee.
requirements on the accounting for:
The amendments provide
●
the effects of vesting and non-vesting conditions on the measurement of cash-settled
share-based payments;
●
share-based payment transactions with a net settlement feature for withholding tax
obligations; and
●
a modification to the terms and conditions of a share-based payment that changes
the classification of the transaction from cash-settled to equity-settled.
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A3
Changes in this edition
Applying IFRS 9 Financial Instruments with IFRS 4 Insurance
Contracts (Amendments to IFRS 4)
Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts (Amendments to IFRS 4)
addresses concerns arising from the different effective dates of IFRS 9 and the forthcoming
insurance contracts Standard. The amendments introduce two optional approaches:
●
a temporary exemption—entities whose activities are predominantly connected with
insurance may choose to continue to apply IAS 39 instead of IFRS 9. This optional
temporary exemption from IFRS 9 is available until 2021.
●
an overlay approach—all entities that issue insurance contracts and apply IFRS 9
may choose to reclassify in other comprehensive income, the difference in the
amounts recognised in profit or loss for eligible financial assets between applying
IFRS 9 and applying IAS 39.
Transfers of Investment Property (Amendments to IAS 40)
Transfers of Investment Property (Amendments to IAS 40) clarifies when there is a transfer to or
from investment property.
Annual Improvements
Annual Improvements to IFRS® Standards 2014–2016 Cycle contains three amendments related to
three Standards. The following table shows the topics addressed by these amendments.
Standard
Subject of amendment
IFRS 1 First-time Adoption of International Financial
Reporting Standards
Deletion of short-term exemptions
for first-time adopters.
IFRS 12 Disclosure of Interests in Other Entities
Clarification of the scope of the
Standard.
IAS 28 Investments in Associates and Joint Ventures
Measuring an associate or joint
venture at fair value.
IFRIC Interpretation
IFRIC® Interpretation 22 Foreign Currency Transactions and Advance Consideration addresses how
to determine the date of the transaction for the purpose of determining the exchange rate
to use on initial recognition of an asset, expense or income (or part of it) when
derecognising a non-monetary asset or non-monetary liability arising from the payment or
receipt of advance consideration in a foreign currency.
Other material that has changed
The Glossary has been revised.
A4
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Changes in this edition
Minor editorial corrections to Standards (including necessary updating) have been made; a
list of these is available on the website at http://www.ifrs.org/IFRSs/Pages/InternationalAccounting-Standards-Board-IASB-Editorial-Corrections.aspx.
The IFRS Foundation Constitution and the IFRS Foundation Due Process Handbook have not been
reproduced in this edition. In earlier editions they were reproduced in Part B. They can be
accessed at:
●
http://go.ifrs.org/IFRS-Foundation-Constitution
●
http://go.ifrs.org/DPOC
姝 IFRS Foundation
A5
Introduction
Introduction to this edition
Overview
The International Accounting Standards Board (the Board), based in London, began
operations in 2001. The Board is committed to developing, in the public interest, a single
set of high quality, global accounting standards that require transparent and comparable
information in general purpose financial statements. The Board is selected, overseen and
funded by the IFRS Foundation (formerly called the International Accounting Standards
Committee Foundation). The IFRS Foundation (the Foundation) is financed through a
number of national financing regimes, which include levies and payments from regulatory
and standard-setting bodies, international organisations and other accounting bodies.
Trustees
The Trustees provide oversight of the operations of the Foundation and the Board. The
responsibilities of the Trustees include the appointment of Board members, the IFRS
Advisory Council and the IFRS Interpretations Committee; overseeing and monitoring the
Board’s effectiveness and adherence to its due process and consultation procedures;
establishing and maintaining appropriate financing arrangements; approving the
Foundation budget; and approving any constitutional changes, following appropriate
public consultation. The Trustees have established a public accountability link to a
Monitoring Board comprising public capital-market authorities.
Trustee membership includes professionals from diverse backgrounds with an interest in
promoting and maintaining transparency in corporate reporting globally. This includes
global experience at a senior level in securities market regulators, firms representing
investors, one of the international audit networks, preparers, users, academics and officials
serving the public interest. Under the IFRS Foundation Constitution, the Trustee body is
composed of six Trustees each from Asia Oceania; Europe and the Americas; one from
Africa, and three others from any area, as long as geographical balance is maintained.
IFRS Foundation’s Constitution
The IFRS Foundation Constitution (the Constitution) requires the Trustees to review the
structure and effectiveness of the Foundation at the latest, every five years after the last
review has been completed. The Trustees completed a full review and revision of the
Constitution in June 2005, and a revised Constitution came into effect on 1 July 2005. In 2008
the Trustees began the next review, with the first part focusing on the creation of a formal
link to public authorities to enhance public accountability and considering the size and
composition of the Board. The Trustees concluded the first part of the review in
January 2009 and issued a revised Constitution for effect from 1 February 2009. The changes
included the expansion of the Board from 15 to 16 members, selected by geographical
origins, by 1 July 2012, with an option to include up to three part-time members. The
revised Constitution established the link to the new Monitoring Board to ensure public
accountability. The remaining part of the review was concluded in January 2010, when the
Constitution was further revised with effect from 1 March 2010. The revisions included
renaming the International Accounting Standards Committee Foundation as the IFRS
姝 IFRS Foundation
A7
Introduction
Foundation, the International Financial Reporting Interpretations Committee as the IFRS
Interpretations Committee (the Interpretations Committee), and the Standards Advisory
Council as the IFRS Advisory Council (the Advisory Council). Other changes included
introducing revised objectives for the organisation and specific provisions for Trustees to be
appointed from Africa and South America.
In response to the recommendations in the Trustees’ 2011 Strategy Review, IFRSs as the Global
Standards: Setting a Strategy for the Foundation’s Second Decade, and the Monitoring Board’s Final
Report on the Review of the IFRS Foundation’s Governance, the Trustees amended the Constitution to
reflect the separation of the role of the Chairman of the Board from that of the executive
director. The Trustees approved the changes on 23 January 2013 for immediate effect.
In July 2015, the Trustees again reviewed the structure and effectiveness of the Foundation
by issuing a Request for Views 120-day consultation. The results of the review were
considered by the Trustees at their meeting in May 2016. The Trustees determined that
further changes should be made to the Constitution, some of which had not been exposed in
the original July 2015 consultation. As a result, the Trustees issued an Exposure Draft of the
proposed changes to the Constitution in June 2016. Following a consultation period of
90 days, the Trustees reviewed the proposed changes to the Constitution at their meeting in
October 2016. The Trustees resolved that the Board should be reduced to 14 members,
composed of four members from each of the following regions: Europe, Asia Oceania, the
Americas; one from Africa and one ‘at-large’ Board member from any region in the world,
subject to overall geographic balance.
The Trustees also agreed to alter the quorum and voting thresholds for passing an IFRS
Standard or an IFRIC® Interpretation, to reflect the smaller Board. The Trustees agreed that
nine Board members would be required to approve a new Standard or IFRIC Interpretation
when the Board is composed of 14 members, and eight Board members would be required
to approve a new Standard or IFRIC Interpretation when the Board is composed of 13 or
fewer members.
The Trustee’s geographic composition was also altered to six members from each of the
Americas, Europe and Asia Oceania, with an increase in the ‘at-large’ category from two to
three members, subject to overall geographic balance.
There was also an alteration to the professional backgrounds of the Trustees, whereby the
quota of two senior partners from one of the internationally recognised audit firms was
removed and market and/or financial regulators were added to the list of professional
backgrounds. The composition of the Trustees would be subject to overall balance and
would be drawn from a wide variety of backgrounds including securities, market
regulators, firms representing investors, the international audit networks, preparers, users,
academics and officials serving the public interest.
Section 17 of the Constitution was also amended to note that the Trustees would review the
strategy and effectiveness of the Foundation (including, as appropriate, its structure), at the
latest, five years after the previous review has been completed.
Finally, the Trustees agreed to alter the Board members’ second term (Section 31 of the
Constitution). All Board members would be appointed for a first term of five years and a
second term would normally be three years, but with the ability to extend that for up to five
years, with the entire membership capped at 10 years. Second term Board appointments
A8
姝 IFRS Foundation
Introduction
would be carried out ‘in line with procedures developed by the Trustees for such renewals’.
There would be no distinction between the Chair and Vice-Chair and the remaining
members of the Board.
The Board
The Board has full discretion in developing and pursuing the technical agenda for setting
accounting standards, subject to consultation with the Trustees and a public consultation
every five years. The Board’s most recent agenda consultation concluded in 2016. The main
qualifications for membership of the Board are professional competence and practical
experience. The Trustees are required to select members so that the Board, as a group, will
offer the best available combination of technical expertise and international business and
market experience. The Board is also expected to provide an appropriate mix of recent
practical experience among auditors, preparers, market and financial regulators, users and
academics. The publication of an IFRS Standard, Exposure Draft, or IFRIC Interpretation
requires approval of the Board’s members. This approval has to meet the minimum voting
requirements as detailed in paragraph 3.14 of the IFRS Foundation Due Process Handbook. At
1 January 2017 the Board members were:
Hans Hoogervorst, Chairman
Gary Kabureck
Suzanne Lloyd, Vice Chair
Takatsugu Ochi
Stephen Cooper
Darrel Scott
Martin Edelmann
Chungwoo Suh
Françoise Flores
Mary Tokar
Amaro Gomes
Wei-Guo Zhang
The Board issues a summary of its decisions (the IASB® Update) after each of its meetings.
This Update is published in electronic format on the IFRS Foundation website: www.ifrs.org.
IFRS Advisory Council
The IFRS Advisory Council (the Advisory Council) provides a forum for participation by
organisations and individuals from diverse geographical and functional backgrounds who
have an interest in international financial reporting. The objective of the Advisory Council
is to give the Board advice on agenda decisions and priorities in its work and give other
advice to the Board or the Trustees.
The Advisory Council comprises around 50 members, representing stakeholder
organisations internationally. The Advisory Council holds a minimum of two public
meetings each year. The Trustees appoint the Advisory Council Chair, who cannot be a
member of the Board or its staff. The Advisory Council Chair is invited to participate in
Trustees’ meetings.
Details of the members of the Advisory Council are available on the IFRS Foundation
website: www.ifrs.org.
姝 IFRS Foundation
A9
Introduction
The IFRS Interpretations Committee
The Trustees established the IFRS Interpretations Committee (then called the International
Financial Reporting Interpretations Committee) in March 2002, when it replaced what was
then called the Standing Interpretations Committee. The IFRS Interpretations Committee
(the Interpretations Committee) provides timely guidance on newly identified financial
reporting issues, not specifically addressed in IFRS Standards, or issues where unsatisfactory
or conflicting interpretations have developed, or seem likely to develop. Therefore, it
promotes the rigorous and uniform application of our Standards.
The Interpretations Committee has 14 voting members and a non-voting Chair, who can
speak about technical matters under consideration. The Trustees may appoint regulatory
organisations, as non-voting members, whose representatives have the right to attend and
speak at meetings. Currently, the International Organization of Securities Commissions
and the European Commission are non-voting observers.
The Interpretations Committee publishes a summary of its decisions after each meeting.
This IFRIC Update is published in electronic format on the website: www.ifrs.org.
Details of the members of the Interpretations Committee are available on the website:
www.ifrs.org.
The IASB technical staff
Headed by the Chairman of the Board, staff members from nearly 30 countries, based in
London, support the Board.
Open meetings
Meetings of the Trustees, the Board, the IFRS Advisory Council (the Advisory Council) and
the IFRS Interpretations Committee (the Interpretations Committee) are all open to public
observation. The agenda for each meeting is published in advance on the website, along
with papers discussed at those meetings.
These meetings are also broadcast via audio and in most cases video, on the website:
www.ifrs.org. Recordings of the meetings are also retained on the website.
Consultation
The development of a IFRS Standard involves an open, public process of debating technical
issues and evaluating input. The Board publishes, for public comment, Discussion Papers
and an Exposure Draft of each Standard or IFRIC Interpretation. Opportunities for
interested parties to participate in the development of our Standards include:
●
participation in the development of views as a member of the Advisory Council;
●
participation in working groups;
●
submission of an issue to the Interpretations Committee (see the website for details);
●
submission of a comment letter in response to a Discussion Paper;
●
submission of a comment letter in response to an Exposure Draft;
●
submission of a comment letter in response to a draft Interpretation;
●
participation in public hearings and round-table discussions; and
A10
姝 IFRS Foundation
Introduction
●
participation in field visits.
The Board publishes an Annual Report on its activities during the previous year and priorities
for the following year. This report provides an opportunity for comment by interested
parties.
Preface to IFRS Standards
The Preface to IFRS Standards sets out the Board’s objectives and due process, while
explaining the scope, authority and timing of the Standards.
The Conceptual Framework for Financial Reporting
The Conceptual Framework for Financial Reporting (the Conceptual Framework) was issued in
September 2010, replacing the Framework for the Preparation and Presentation of Financial
Statements that had been developed by the Board’s predecessor body. The Conceptual
Framework assists the Board in:
(a)
developing future Standards and in its review of existing Standards; and
(b)
promoting the harmonisation of regulations, accounting standards and procedures
relating to the presentation of financial statements by providing a basis for reducing
the number of alternative accounting treatments permitted by our Standards.
In addition, the Conceptual Framework may assist:
●
preparers of financial statements in applying our Standards and in dealing with
topics that have yet to form the subject of a Standard or an IFRIC Interpretation;
●
auditors in forming an opinion on whether financial statements comply with our
Standards;
●
users of financial statements in interpreting the information contained in financial
statements prepared in conformity with our Standards; and
●
those who are interested in the work of the Board, providing them with information
about its approach to the formulation of accounting standards.
The Conceptual Framework is not a Standard. However, when developing an accounting policy
in the absence of a Standard or an IFRIC Interpretation or a SIC® Interpretation that
specifically applies to an item, an entity’s management is required to refer to and consider
the applicability of the Conceptual Framework (see IAS 8 Accounting Policies, Changes in Accounting
Estimates and Errors).
In a limited number of cases, there may be a conflict between the Conceptual Framework and
a requirement within a Standard or an IFRIC Interpretation or a SIC Interpretation. In those
cases where there is a conflict, the requirements of the Standard or IFRIC Interpretation or
SIC Interpretation prevail over those of the Conceptual Framework.
IAS® Standards
The Board issues its Standards in a series of pronouncements called IFRS Standards. Upon
its inception, the Board adopted the body of International Accounting Standards issued by
its predecessor, the Board of the International Accounting Standards Committee.
IFRS Standards include IAS Standards, the Conceptual Framework for Financial Reporting, IFRIC
姝 IFRS Foundation
A11
Introduction
Interpretations and SIC Interpretations developed by the IFRS Interpretations Committee or
the former Standing Interpretations Committee.
Staff advice
The Board’s operating procedures do not allow staff to give advice on the meaning of our
Standards.
Current technical activities
Details of the current technical activities of the Board and the IFRS Interpretations
Committee, including the progress of their deliberations, are available on the website:
www.ifrs.org.
Publications and translations
The IFRS Foundation holds the copyright in IFRS Standards, IAS Standards, IFRIC
Interpretations, Exposure Drafts, and other IASB publications in all countries, except where
the Foundation has expressly waived copyright on portions of that material. For more
information regarding the Foundation’s copyright, please refer to the copyright notice with
this edition or the website www.ifrs.org.
Translations of IFRS Standards have been created in more than 31 languages. The IFRS
Foundation considers additional translations as needs arise. For more information, contact
IFRS Content Services.
Although the IFRS Foundation makes every reasonable effort to translate our Standards into
other languages on a timely basis, a rigorous process is followed to ensure that the
translations are as accurate as possible. For that reason, there may well be a lag between
when a Standard or an IFRIC Interpretation is issued by the Board (in English) and when it is
issued in other languages. Further details are available on the website (www.ifrs.org) and
from the IFRS Foundation’s Publications department.
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姝 IFRS Foundation
Introduction
More information
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Preface to IFRS Standards
Preface to International Financial Reporting Standards1
This Preface is issued to set out the objectives and due process of the International
Accounting Standards Board and to explain the scope, authority and timing of
application of International Financial Reporting Standards. The Preface was approved by
the IASB in April 2002 and superseded the Preface published in January 1975 (amended
November 1982). The Preface has been subsequently amended (most recently in
December 2016) to reflect changes in the IFRS Foundation’s2 Constitution, changes made
by IAS 1 Presentation of Financial Statements (as revised in 2007) and the publication of the
Conceptual Framework for Financial Reporting in September 2010.
1
The International Accounting Standards Board (IASB) was established in 2001 as
part of the International Accounting Standards Committee (IASC) Foundation.
In 2010 the IASC Foundation was renamed the IFRS Foundation. The governance
of the IFRS Foundation rests with twenty-two Trustees.
The Trustees’
responsibilities include appointing the members of the IASB and associated
councils and committees, as well as securing financing for the organisation. The
IFRS Foundation’s Constitution was revised in December 2016; it reduced the
number of Board members from 16 to 14. Approval of International Financial
Reporting Standards (IFRSs) and related documents, such as the Conceptual
Framework for Financial Reporting, exposure drafts, and other discussion
documents, is the responsibility of the IASB.
2
The IFRS Interpretations Committee3 comprises fourteen voting members and a
non-voting Chairman, all appointed by the Trustees. The role of the Committee
is to prepare interpretations of IFRSs for approval by the IASB and, in the context
of the Conceptual Framework, to provide timely guidance on financial reporting
issues. The Committee (then called the International Financial Reporting
Interpretations Committee) replaced the former Standing Interpretations
Committee (SIC) in 2002.
3
The IFRS Advisory Council4 is appointed by the Trustees. It provides a formal
vehicle for participation by organisations and individuals with an interest in
international financial reporting. The participants have diverse geographical
and functional backgrounds. The Council’s objective is to give advice to the IASB
on priorities, agenda decisions and on major standard-setting projects.
4
The IASB was preceded by the Board of IASC, which came into existence on
29 June 1973 as a result of an agreement by professional accountancy bodies in
Australia, Canada, France, Germany, Japan, Mexico, the Netherlands, the United
Kingdom and Ireland, and the United States of America. A revised Agreement
and Constitution were signed in November 1982. The Constitution was further
revised in October 1992 and May 2000 by the IASC Board. Under the May 2000
1
including IFRIC and SIC Interpretations
2
Until July 2010 the IFRS Foundation was named the IASC Foundation
3
Before March 2010 the Interpretations Committee was called the International Financial Reporting
Interpretations Committee (IFRIC).
4
Before March 2010 the IFRS Advisory Council was called the Standards Advisory Council (SAC).
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Preface to IFRS Standards
Constitution, the professional accountancy bodies adopted a mechanism
enabling the appointed Trustees to put the May 2000 Constitution into force.
The Trustees activated the new Constitution in January 2001, and revised it in
March 2002.5
5
At its meeting on 20 April 2001 the IASB passed the following resolution:
All Standards and Interpretations issued under previous Constitutions continue to
be applicable unless and until they are amended or withdrawn. The International
Accounting Standards Board may amend or withdraw International Accounting
Standards and SIC Interpretations issued under previous Constitutions of IASC as
well as issue new Standards and Interpretations.
When the term IFRSs is used in this Preface, it includes standards and
Interpretations approved by the IASB, and International Accounting Standards
(IASs) and SIC Interpretations issued under previous Constitutions.
Objectives of the IASB
6
The objectives of the IASB are:
(a)
to develop, in the public interest, a single set of high quality,
understandable, enforceable and globally accepted financial reporting
standards based on clearly articulated principles. These standards
should require high quality, transparent and comparable information in
financial statements and other financial reporting to help investors,
other participants in the various capital markets of the world and other
users of financial information make economic decisions;
(b)
to promote the use and rigorous application of those standards;
(c)
in fulfilling the objectives associated with (a) and (b), to take account of,
as appropriate, the needs of a range of sizes and types of entities in
diverse economic settings;
(d)
to promote and facilitate the adoption of IFRSs, being the standards and
interpretations issued by the IASB, through the convergence of national
accounting standards and IFRSs.
Scope and authority of International Financial Reporting
Standards
7
The IASB achieves its objectives primarily by developing and publishing IFRSs
and promoting the use of those standards in general purpose financial
statements and other financial reporting. Other financial reporting comprises
information provided outside financial statements that assists in the
interpretation of a complete set of financial statements or improves users’
ability to make efficient economic decisions. In developing IFRSs, the IASB
works with national standard-setters to promote and facilitate adoption of IFRSs
through convergence of national accounting standards and IFRSs.
5
The Constitution was further revised in July 2002, June 2005, October 2007, January 2009,
January 2010, January 2013 and December 2016.
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Preface to IFRS Standards
8
IFRSs set out recognition, measurement, presentation and disclosure
requirements dealing with transactions and events that are important in
general purpose financial statements. They may also set out such requirements
for transactions and events that arise mainly in specific industries. IFRSs are
based on the Conceptual Framework, which addresses the concepts underlying the
information presented in general purpose financial statements. Although the
Conceptual Framework was not issued until September 2010, it was developed from
the previous Framework for the Preparation and Presentation of Financial Statements,
which the IASB adopted in 2001. The objective of the Conceptual Framework is to
facilitate the consistent and logical formulation of IFRSs. The Conceptual
Framework also provides a basis for the use of judgement in resolving accounting
issues.
9
IFRSs are designed to apply to the general purpose financial statements and
other financial reporting of profit-oriented entities. Profit-oriented entities
include those engaged in commercial, industrial, financial and similar activities,
whether organised in corporate or in other forms. They include organisations
such as mutual insurance companies and other mutual co-operative entities that
provide dividends or other economic benefits directly and proportionately to
their owners, members or participants. Although IFRSs are not designed to
apply to not-for-profit activities in the private sector, public sector or
government, entities with such activities may find them appropriate. The
International Public Sector Accounting Standards Board (IPSASB) prepares
accounting standards for governments and other public sector entities, other
than government business entities, based on IFRSs.
10
IFRSs apply to all general purpose financial statements. Such financial
statements are directed towards the common information needs of a wide range
of users, for example, shareholders, creditors, employees and the public at large.
The objective of financial statements is to provide information about the
financial position, performance and cash flows of an entity that is useful to
those users in making economic decisions.
11
A complete set of financial statements includes a statement of financial position,
a statement of comprehensive income, a statement of changes in equity, a
statement of cash flows, and accounting policies and explanatory notes. When a
separate income statement is presented in accordance with IAS 1 Presentation of
Financial Statements (as revised in 2007), it is part of that complete set. In the
interest of timeliness and cost considerations and to avoid repeating
information previously reported, an entity may provide less information in its
interim financial statements than in its annual financial statements. IAS 34
Interim Financial Reporting prescribes the minimum content of complete or
condensed financial statements for an interim period. The term ‘financial
statements’ includes a complete set of financial statements prepared for an
interim or annual period, and condensed financial statements for an interim
period.
12
Some IFRSs permit different treatments for given transactions and events. The
IASB’s objective is to require like transactions and events to be accounted for and
reported in a like way and unlike transactions and events to be accounted for
and reported differently, both within an entity over time and among entities.
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Preface to IFRS Standards
Consequently, the IASB intends not to permit choices in accounting treatment.
Also, the IASB has reconsidered, and will continue to reconsider, those
transactions and events for which IFRSs permit a choice of accounting
treatment, with the objective of reducing the number of those choices.
13
Standards approved by the IASB include paragraphs in bold type and plain type,
which have equal authority. Paragraphs in bold type indicate the main
principles. An individual standard should be read in the context of the objective
stated in that standard and this Preface.
14
Interpretations of IFRSs are prepared by the Interpretations Committee to give
authoritative guidance on issues that are likely to receive divergent or
unacceptable treatment, in the absence of such guidance.
15
IAS 1 (as revised in 2007) includes the following requirement:
An entity whose financial statements comply with IFRSs shall make an explicit and
unreserved statement of such compliance in the notes. An entity shall not
describe financial statements as complying with IFRSs unless they comply with all
the requirements of IFRSs.
16
Any limitation of the scope of an IFRS is made clear in the standard.
Due process
17
6
IFRSs are developed through an international due process that involves
accountants, financial analysts and other users of financial statements, the
business community, stock exchanges, regulatory and legal authorities,
academics and other interested individuals and organisations from around the
world. The IASB consults, in public meetings, the Advisory Council on major
projects, agenda decisions and work priorities, and discusses technical matters
in meetings that are open to public observation. Due process for projects
normally, but not necessarily, involves the following steps (the steps that are
required under the terms of the IFRS Foundation’s Constitution are indicated by
an asterisk*):
(a)
the staff are asked to identify and review all the issues associated with
the topic and to consider the application of the Conceptual Framework to
the issues;
(b)
study of national accounting requirements and practice and an
exchange of views about the issues with national standard-setters;
(c)
consulting the Trustees and the Advisory Council about the advisability
of adding the topic to the IASB’s agenda;*6
(d)
formation of an advisory group to give advice to the IASB on the project;
(e)
publishing for public comment a discussion document;
(f)
publishing for public comment an exposure draft (including any
dissenting opinions held by IASB members) approved by at least eight
votes of the IASB if there are fewer than fourteen members, or by nine of
its members if there are fourteen members;*
With effect from 1 December 2016, the IASB is required to carry out a public consultation on its
agenda every five years from the date of the most recent public agenda consultation.
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Preface to IFRS Standards
18
(g)
normally publishing with an exposure draft a basis for conclusions and
the alternative views of any IASB member who opposes publication;*
(h)
consideration of all comments received within the comment period on
discussion documents and exposure drafts;*
(i)
consideration of the desirability of holding a public hearing and of the
desirability of conducting field tests and, if considered desirable, holding
such hearings and conducting such tests;
(j)
approval of a standard by at least eight votes of the IASB if there are
fewer than fourteen members, or by nine of its members if there are
fourteen members;* and
(k)
publishing with a standard (i) a basis for conclusions, explaining, among
other things, the steps in the IASB’s due process and how the IASB dealt
with public comments on the exposure draft, and (ii) the dissenting
opinion of any IASB member.*
Interpretations of IFRSs are developed through an international due process that
involves accountants, financial analysts and other users of financial statements,
the business community, stock exchanges, regulatory and legal authorities,
academics and other interested individuals and organisations from around the
world. The Interpretations Committee discusses technical matters in meetings
that are open to public observation. The due process for each project normally,
but not necessarily, involves the following steps (the steps that are required
under the terms of the IFRS Foundation’s Constitution are indicated by an
asterisk*):
(a)
the staff are asked to identify and review all the issues associated with
the topic and to consider the application of the Conceptual Framework to
the issues;
(b)
consideration of the implications for the issues of the hierarchy of IAS 8
Accounting Policies, Changes in Accounting Estimates and Errors;
(c)
publication of a draft Interpretation for public comment if no more than
four Committee members have voted against the proposal;*
(d)
consideration of all comments received within the comment period on a
draft Interpretation;*
(e)
approval by the Interpretations Committee of an Interpretation if no
more than four Committee members have voted against the
Interpretation after considering public comments on the draft
Interpretation;* and
(f)
approval of the Interpretation by at least eight votes of the IASB if there
are fewer than fourteen members, or by nine of its members if there are
fourteen members.*
Timing of application of International Financial Reporting
Standards
19
IFRSs apply from a date specified in the document. New or revised IFRSs set out
transitional provisions to be applied on their initial application.
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Preface to IFRS Standards
20
The IASB has no general policy of exempting transactions occurring before a
specific date from the requirements of new IFRSs. When financial statements
are used to monitor compliance with contracts and agreements, a new IFRS may
have consequences that were not foreseen when the contract or agreement was
finalised. For example, covenants contained in banking and loan agreements
may impose limits on measures shown in a borrower’s financial statements. The
IASB believes the fact that financial reporting requirements evolve and change
over time is well understood and would be known to the parties when they
entered into the agreement. It is up to the parties to determine whether the
agreement should be insulated from the effects of a future IFRS, or, if not, the
manner in which it might be renegotiated to reflect changes in reporting rather
than changes in the underlying financial condition.
21
Exposure drafts are issued for comment and their proposals are subject to
revision. Until the effective date of an IFRS, the requirements of any IFRS that
would be affected by proposals in an exposure draft remain in force.
Language
22
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The approved text of any discussion document, exposure draft or IFRS is that
approved by the IASB in the English language. The IASB may approve
translations in other languages, provided that the translation is prepared in
accordance with a process that provides assurance of the quality of the
translation, and the IASB may license other translations.
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The Conceptual Framework for Financial
Reporting
The Conceptual Framework for Financial Reporting (the Conceptual Framework) was issued by the
International Accounting Standards Board in September 2010. It superseded the Framework
for the Preparation and Presentation of Financial Statements.
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Conceptual Framework
CONTENTS
from paragraph
FOREWORD
THE CONCEPTUAL FRAMEWORK FOR FINANCIAL
REPORTING
INTRODUCTION
Purpose and status
Scope
CHAPTERS
1 The objective of general purpose financial reporting
OB1
2 The reporting entity [to be added]
3 Qualitative characteristics of useful financial information
4 The Framework (1989): the remaining text
FOR THE ACCOMPANYING DOCUMENTS LISTED BELOW, SEE PART B OF THIS
EDITION
APPROVAL BY THE BOARD OF THE CONCEPTUAL FRAMEWORK 2010
BASIS FOR CONCLUSIONS ON CHAPTERS 1 AND 3
TABLE OF CONCORDANCE
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4.1
Conceptual Framework
Foreword
The International Accounting Standards Board is currently in the process of updating its
conceptual framework. This conceptual framework project is conducted in phases.
As a chapter is finalised, the relevant paragraphs in the Framework for the Preparation and
Presentation of Financial Statements that was published in 1989 will be replaced. When the
conceptual framework project is completed, the Board will have a complete, comprehensive
and single document called the Conceptual Framework for Financial Reporting.
This version of the Conceptual Framework includes the first two chapters the Board published
as a result of its first phase of the conceptual framework project—Chapter 1 The objective of
general purpose financial reporting and Chapter 3 Qualitative characteristics of useful financial
information. Chapter 2 will deal with the reporting entity concept. The Board published an
exposure draft on this topic in March 2010 with a comment period that ended on 16 July
2010. Chapter 4 contains the remaining text of the Framework (1989). The table of
concordance, at the end of this publication, shows how the contents of the Framework (1989)
and the Conceptual Framework (2010) correspond.
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Conceptual Framework
The Introduction has been carried forward from the Framework (1989). This will be
updated when the IASB considers the purpose of the Conceptual Framework. Until then, the
purpose and the status of the Conceptual Framework are the same as before.
Introduction
Financial statements are prepared and presented for external users by many entities around
the world. Although such financial statements may appear similar from country to
country, there are differences which have probably been caused by a variety of social,
economic and legal circumstances and by different countries having in mind the needs of
different users of financial statements when setting national requirements.
These different circumstances have led to the use of a variety of definitions of the elements
of financial statements: for example, assets, liabilities, equity, income and expenses. They
have also resulted in the use of different criteria for the recognition of items in the financial
statements and in a preference for different bases of measurement. The scope of the
financial statements and the disclosures made in them have also been affected.
The International Accounting Standards Board is committed to narrowing these differences
by seeking to harmonise regulations, accounting standards and procedures relating to the
preparation and presentation of financial statements.
It believes that further
harmonisation can best be pursued by focusing on financial statements that are prepared
for the purpose of providing information that is useful in making economic decisions.
The Board believes that financial statements prepared for this purpose meet the common
needs of most users. This is because nearly all users are making economic decisions, for
example:
(a)
to decide when to buy, hold or sell an equity investment.
(b)
to assess the stewardship or accountability of management.
(c)
to assess the ability of the entity to pay and provide other benefits to its employees.
(d)
to assess the security for amounts lent to the entity.
(e)
to determine taxation policies.
(f)
to determine distributable profits and dividends.
(g)
to prepare and use national income statistics.
(h)
to regulate the activities of entities.
The Board recognises, however, that governments, in particular, may specify different or
additional requirements for their own purposes. These requirements should not, however,
affect financial statements published for the benefit of other users unless they also meet the
needs of those other users.
Financial statements are most commonly prepared in accordance with an accounting
model based on recoverable historical cost and the nominal financial capital maintenance
concept. Other models and concepts may be more appropriate in order to meet the
objective of providing information that is useful for making economic decisions although
there is at present no consensus for change. This Conceptual Framework has been developed
so that it is applicable to a range of accounting models and concepts of capital and capital
maintenance.
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Conceptual Framework
Purpose and status
This Conceptual Framework sets out the concepts that underlie the preparation and
presentation of financial statements for external users. The purpose of the Conceptual
Framework is:
(a)
to assist the Board in the development of future IFRSs and in its review of existing
IFRSs;
(b)
to assist the Board in promoting harmonisation of regulations, accounting
standards and procedures relating to the presentation of financial statements by
providing a basis for reducing the number of alternative accounting treatments
permitted by IFRSs;
(c)
to assist national standard-setting bodies in developing national standards;
(d)
to assist preparers of financial statements in applying IFRSs and in dealing with
topics that have yet to form the subject of an IFRS;
(e)
to assist auditors in forming an opinion on whether financial statements comply
with IFRSs;
(f)
to assist users of financial statements in interpreting the information contained in
financial statements prepared in compliance with IFRSs; and
(g)
to provide those who are interested in the work of the IASB with information about
its approach to the formulation of IFRSs.
This Conceptual Framework is not an IFRS and hence does not define standards for any
particular measurement or disclosure issue. Nothing in this Conceptual Framework overrides
any specific IFRS.
The Board recognises that in a limited number of cases there may be a conflict between the
Conceptual Framework and an IFRS. In those cases where there is a conflict, the requirements
of the IFRS prevail over those of the Conceptual Framework. As, however, the Board will be
guided by the Conceptual Framework in the development of future IFRSs and in its review of
existing IFRSs, the number of cases of conflict between the Conceptual Framework and IFRSs
will diminish through time.
The Conceptual Framework will be revised from time to time on the basis of the Board’s
experience of working with it.
Scope
The Conceptual Framework deals with:
(a)
the objective of financial reporting;
(b)
the qualitative characteristics of useful financial information;
(c)
the definition, recognition and measurement of the elements from which financial
statements are constructed; and
(d)
concepts of capital and capital maintenance.
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Conceptual Framework
CONTENTS
from paragraph
CHAPTER 1: THE OBJECTIVE OF GENERAL PURPOSE
FINANCIAL REPORTING
INTRODUCTION
OB1
OBJECTIVE, USEFULNESS AND LIMITATIONS OF GENERAL PURPOSE
FINANCIAL REPORTING
OB2
INFORMATION ABOUT A REPORTING ENTITY’S ECONOMIC RESOURCES,
CLAIMS AGAINST THE ENTITY AND CHANGES IN RESOURCES AND CLAIMS
OB12
Economic resources and claims
OB13
Changes in economic resources and claims
OB15
Financial performance reflected by accrual accounting
OB17
Financial performance reflected by past cash flows
Changes in economic resources and claims not resulting from financial
performance
OB20
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OB21
Conceptual Framework
Chapter 1: The objective of general purpose financial reporting
Introduction
OB1
The objective of general purpose financial reporting forms the foundation of the
Conceptual Framework. Other aspects of the Conceptual Framework—a reporting
entity concept, the qualitative characteristics of, and the constraint on, useful
financial information, elements of financial statements, recognition,
measurement, presentation and disclosure—flow logically from the objective.
Objective, usefulness and limitations of general purpose
financial reporting
OB2
The objective of general purpose financial reporting1 is to provide financial
information about the reporting entity that is useful to existing and potential
investors, lenders and other creditors in making decisions about providing
resources to the entity. Those decisions involve buying, selling or holding equity
and debt instruments, and providing or settling loans and other forms of credit.
OB3
Decisions by existing and potential investors about buying, selling or holding
equity and debt instruments depend on the returns that they expect from an
investment in those instruments, for example dividends, principal and interest
payments or market price increases. Similarly, decisions by existing and
potential lenders and other creditors about providing or settling loans and other
forms of credit depend on the principal and interest payments or other returns
that they expect. Investors’, lenders’ and other creditors’ expectations about
returns depend on their assessment of the amount, timing and uncertainty of
(the prospects for) future net cash inflows to the entity. Consequently, existing
and potential investors, lenders and other creditors need information to help
them assess the prospects for future net cash inflows to an entity.
OB4
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 how efficiently and effectively the
entity’s management and governing board2 have discharged their
responsibilities to use the entity’s resources. Examples of such responsibilities
include protecting the entity’s resources from unfavourable effects of economic
factors such as price and technological changes and ensuring that the entity
complies with applicable laws, regulations and contractual provisions.
Information about management’s discharge of its responsibilities is also useful
for decisions by existing investors, lenders and other creditors who have the
right to vote on or otherwise influence management’s actions.
OB5
Many existing and potential investors, lenders and other creditors cannot
require reporting entities to provide information directly to them and must rely
1
Throughout this Conceptual Framework, the terms financial reports and financial reporting refer to general
purpose financial reports and general purpose financial reporting unless specifically indicated otherwise.
2
Throughout this Conceptual Framework, the term management refers to management and the governing
board of an entity unless specifically indicated otherwise.
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Conceptual Framework
on general purpose financial reports for much of the financial information they
need. Consequently, they are the primary users to whom general purpose
financial reports are directed.
OB6
However, general purpose financial reports do not and cannot provide all of the
information that existing and potential investors, lenders and other creditors
need. Those users need to consider pertinent information from other sources,
for example, general economic conditions and expectations, political events and
political climate, and industry and company outlooks.
OB7
General purpose financial reports are not designed to show the value of a
reporting entity; but they provide information to help existing and potential
investors, lenders and other creditors to estimate the value of the reporting
entity.
OB8
Individual primary users have different, and possibly conflicting, information
needs and desires. The Board, in developing financial reporting standards, will
seek to provide the information set that will meet the needs of the maximum
number of primary users. However, focusing on common information needs
does not prevent the reporting entity from including additional information
that is most useful to a particular subset of primary users.
OB9
The management of a reporting entity is also interested in financial information
about the entity. However, management need not rely on general purpose
financial reports because it is able to obtain the financial information it needs
internally.
OB10
Other parties, such as regulators and members of the public other than
investors, lenders and other creditors, may also find general purpose financial
reports useful. However, those reports are not primarily directed to these other
groups.
OB11
To a large extent, financial reports are based on estimates, judgements and
models rather than exact depictions. The Conceptual Framework establishes the
concepts that underlie those estimates, judgements and models. The concepts
are the goal towards which the Board and preparers of financial reports strive.
As with most goals, the Conceptual Framework’s vision of ideal financial reporting
is unlikely to be achieved in full, at least not in the short term, because it takes
time to understand, accept and implement new ways of analysing transactions
and other events. Nevertheless, establishing a goal towards which to strive is
essential if financial reporting is to evolve so as to improve its usefulness.
Information about a reporting entity’s economic resources,
claims against the entity and changes in resources and claims
OB12
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General purpose financial reports provide information about the financial
position of a reporting entity, which is information about the entity’s economic
resources and the claims against the reporting entity. Financial reports also
provide information about the effects of transactions and other events that
change a reporting entity’s economic resources and claims. Both types of
information provide useful input for decisions about providing resources to an
entity.
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Conceptual Framework
Economic resources and claims
OB13
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. 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.
OB14
Different types of economic resources affect a user’s assessment of the reporting
entity’s prospects for future cash flows differently. Some future cash flows
result directly from existing economic resources, such as accounts receivable.
Other cash flows result from using several resources in combination to produce
and market goods or services to customers. Although those cash flows cannot be
identified with individual economic resources (or claims), users of financial
reports need to know the nature and amount of the resources available for use
in a reporting entity’s operations.
Changes in economic resources and claims
OB15
Changes in a reporting entity’s economic resources and claims result from that
entity’s financial performance (see paragraphs OB17–OB20) and from other
events or transactions such as issuing debt or equity instruments (see
paragraph OB21). To properly assess the prospects for future cash flows from the
reporting entity, users need to be able to distinguish between both of these
changes.
OB16
Information about a reporting entity’s financial performance helps users to
understand the return that the entity has produced on its economic resources.
Information about the return the entity has produced provides an indication of
how well management has discharged its responsibilities to make efficient and
effective use of the reporting entity’s resources. Information about the
variability and components of that return is also important, especially in
assessing the uncertainty of future cash flows. Information about a reporting
entity’s past financial performance and how its management discharged its
responsibilities is usually helpful in predicting the entity’s future returns on its
economic resources.
Financial performance reflected by accrual accounting
OB17
Accrual accounting depicts the effects of transactions and other events and
circumstances on a reporting entity’s economic resources and claims in the
periods in which those effects occur, even if the resulting cash receipts and
payments occur in a different period. This is important because information
about a reporting entity’s economic resources and claims and changes in its
economic resources and claims during a period provides a better basis for
assessing the entity’s past and future performance than information solely
about cash receipts and payments during that period.
OB18
Information about a reporting entity’s financial performance during a period,
reflected by changes in its economic resources and claims other than by
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Conceptual Framework
obtaining additional resources directly from investors and creditors (see
paragraph OB21), is useful in assessing the entity’s past and future ability to
generate net cash inflows. That information indicates the extent to which the
reporting entity has increased its available economic resources, and thus its
capacity for generating net cash inflows through its operations rather than by
obtaining additional resources directly from investors and creditors.
OB19
Information about a reporting entity’s financial performance during a period
may also indicate the extent to which events such as changes in market prices or
interest rates have increased or decreased the entity’s economic resources and
claims, thereby affecting the entity’s ability to generate net cash inflows.
Financial performance reflected by past cash flows
OB20
Information about a reporting entity’s cash flows during a period also helps
users to assess the entity’s ability to generate future net cash inflows. It
indicates how the reporting entity obtains and spends cash, including
information about its borrowing and repayment of debt, cash dividends or other
cash distributions to investors, and other factors that may affect the entity’s
liquidity or solvency. Information about cash flows helps users understand a
reporting entity’s operations, evaluate its financing and investing activities,
assess its liquidity or solvency and interpret other information about financial
performance.
Changes in economic resources and claims not resulting from
financial performance
OB21
A30
A reporting entity’s economic resources and claims may also change for reasons
other than financial performance, such as issuing additional ownership shares.
Information about this type of change is necessary to give users a complete
understanding of why the reporting entity’s economic resources and claims
changed and the implications of those changes for its future financial
performance.
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CHAPTER 2: THE REPORTING ENTITY
[to be added]
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CONTENTS
from paragraph
CHAPTER 3: QUALITATIVE CHARACTERISTICS OF USEFUL
FINANCIAL INFORMATION
INTRODUCTION
QC1
QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL INFORMATION
QC4
Fundamental qualitative characteristics
QC5
Relevance
QC6
Faithful representation
Applying the fundamental qualitative characteristics
Enhancing qualitative characteristics
QC12
QC17
QC19
Comparability
QC20
Verifiability
QC26
Timeliness
QC29
Understandability
Applying the enhancing characteristics
QC30
QC33
THE COST CONSTRAINT ON USEFUL FINANCIAL REPORTING
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Conceptual Framework
Chapter 3: Qualitative characteristics of useful financial
information
Introduction
QC1
The qualitative characteristics of useful financial information discussed in this
chapter identify the types of information that are likely to be most useful to the
existing and potential investors, lenders and other creditors for making
decisions about the reporting entity on the basis of information in its financial
report (financial information).
QC2
Financial reports provide information about the reporting entity’s economic
resources, claims against the reporting entity and the effects of transactions and
other events and conditions that change those resources and claims. (This
information is referred to in the Conceptual Framework as information about the
economic phenomena.) Some financial reports also include explanatory
material about management’s expectations and strategies for the reporting
entity, and other types of forward-looking information.
QC3
The qualitative characteristics of useful financial information3 apply to financial
information provided in financial statements, as well as to financial information
provided in other ways. Cost, which is a pervasive constraint on the reporting
entity’s ability to provide useful financial information, applies similarly.
However, the considerations in applying the qualitative characteristics and the
cost constraint may be different for different types of information. For example,
applying them to forward-looking information may be different from applying
them to information about existing economic resources and claims and to
changes in those resources and claims.
Qualitative characteristics of useful financial information
QC4
If financial information is to be useful, it must be relevant and faithfully
represent what it purports to represent. The usefulness of financial information
is enhanced if it is comparable, verifiable, timely and understandable.
Fundamental qualitative characteristics
QC5
The
fundamental
qualitative
characteristics
are
relevance
and
faithful
representation.
Relevance
QC6
Relevant financial information is capable of making a difference in the decisions
made by users. Information may be capable of making a difference in a decision
even if some users choose not to take advantage of it or are already aware of it
from other sources.
QC7
Financial information is capable of making a difference in decisions if it has
predictive value, confirmatory value or both.
3
Throughout this Conceptual Framework, the terms qualitative characteristics and constraint refer to the
qualitative characteristics of, and the constraint on, useful financial information.
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QC8
Financial information has predictive value if it can be used as an input to
processes employed by users to predict future outcomes. Financial information
need not be a prediction or forecast to have predictive value. Financial
information with predictive value is employed by users in making their own
predictions.
QC9
Financial information has confirmatory value if it provides feedback about
(confirms or changes) previous evaluations.
QC10
The predictive value and confirmatory value of financial information are
interrelated. Information that has predictive value often also has confirmatory
value. For example, revenue information for the current year, which can be
used as the basis for predicting revenues in future years, can also be compared
with revenue predictions for the current year that were made in past years. The
results of those comparisons can help a user to correct and improve the
processes that were used to make those previous predictions.
Materiality
QC11
Information is material if omitting it or misstating it could influence decisions
that users make on the basis of financial information about a specific reporting
entity. In other words, 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,
the Board cannot specify a uniform quantitative threshold for materiality or
predetermine what could be material in a particular situation.
Faithful representation
QC12
Financial reports represent economic phenomena in words and numbers. To be
useful, financial information must not only represent relevant phenomena, but
it must also faithfully represent the phenomena that it purports to represent.
To be a perfectly faithful representation, a depiction would have three
characteristics. It would be complete, neutral and free from error. Of course,
perfection is seldom, if ever, achievable. The Board’s objective is to maximise
those qualities to the extent possible.
QC13
A complete depiction includes all information necessary for a user to
understand the phenomenon being depicted, including all necessary
descriptions and explanations. For example, a complete depiction of a group of
assets would include, at a minimum, a description of the nature of the assets in
the group, a numerical depiction of all of the assets in the group, and a
description of what the numerical depiction represents (for example, original
cost, adjusted cost or fair value). For some items, a complete depiction may also
entail explanations of significant facts about the quality and nature of the items,
factors and circumstances that might affect their quality and nature, and the
process used to determine the numerical depiction.
QC14
A neutral depiction is without bias in the selection or presentation of financial
information. A neutral depiction is not slanted, weighted, emphasised,
de-emphasised or otherwise manipulated to increase the probability that
financial information will be received favourably or unfavourably by users.
Neutral information does not mean information with no purpose or no
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influence on behaviour. On the contrary, relevant financial information is, by
definition, capable of making a difference in users’ decisions.
QC15
Faithful representation does not mean accurate in all respects. Free from error
means there are no errors or omissions in the description of the phenomenon,
and the process used to produce the reported information has been selected and
applied with no errors in the process. In this context, free from error does not
mean perfectly accurate in all respects. For example, an estimate of an
unobservable price or value cannot be determined to be accurate or inaccurate.
However, a representation of that estimate can be faithful if the amount is
described clearly and accurately as being an estimate, the nature and limitations
of the estimating process are explained, and no errors have been made in
selecting and applying an appropriate process for developing the estimate.
QC16
A faithful representation, by itself, does not necessarily result in useful
information. For example, a reporting entity may receive property, plant and
equipment through a government grant. Obviously, reporting that an entity
acquired an asset at no cost would faithfully represent its cost, but that
information would probably not be very useful. A slightly more subtle example
is an estimate of the amount by which an asset’s carrying amount should be
adjusted to reflect an impairment in the asset’s value. That estimate can be a
faithful representation if the reporting entity has properly applied an
appropriate process, properly described the estimate and explained any
uncertainties that significantly affect the estimate. However, if the level of
uncertainty in such an estimate is sufficiently large, that estimate will not be
particularly useful. In other words, the relevance of the asset being faithfully
represented is questionable. If there is no alternative representation that is
more faithful, that estimate may provide the best available information.
Applying the fundamental qualitative characteristics
QC17
Information must be both relevant and faithfully represented if it is to be useful.
Neither a faithful representation of an irrelevant phenomenon nor an unfaithful
representation of a relevant phenomenon helps users make good decisions.
QC18
The most efficient and effective process for applying the fundamental
qualitative characteristics would usually be as follows (subject to the effects of
enhancing characteristics and the cost constraint, which are not considered in
this example). First, identify an economic phenomenon that has the potential to
be useful to users of the reporting entity’s financial information. Second,
identify the type of information about that phenomenon that would be most
relevant if it is available and can be faithfully represented. Third, determine
whether that information is available and can be faithfully represented. If so,
the process of satisfying the fundamental qualitative characteristics ends at that
point. If not, the process is repeated with the next most relevant type of
information.
Enhancing qualitative characteristics
QC19
Comparability, verifiability, timeliness and understandability are qualitative
characteristics that enhance the usefulness of information that is relevant and
faithfully represented. The enhancing qualitative characteristics may also help
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determine which of two ways should be used to depict a phenomenon if both are
considered equally relevant and faithfully represented.
Comparability
QC20
Users’ decisions involve choosing between alternatives, for example, selling or
holding an investment, or investing in one reporting entity or another.
Consequently, information about a reporting entity is more useful if it can be
compared with similar information about other entities and with similar
information about the same entity for another period or another date.
QC21
Comparability is the qualitative characteristic that enables users to identify and
understand similarities in, and differences among, items. Unlike the other
qualitative characteristics, comparability does not relate to a single item. A
comparison requires at least two items.
QC22
Consistency, although related to comparability, is not the same. Consistency
refers to the use of the same methods for the same items, either from period to
period within a reporting entity or in a single period across entities.
Comparability is the goal; consistency helps to achieve that goal.
QC23
Comparability is not uniformity. For information to be comparable, like things
must look alike and different things must look different. Comparability of
financial information is not enhanced by making unlike things look alike any
more than it is enhanced by making like things look different.
QC24
Some degree of comparability is likely to be attained by satisfying the
fundamental qualitative characteristics. A faithful representation of a relevant
economic phenomenon should naturally possess some degree of comparability
with a faithful representation of a similar relevant economic phenomenon by
another reporting entity.
QC25
Although a single economic phenomenon can be faithfully represented in
multiple ways, permitting alternative accounting methods for the same
economic phenomenon diminishes comparability.
Verifiability
QC26
Verifiability helps assure users that information faithfully represents the
economic phenomena it purports to represent. Verifiability means that
different knowledgeable and independent observers could reach consensus,
although not necessarily complete agreement, that a particular depiction is a
faithful representation. Quantified information need not be a single point
estimate to be verifiable. A range of possible amounts and the related
probabilities can also be verified.
QC27
Verification can be direct or indirect. Direct verification means verifying an
amount or other representation through direct observation, for example, by
counting cash. Indirect verification means checking the inputs to a model,
formula or other technique and recalculating the outputs using the same
methodology. An example is verifying the carrying amount of inventory by
checking the inputs (quantities and costs) and recalculating the ending
inventory using the same cost flow assumption (for example, using the first-in,
first-out method).
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QC28
It may not be possible to verify some explanations and forward-looking financial
information until a future period, if at all. To help users decide whether they
want to use that information, it would normally be necessary to disclose the
underlying assumptions, the methods of compiling the information and other
factors and circumstances that support the information.
Timeliness
QC29
Timeliness means having information available to decision-makers in time to be
capable of influencing their decisions. Generally, the older the information is
the less useful it is. However, some information may continue to be timely long
after the end of a reporting period because, for example, some users may need to
identify and assess trends.
Understandability
QC30
Classifying, characterising and presenting information clearly and concisely
makes it understandable.
QC31
Some phenomena are inherently complex and cannot be made easy to
understand. Excluding information about those phenomena from financial
reports might make the information in those financial reports easier to
understand. However, those reports would be incomplete and therefore
potentially misleading.
QC32
Financial reports are prepared for users who have a reasonable knowledge of
business and economic activities and who review and analyse the information
diligently. At times, even well-informed and diligent users may need to seek the
aid of an adviser to understand information about complex economic
phenomena.
Applying the enhancing qualitative characteristics
QC33
Enhancing qualitative characteristics should be maximised to the extent
possible. However, the enhancing qualitative characteristics, either individually
or as a group, cannot make information useful if that information is irrelevant
or not faithfully represented.
QC34
Applying the enhancing qualitative characteristics is an iterative process that
does not follow a prescribed order. Sometimes, one enhancing qualitative
characteristic may have to be diminished to maximise another qualitative
characteristic. For example, a temporary reduction in comparability as a result
of prospectively applying a new financial reporting standard may be worthwhile
to improve relevance or faithful representation in the longer term. Appropriate
disclosures may partially compensate for non-comparability.
The cost constraint on useful financial reporting
QC35
Cost is a pervasive constraint on the information that can be provided by
financial reporting. Reporting financial information imposes costs, and it is
important that those costs are justified by the benefits of reporting that
information. There are several types of costs and benefits to consider.
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QC36
Providers of financial information expend most of the effort involved in
collecting, processing, verifying and disseminating financial information, but
users ultimately bear those costs in the form of reduced returns. Users of
financial information also incur costs of analysing and interpreting the
information provided. If needed information is not provided, users incur
additional costs to obtain that information elsewhere or to estimate it.
QC37
Reporting financial information that is relevant and faithfully represents what
it purports to represent helps users to make decisions with more confidence.
This results in more efficient functioning of capital markets and a lower cost of
capital for the economy as a whole. An individual investor, lender or other
creditor also receives benefits by making more informed decisions. However, it
is not possible for general purpose financial reports to provide all the
information that every user finds relevant.
QC38
In applying the cost constraint, the Board assesses whether the benefits of
reporting particular information are likely to justify the costs incurred to
provide and use that information. When applying the cost constraint in
developing a proposed financial reporting standard, the Board seeks
information from providers of financial information, users, auditors, academics
and others about the expected nature and quantity of the benefits and costs of
that standard. In most situations, assessments are based on a combination of
quantitative and qualitative information.
QC39
Because of the inherent subjectivity, different individuals’ assessments of the
costs and benefits of reporting particular items of financial information will
vary. Therefore, the Board seeks to consider costs and benefits in relation to
financial reporting generally, and not just in relation to individual reporting
entities. That does not mean that assessments of costs and benefits always
justify the same reporting requirements for all entities. Differences may be
appropriate because of different sizes of entities, different ways of raising capital
(publicly or privately), different users’ needs or other factors.
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CONTENTS
from paragraph
CHAPTER 4: THE FRAMEWORK (1989): THE REMAINING
TEXT
UNDERLYING ASSUMPTION
4.1
Going concern
4.1
THE ELEMENTS OF FINANCIAL STATEMENTS
4.2
Financial position
4.4
Assets
4.8
Liabilities
4.15
Equity
4.20
Performance
4.24
Income
4.29
Expenses
4.33
Capital maintenance adjustments
4.36
RECOGNITION OF THE ELEMENTS OF FINANCIAL STATEMENTS
4.37
The probability of future economic benefit
4.40
Reliability of measurement
4.41
Recognition of assets
4.44
Recognition of liabilities
4.46
Recognition of income
4.47
Recognition of expenses
4.49
MEASUREMENT OF THE ELEMENTS OF FINANCIAL STATEMENTS
4.54
CONCEPTS OF CAPITAL AND CAPITAL MAINTENANCE
4.57
Concepts of capital
4.57
Concepts of capital maintenance and the determination of profit
4.59
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Chapter 4: The Framework (1989): the remaining text
The remaining text of the Framework for the Preparation and Presentation of Financial
Statements (1989) has not been amended to reflect changes made by IAS 1 Presentation of
Financial Statements (as revised in 2007).
The remaining text will also be updated when the Board has considered the elements of financial
statements and their measurement bases.
Underlying assumption
Going concern
4.1
The financial statements are normally prepared on the assumption that an
entity is a going concern and will continue in operation for the foreseeable
future. Hence, it is assumed that the entity has neither the intention nor the
need to liquidate or curtail materially the scale of its operations; if such an
intention or need exists, the financial statements may have to be prepared on a
different basis and, if so, the basis used is disclosed.
The elements of financial statements
4.2
Financial statements portray the financial effects of transactions and other
events by grouping them into broad classes according to their economic
characteristics. These broad classes are termed the elements of financial
statements. The elements directly related to the measurement of financial
position in the balance sheet are assets, liabilities and equity. The elements
directly related to the measurement of performance in the income statement are
income and expenses. The statement of changes in financial position usually
reflects income statement elements and changes in balance sheet elements;
accordingly, this Conceptual Framework identifies no elements that are unique to
this statement.
4.3
The presentation of these elements in the balance sheet and the income
statement involves a process of sub-classification. For example, assets and
liabilities may be classified by their nature or function in the business of the
entity in order to display information in the manner most useful to users for
purposes of making economic decisions.
Financial position
4.4
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The elements directly related to the measurement of financial position are
assets, liabilities and equity. These are defined as follows:
(a)
An asset is 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.
(b)
A liability is a present obligation of the entity arising from past events,
the settlement of which is expected to result in an outflow from the
entity of resources embodying economic benefits.
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(c)
Equity is the residual interest in the assets of the entity after deducting
all its liabilities.
4.5
The definitions of an asset and a liability identify their essential features but do
not attempt to specify the criteria that need to be met before they are recognised
in the balance sheet. Thus, the definitions embrace items that are not
recognised as assets or liabilities in the balance sheet because they do not satisfy
the criteria for recognition discussed in paragraphs 4.37–4.53. In particular, the
expectation that future economic benefits will flow to or from an entity must be
sufficiently certain to meet the probability criterion in paragraph 4.38 before an
asset or liability is recognised.
4.6
In assessing whether an item meets the definition of an asset, liability or equity,
attention needs to be given to its underlying substance and economic reality and
not merely its legal form. Thus, for example, in the case of finance leases, the
substance and economic reality are that the lessee acquires the economic
benefits of the use of the leased asset for the major part of its useful life in
return for entering into an obligation to pay for that right an amount
approximating to the fair value of the asset and the related finance charge.
Hence, the finance lease gives rise to items that satisfy the definition of an asset
and a liability and are recognised as such in the lessee’s balance sheet.
4.7
Balance sheets drawn up in accordance with current IFRSs may include items
that do not satisfy the definitions of an asset or liability and are not shown as
part of equity. The definitions set out in paragraph 4.4 will, however, underlie
future reviews of existing IFRSs and the formulation of further IFRSs.
Assets
4.8
The future economic benefit embodied in an asset is the potential to contribute,
directly or indirectly, to the flow of cash and cash equivalents to the entity. The
potential may be a productive one that is part of the operating activities of the
entity. It may also take the form of convertibility into cash or cash equivalents
or a capability to reduce cash outflows, such as when an alternative
manufacturing process lowers the costs of production.
4.9
An entity usually employs its assets to produce goods or services capable of
satisfying the wants or needs of customers; because these goods or services can
satisfy these wants or needs, customers are prepared to pay for them and hence
contribute to the cash flow of the entity. Cash itself renders a service to the
entity because of its command over other resources.
4.10
The future economic benefits embodied in an asset may flow to the entity in a
number of ways. For example, an asset may be:
(a)
used singly or in combination with other assets in the production of
goods or services to be sold by the entity;
(b)
exchanged for other assets;
(c)
used to settle a liability; or
(d)
distributed to the owners of the entity.
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4.11
Many assets, for example, property, plant and equipment, have a physical form.
However, physical form is not essential to the existence of an asset; hence
patents and copyrights, for example, are assets if future economic benefits are
expected to flow from them to the entity and if they are controlled by the entity.
4.12
Many assets, for example, receivables and property, are associated with legal
rights, including the right of ownership. In determining the existence of an
asset, the right of ownership is not essential; thus, for example, property held on
a lease is an asset if the entity controls the benefits which are expected to flow
from the property. Although the capacity of an entity to control benefits is
usually the result of legal rights, an item may nonetheless satisfy the definition
of an asset even when there is no legal control. For example, know-how
obtained from a development activity may meet the definition of an asset when,
by keeping that know-how secret, an entity controls the benefits that are
expected to flow from it.
4.13
The assets of an entity result from past transactions or other past events.
Entities normally obtain assets by purchasing or producing them, but other
transactions or events may generate assets; examples include property received
by an entity from government as part of a programme to encourage economic
growth in an area and the discovery of mineral deposits. Transactions or events
expected to occur in the future do not in themselves give rise to assets; hence,
for example, an intention to purchase inventory does not, of itself, meet the
definition of an asset.
4.14
There is a close association between incurring expenditure and generating assets
but the two do not necessarily coincide. Hence, when an entity incurs
expenditure, this may provide evidence that future economic benefits were
sought but is not conclusive proof that an item satisfying the definition of an
asset has been obtained. Similarly the absence of a related expenditure does not
preclude an item from satisfying the definition of an asset and thus becoming a
candidate for recognition in the balance sheet; for example, items that have
been donated to the entity may satisfy the definition of an asset.
Liabilities
4.15
An essential characteristic of a liability is that the entity has a present
obligation. An obligation is a duty or responsibility to act or perform in a
certain way. Obligations may be legally enforceable as a consequence of a
binding contract or statutory requirement. This is normally the case, for
example, with amounts payable for goods and services received. Obligations
also arise, however, from normal business practice, custom and a desire to
maintain good business relations or act in an equitable manner. If, for example,
an entity decides as a matter of policy to rectify faults in its products even when
these become apparent after the warranty period has expired, the amounts that
are expected to be expended in respect of goods already sold are liabilities.
4.16
A distinction needs to be drawn between a present obligation and a future
commitment. A decision by the management of an entity to acquire assets in
the future does not, of itself, give rise to a present obligation. An obligation
normally arises only when the asset is delivered or the entity enters into an
irrevocable agreement to acquire the asset. In the latter case, the irrevocable
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nature of the agreement means that the economic consequences of failing to
honour the obligation, for example, because of the existence of a substantial
penalty, leave the entity with little, if any, discretion to avoid the outflow of
resources to another party.
4.17
The settlement of a present obligation usually involves the entity giving up
resources embodying economic benefits in order to satisfy the claim of the other
party. Settlement of a present obligation may occur in a number of ways, for
example, by:
(a)
payment of cash;
(b)
transfer of other assets;
(c)
provision of services;
(d)
replacement of that obligation with another obligation; or
(e)
conversion of the obligation to equity.
An obligation may also be extinguished by other means, such as a creditor
waiving or forfeiting its rights.
4.18
Liabilities result from past transactions or other past events. Thus, for example,
the acquisition of goods and the use of services give rise to trade payables (unless
paid for in advance or on delivery) and the receipt of a bank loan results in an
obligation to repay the loan. An entity may also recognise future rebates based
on annual purchases by customers as liabilities; in this case, the sale of the goods
in the past is the transaction that gives rise to the liability.
4.19
Some liabilities can be measured only by using a substantial degree of
estimation. Some entities describe these liabilities as provisions. In some
countries, such provisions are not regarded as liabilities because the concept of a
liability is defined narrowly so as to include only amounts that can be
established without the need to make estimates. The definition of a liability in
paragraph 4.4 follows a broader approach. Thus, when a provision involves a
present obligation and satisfies the rest of the definition, it is a liability even if
the amount has to be estimated. Examples include provisions for payments to
be made under existing warranties and provisions to cover pension obligations.
Equity
4.20
Although equity is defined in paragraph 4.4 as a residual, it may be sub-classified
in the balance sheet. For example, in a corporate entity, funds contributed by
shareholders, retained earnings, reserves representing appropriations of
retained earnings and reserves representing capital maintenance adjustments
may be shown separately. Such classifications can be relevant to the
decision-making needs of the users of financial statements when they indicate
legal or other restrictions on the ability of the entity to distribute or otherwise
apply its equity. They may also reflect the fact that parties with ownership
interests in an entity have differing rights in relation to the receipt of dividends
or the repayment of contributed equity.
4.21
The creation of reserves is sometimes required by statute or other law in order to
give the entity and its creditors an added measure of protection from the effects
of losses. Other reserves may be established if national tax law grants
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exemptions from, or reductions in, taxation liabilities when transfers to such
reserves are made. The existence and size of these legal, statutory and tax
reserves is information that can be relevant to the decision-making needs of
users. Transfers to such reserves are appropriations of retained earnings rather
than expenses.
4.22
The amount at which equity is shown in the balance sheet is dependent on the
measurement of assets and liabilities. Normally, the aggregate amount of equity
only by coincidence corresponds with the aggregate market value of the shares
of the entity or the sum that could be raised by disposing of either the net assets
on a piecemeal basis or the entity as a whole on a going concern basis.
4.23
Commercial, industrial and business activities are often undertaken by means of
entities such as sole proprietorships, partnerships and trusts and various types
of government business undertakings. The legal and regulatory framework for
such entities is often different from that applying to corporate entities. For
example, there may be few, if any, restrictions on the distribution to owners or
other beneficiaries of amounts included in equity. Nevertheless, the definition
of equity and the other aspects of this Conceptual Framework that deal with equity
are appropriate for such entities.
Performance
4.24
Profit is frequently used as a measure of performance or as the basis for other
measures, such as return on investment or earnings per share. The elements
directly related to the measurement of profit are income and expenses. The
recognition and measurement of income and expenses, and hence profit,
depends in part on the concepts of capital and capital maintenance used by the
entity in preparing its financial statements. These concepts are discussed in
paragraphs 4.57–4.65.
4.25
The elements of income and expenses are defined as follows:
(a)
Income is increases in economic benefits during the accounting period
in the form of inflows or enhancements of assets or decreases of
liabilities that result in increases in equity, other than those relating to
contributions from equity participants.
(b)
Expenses are 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.
4.26
The definitions of income and expenses identify their essential features but do
not attempt to specify the criteria that would need to be met before they are
recognised in the income statement. Criteria for the recognition of income and
expenses are discussed in paragraphs 4.37–4.53.
4.27
Income and expenses may be presented in the income statement in different
ways so as to provide information that is relevant for economic decision-making.
For example, it is common practice to distinguish between those items of
income and expenses that arise in the course of the ordinary activities of the
entity and those that do not. This distinction is made on the basis that the
source of an item is relevant in evaluating the ability of the entity to generate
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cash and cash equivalents in the future; for example, incidental activities such
as the disposal of a long-term investment are unlikely to recur on a regular basis.
When distinguishing between items in this way consideration needs to be given
to the nature of the entity and its operations. Items that arise from the ordinary
activities of one entity may be unusual in respect of another.
4.28
Distinguishing between items of income and expense and combining them in
different ways also permits several measures of entity performance to be
displayed. These have differing degrees of inclusiveness. For example, the
income statement could display gross margin, profit or loss from ordinary
activities before taxation, profit or loss from ordinary activities after taxation,
and profit or loss.
Income
4.29
The definition of income encompasses both revenue and gains. Revenue arises
in the course of the ordinary activities of an entity and is referred to by a variety
of different names including sales, fees, interest, dividends, royalties and rent.
4.30
Gains represent other items that meet the definition of income and may, or may
not, arise in the course of the ordinary activities of an entity. Gains represent
increases in economic benefits and as such are no different in nature from
revenue. Hence, they are not regarded as constituting a separate element in this
Conceptual Framework.
4.31
Gains include, for example, those arising on the disposal of non-current assets.
The definition of income also includes unrealised gains; for example, those
arising on the revaluation of marketable securities and those resulting from
increases in the carrying amount of long-term assets. When gains are recognised
in the income statement, they are usually displayed separately because
knowledge of them is useful for the purpose of making economic decisions.
Gains are often reported net of related expenses.
4.32
Various kinds of assets may be received or enhanced by income; examples
include cash, receivables and goods and services received in exchange for goods
and services supplied. Income may also result from the settlement of liabilities.
For example, an entity may provide goods and services to a lender in settlement
of an obligation to repay an outstanding loan.
4.33
The definition of expenses encompasses losses as well as those expenses that
arise in the course of the ordinary activities of the entity. Expenses that arise in
the course of the ordinary activities of the entity include, for example, cost of
sales, wages and depreciation. They usually take the form of an outflow or
depletion of assets such as cash and cash equivalents, inventory, property, plant
and equipment.
4.34
Losses represent other items that meet the definition of expenses and may, or
may not, arise in the course of the ordinary activities of the entity. Losses
represent decreases in economic benefits and as such they are no different in
nature from other expenses. Hence, they are not regarded as a separate element
in this Conceptual Framework.
Expenses
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Conceptual Framework
4.35
Losses include, for example, those resulting from disasters such as fire and flood,
as well as those arising on the disposal of non-current assets. The definition of
expenses also includes unrealised losses, for example, those arising from the
effects of increases in the rate of exchange for a foreign currency in respect of
the borrowings of an entity in that currency. When losses are recognised in the
income statement, they are usually displayed separately because knowledge of
them is useful for the purpose of making economic decisions. Losses are often
reported net of related income.
Capital maintenance adjustments
4.36
The revaluation or restatement of assets and liabilities gives rise to increases or
decreases in equity. While these increases or decreases meet the definition of
income and expenses, they are not included in the income statement under
certain concepts of capital maintenance. Instead these items are included in
equity as capital maintenance adjustments or revaluation reserves. These
concepts of capital maintenance are discussed in paragraphs 4.57–4.65 of this
Conceptual Framework.
Recognition of the elements of financial statements
4.37
Recognition is the process of incorporating in the balance sheet or income
statement an item that meets the definition of an element and satisfies the
criteria for recognition set out in paragraph 4.38. It involves the depiction of the
item in words and by a monetary amount and the inclusion of that amount in
the balance sheet or income statement totals. Items that satisfy the recognition
criteria should be recognised in the balance sheet or income statement. The
failure to recognise such items is not rectified by disclosure of the accounting
policies used nor by notes or explanatory material.
4.38
An item that meets the definition of an element should be recognised if:
4.39
(a)
it is probable that any future economic benefit associated with the item
will flow to or from the entity; and
(b)
the item has a cost or value that can be measured with reliability.4
In assessing whether an item meets these criteria and therefore qualifies for
recognition in the financial statements, regard needs to be given to the
materiality considerations discussed in Chapter 3 Qualitative characteristics of useful
financial information. The interrelationship between the elements means that an
item that meets the definition and recognition criteria for a particular element,
for example, an asset, automatically requires the recognition of another
element, for example, income or a liability.
The probability of future economic benefit
4.40
4
The concept of probability is used in the recognition criteria to refer to the
degree of uncertainty that the future economic benefits associated with the item
will flow to or from the entity. The concept is in keeping with the uncertainty
that characterises the environment in which an entity operates. Assessments of
Information is reliable when it is complete, neutral and free from error.
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Conceptual Framework
the degree of uncertainty attaching to the flow of future economic benefits are
made on the basis of the evidence available when the financial statements are
prepared. For example, when it is probable that a receivable owed to an entity
will be paid, it is then justifiable, in the absence of any evidence to the contrary,
to recognise the receivable as an asset. For a large population of receivables,
however, some degree of non-payment is normally considered probable; hence
an expense representing the expected reduction in economic benefits is
recognised.
Reliability of measurement
4.41
The second criterion for the recognition of an item is that it possesses a cost or
value that can be measured with reliability. 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. When,
however, a reasonable estimate cannot be made the item is not recognised in the
balance sheet or income statement. For example, the expected proceeds from a
lawsuit may meet the definitions of both an asset and income as well as the
probability criterion for recognition; however, if it is not possible for the claim
to be measured reliably, it should not be recognised as an asset or as income; the
existence of the claim, however, would be disclosed in the notes, explanatory
material or supplementary schedules.
4.42
An item that, at a particular point in time, fails to meet the recognition criteria
in paragraph 4.38 may qualify for recognition at a later date as a result of
subsequent circumstances or events.
4.43
An item that possesses the essential characteristics of an element but fails to
meet the criteria for recognition may nonetheless warrant disclosure in the
notes, explanatory material or in supplementary schedules. This is appropriate
when knowledge of the item is considered to be relevant to the evaluation of the
financial position, performance and changes in financial position of an entity by
the users of financial statements.
Recognition of assets
4.44
An asset is recognised in the balance sheet when it is probable that the future
economic benefits will flow to the entity and the asset has a cost or value that
can be measured reliably.
4.45
An asset is not recognised in the balance sheet when expenditure has been
incurred for which it is considered improbable that economic benefits will flow
to the entity beyond the current accounting period. Instead such a transaction
results in the recognition of an expense in the income statement. This
treatment does not imply either that the intention of management in incurring
expenditure was other than to generate future economic benefits for the entity
or that management was misguided. The only implication is that the degree of
certainty that economic benefits will flow to the entity beyond the current
accounting period is insufficient to warrant the recognition of an asset.
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Conceptual Framework
Recognition of liabilities
4.46
A liability is recognised in the balance sheet when it is probable that an outflow
of resources embodying economic benefits will result from the settlement of a
present obligation and the amount at which the settlement will take place can
be measured reliably. In practice, obligations under contracts that are equally
proportionately unperformed (for example, liabilities for inventory ordered but
not yet received) are generally not recognised as liabilities in the financial
statements. However, such obligations may meet the definition of liabilities
and, provided the recognition criteria are met in the particular circumstances,
may qualify for recognition. In such circumstances, recognition of liabilities
entails recognition of related assets or expenses.
Recognition of income
4.47
Income is recognised in the income statement when an increase in future
economic benefits related to an increase in an asset or a decrease of a liability
has arisen that can be measured reliably. This means, in effect, that recognition
of income occurs simultaneously with the recognition of increases in assets or
decreases in liabilities (for example, the net increase in assets arising on a sale of
goods or services or the decrease in liabilities arising from the waiver of a debt
payable).
4.48
The procedures normally adopted in practice for recognising income, for
example, the requirement that revenue should be earned, are applications of the
recognition criteria in this Conceptual Framework. Such procedures are generally
directed at restricting the recognition as income to those items that can be
measured reliably and have a sufficient degree of certainty.
Recognition of expenses
4.49
Expenses are recognised in the income statement when a decrease in future
economic benefits related to a decrease in an asset or an increase of a liability
has arisen that can be measured reliably. This means, in effect, that recognition
of expenses occurs simultaneously with the recognition of an increase in
liabilities or a decrease in assets (for example, the accrual of employee
entitlements or the depreciation of equipment).
4.50
Expenses are recognised in the income statement on the basis of a direct
association between the costs incurred and the earning of specific items of
income. This process, commonly referred to as the matching of costs with
revenues, involves the simultaneous or combined recognition of revenues and
expenses that result directly and jointly from the same transactions or other
events; for example, the various components of expense making up the cost of
goods sold are recognised at the same time as the income derived from the sale
of the goods. However, the application of the matching concept under this
Conceptual Framework does not allow the recognition of items in the balance sheet
which do not meet the definition of assets or liabilities.
4.51
When economic benefits are expected to arise over several accounting periods
and the association with income can only be broadly or indirectly determined,
expenses are recognised in the income statement on the basis of systematic and
rational allocation procedures. This is often necessary in recognising the
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expenses associated with the using up of assets such as property, plant,
equipment, goodwill, patents and trademarks; in such cases the expense is
referred to as depreciation or amortisation. These allocation procedures are
intended to recognise expenses in the accounting periods in which the
economic benefits associated with these items are consumed or expire.
4.52
An expense is recognised immediately in the income statement when an
expenditure produces no future economic benefits or when, and to the extent
that, future economic benefits do not qualify, or cease to qualify, for recognition
in the balance sheet as an asset.
4.53
An expense is also recognised in the income statement in those cases when a
liability is incurred without the recognition of an asset, as when a liability under
a product warranty arises.
Measurement of the elements of financial statements
4.54
Measurement is the process of determining the monetary amounts at which the
elements of the financial statements are to be recognised and carried in the
balance sheet and income statement. This involves the selection of the
particular basis of measurement.
4.55
A number of different measurement bases are employed to different degrees and
in varying combinations in financial statements. They include the following:
(a)
Historical cost. Assets are recorded at the amount of cash or cash
equivalents paid or the fair value of the consideration given to acquire
them at the time of their acquisition. Liabilities are recorded at the
amount of proceeds received in exchange for the obligation, or in some
circumstances (for example, income taxes), at the amounts of cash or
cash equivalents expected to be paid to satisfy the liability in the normal
course of business.
(b)
Current cost. Assets are carried at the amount of cash or cash equivalents
that would have to be paid if the same or an equivalent asset was
acquired currently. Liabilities are carried at the undiscounted amount of
cash or cash equivalents that would be required to settle the obligation
currently.
(c)
Realisable (settlement) value. Assets are carried at the amount of cash or
cash equivalents that could currently be obtained by selling the asset in
an orderly disposal. Liabilities are carried at their settlement values; that
is, the undiscounted amounts of cash or cash equivalents expected to be
paid to satisfy the liabilities in the normal course of business.
(d)
Present value. Assets are carried at the present discounted value of the
future net cash inflows that the item is expected to generate in the
normal course of business. Liabilities are carried at the present
discounted value of the future net cash outflows that are expected to be
required to settle the liabilities in the normal course of business.
4.56
The measurement basis most commonly adopted by entities in preparing their
financial statements is historical cost. This is usually combined with other
measurement bases. For example, inventories are usually carried at the lower of
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Conceptual Framework
cost and net realisable value, marketable securities may be carried at market
value and pension liabilities are carried at their present value. Furthermore,
some entities use the current cost basis as a response to the inability of the
historical cost accounting model to deal with the effects of changing prices of
non-monetary assets.
Concepts of capital and capital maintenance
Concepts of capital
4.57
A financial concept of capital is adopted by most entities in preparing their
financial statements. Under a financial concept of capital, such as invested
money or invested purchasing power, capital is synonymous with the net assets
or equity of the entity. Under a physical concept of capital, such as operating
capability, capital is regarded as the productive capacity of the entity based on,
for example, units of output per day.
4.58
The selection of the appropriate concept of capital by an entity should be based
on the needs of the users of its financial statements. Thus, a financial concept of
capital should be adopted if the users of financial statements are primarily
concerned with the maintenance of nominal invested capital or the purchasing
power of invested capital. If, however, the main concern of users is with the
operating capability of the entity, a physical concept of capital should be used.
The concept chosen indicates the goal to be attained in determining profit, even
though there may be some measurement difficulties in making the concept
operational.
Concepts of capital maintenance and the determination
of profit
4.59
4.60
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The concepts of capital in paragraph 4.57 give rise to the following concepts of
capital maintenance:
(a)
Financial capital maintenance. Under this concept a profit is earned only if
the financial (or money) amount of the net assets at the end of the period
exceeds the financial (or money) amount of net assets at the beginning of
the period, after excluding any distributions to, and contributions from,
owners during the period. Financial capital maintenance can be
measured in either nominal monetary units or units of constant
purchasing power.
(b)
Physical capital maintenance. Under this concept a profit is earned only if
the physical productive capacity (or operating capability) of the entity (or
the resources or funds needed to achieve that capacity) at the end of the
period exceeds the physical productive capacity at the beginning of the
period, after excluding any distributions to, and contributions from,
owners during the period.
The concept of capital maintenance is concerned with how an entity defines the
capital that it seeks to maintain. It provides the linkage between the concepts of
capital and the concepts of profit because it provides the point of reference by
which profit is measured; it is a prerequisite for distinguishing between an
entity’s return on capital and its return of capital; only inflows of assets in
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Conceptual Framework
excess of amounts needed to maintain capital may be regarded as profit and
therefore as a return on capital. Hence, profit is the residual amount that
remains after expenses (including capital maintenance adjustments, where
appropriate) have been deducted from income. If expenses exceed income the
residual amount is a loss.
4.61
The physical capital maintenance concept requires the adoption of the current
cost basis of measurement. The financial capital maintenance concept, however,
does not require the use of a particular basis of measurement. Selection of the
basis under this concept is dependent on the type of financial capital that the
entity is seeking to maintain.
4.62
The principal difference between the two concepts of capital maintenance is the
treatment of the effects of changes in the prices of assets and liabilities of the
entity. In general terms, an entity has maintained its capital if it has as much
capital at the end of the period as it had at the beginning of the period. Any
amount over and above that required to maintain the capital at the beginning of
the period is profit.
4.63
Under the concept of financial capital maintenance where capital is defined in
terms of nominal monetary units, profit represents the increase in nominal
money capital over the period. Thus, increases in the prices of assets held over
the period, conventionally referred to as holding gains, are, conceptually,
profits. They may not be recognised as such, however, until the assets are
disposed of in an exchange transaction. When the concept of financial capital
maintenance is defined in terms of constant purchasing power units, profit
represents the increase in invested purchasing power over the period. Thus,
only that part of the increase in the prices of assets that exceeds the increase in
the general level of prices is regarded as profit. The rest of the increase is treated
as a capital maintenance adjustment and, hence, as part of equity.
4.64
Under the concept of physical capital maintenance when capital is defined in
terms of the physical productive capacity, profit represents the increase in that
capital over the period. All price changes affecting the assets and liabilities of
the entity are viewed as changes in the measurement of the physical productive
capacity of the entity; hence, they are treated as capital maintenance
adjustments that are part of equity and not as profit.
4.65
The selection of the measurement bases and concept of capital maintenance will
determine the accounting model used in the preparation of the financial
statements. Different accounting models exhibit different degrees of relevance
and reliability and, as in other areas, management must seek a balance between
relevance and reliability. This Conceptual Framework is applicable to a range of
accounting models and provides guidance on preparing and presenting the
financial statements constructed under the chosen model. At the present time,
it is not the intention of the Board to prescribe a particular model other than in
exceptional circumstances, such as for those entities reporting in the currency
of a hyperinflationary economy. This intention will, however, be reviewed in
the light of world developments.
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IFRS 1
IFRS 1
First-time Adoption of International
Financial Reporting Standards
In April 2001 the International Accounting Standards Board (the Board) adopted SIC-8
First-time Application of IASs as the Primary Basis of Accounting, which had been issued by the
Standing Interpretations Committee of the International Accounting Standards Committee
in July 1998.
In June 2003 the Board issued IFRS 1 First-time Adoption of International Financial Reporting
Standards to replace SIC-8. IAS 1 Presentation of Financial Statements (as revised in 2007)
amended the terminology used throughout IFRS, including IFRS 1.
The Board restructured IFRS 1 in November 2008. In December 2010 the Board amended
IFRS 1 to reflect that a first-time adopter would restate past transactions from the date of
transition to IFRS instead of at 1 January 2004.
Since it was issued in 2003, IFRS 1 was amended to accommodate first-time adoption
requirements resulting from new or amended Standards. IFRS 1 was amended by
Government Loans (issued March 2012), which added an exception to the retrospective
application of IFRS to require that first time adopters apply the requirements in IFRS 9
Financial Instruments and IAS 20 Accounting for Government Grants and Disclosure of Government
Assistance prospectively to government loans existing at the date of transition to IFRS.
Other Standards have made minor amendments to IFRS 1. They include Limited Exemption
from Comparative IFRS 7 Disclosures for First-time Adopters (Amendments to IFRS 1) (issued
January 2010), Improvements to IFRSs (issued May 2010), Disclosures—Transfers of Financial Assets
(Amendments to IFRS 7) (issued October 2010), Severe Hyperinflation and Removal of Fixed Dates
for First-time Adopters (Amendments to IFRS 1) (issued December 2010), IFRS 10 Consolidated
Financial Statements (issued May 2011), IFRS 11 Joint Arrangements (issued May 2011), IFRS 13
Fair Value Measurement (issued May 2011), IAS 19 Employee Benefits (issued June 2011),
Presentation of Items of Other Comprehensive Income (Amendments to IAS 1) (issued June 2011),
IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine (issued October 2011), Annual
Improvements to IFRSs 2009–2011 Cycle (issued May 2012), Consolidated Financial Statements, Joint
Arrangements and Disclosure of Interests in Other Entities: Transition Guidance (Amendments to
IFRS 10, IFRS 11 and IFRS 12) (issued June 2012), Investment Entities (Amendments to IFRS 10,
IFRS 12 and IAS 27) (issued October 2012), IFRS 9 Financial Instruments (Hedge Accounting and
amendments to IFRS 9, IFRS 7 and IAS 39) (issued November 2013), IFRS 14 Regulatory Deferral
Accounts (issued January 2014), Accounting for Acquisitions of Interests in Joint Operations
(Amendments to IFRS 11) (issued May 2014), IFRS 15 Revenue from Contracts with Customers
(issued May 2014), IFRS 9 Financial Instruments (issued July 2014), Equity Method in Separate
Financial Statements (Amendments to IAS 27) (issued August 2014), Annual Improvements to IFRSs
2012–2014 Cycle (issued September 2014), IFRS 16 Leases (issued January 2016), Annual
Improvements to IFRS® Standards 2014–2016 Cycle (issued December 2016) and
IFRIC® Interpretation 22 Foreign Currency Transactions and Advance Consideration (issued
December 2016).
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IFRS 1
CONTENTS
from paragraph
INTERNATIONAL FINANCIAL REPORTING STANDARD 1
FIRST-TIME ADOPTION OF INTERNATIONAL FINANCIAL
REPORTING STANDARDS
OBJECTIVE
1
SCOPE
2
RECOGNITION AND MEASUREMENT
6
Opening IFRS statement of financial position
6
Accounting policies
7
Exceptions to the retrospective application of other IFRSs
13
Exemptions from other IFRSs
18
PRESENTATION AND DISCLOSURE
20
Comparative information
21
Explanation of transition to IFRSs
23
EFFECTIVE DATE
34
WITHDRAWAL OF IFRS 1 (ISSUED 2003)
40
APPENDICES
A Defined terms
B Exceptions to the retrospective application of other IFRSs
C Exemptions for business combinations
D Exemptions from other IFRSs
E Short-term exemptions from IFRSs
FOR THE ACCOMPANYING DOCUMENTS LISTED BELOW, SEE PART B OF THIS
EDITION
APPROVAL BY THE BOARD OF IFRS 1 ISSUED IN NOVEMBER 2008
APPROVAL BY THE BOARD OF AMENDMENTS TO IFRS 1:
Additional Exemptions For First-time Adopters issued in July 2009
Limited Exemption from Comparative IFRS 7 Disclosures for First-time
Adopters issued in January 2010
Severe Hyperinflation and Removal of Fixed Dates for First-time Adopters
issued in December 2010
Government Loans issued in March 2012
BASIS FOR CONCLUSIONS
APPENDIX
Amendments to Basis for Conclusions on other IFRSs
IMPLEMENTATION GUIDANCE
TABLE OF CONCORDANCE
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IFRS 1
International Financial Reporting Standard 1 First-time Adoption of International Financial
Reporting Standards (IFRS 1) is set out in paragraphs 1–40 and Appendices A–E. All the
paragraphs have equal authority. Paragraphs in bold type state the main principles.
Terms defined in Appendix A are in italics the first time they appear in the IFRS.
Definitions of other terms are given in the Glossary for International Financial Reporting
Standards. IFRS 1 should be read in the context of its objective and the Basis for
Conclusions, the Preface to International Financial Reporting Standards and the Conceptual
Framework for Financial Reporting. IAS 8 Accounting Policies, Changes in Accounting Estimates and
Errors provides a basis for selecting and applying accounting policies in the absence of
explicit guidance.
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IFRS 1
International Financial Reporting Standard 1
First-time Adoption of International Financial Reporting
Standards
Objective
1
The objective of this IFRS is to ensure that an entity’s first IFRS financial statements,
and its interim financial reports for part of the period covered by those financial
statements, contain high quality information that:
(a)
(b)
is transparent for users and comparable over all periods presented;
provides a suitable starting point for accounting in accordance with
International Financial Reporting Standards (IFRSs); and
(c)
can be generated at a cost that does not exceed the benefits.
Scope
2
3
An entity shall apply this IFRS in:
(a)
its first IFRS financial statements; and
(b)
each interim financial report, if any, that it presents in accordance with
IAS 34 Interim Financial Reporting for part of the period covered by its first
IFRS financial statements.
An entity’s first IFRS financial statements are the first annual financial
statements in which the entity adopts IFRSs, by an explicit and unreserved
statement in those financial statements of compliance with IFRSs. Financial
statements in accordance with IFRSs are an entity’s first IFRS financial
statements if, for example, the entity:
(a)
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presented its most recent previous financial statements:
(i)
in accordance with national requirements that are not consistent
with IFRSs in all respects;
(ii)
in conformity with IFRSs in all respects, except that the financial
statements did not contain an explicit and unreserved statement
that they complied with IFRSs;
(iii)
containing an explicit statement of compliance with some, but
not all, IFRSs;
(iv)
in accordance with national requirements inconsistent with
IFRSs, using some individual IFRSs to account for items for which
national requirements did not exist; or
(v)
in accordance with national requirements, with a reconciliation
of some amounts to the amounts determined in accordance with
IFRSs;
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IFRS 1
4
(b)
prepared financial statements in accordance with IFRSs for internal use
only, without making them available to the entity’s owners or any other
external users;
(c)
prepared a reporting package in accordance with IFRSs for consolidation
purposes without preparing a complete set of financial statements as
defined in IAS 1 Presentation of Financial Statements (as revised in 2007); or
(d)
did not present financial statements for previous periods.
This IFRS applies when an entity first adopts IFRSs. It does not apply when, for
example, an entity:
(a)
stops presenting financial statements in accordance with national
requirements, having previously presented them as well as another set of
financial statements that contained an explicit and unreserved
statement of compliance with IFRSs;
(b)
presented financial statements in the previous year in accordance with
national requirements and those financial statements contained an
explicit and unreserved statement of compliance with IFRSs; or
(c)
presented financial statements in the previous year that contained an
explicit and unreserved statement of compliance with IFRSs, even if the
auditors qualified their audit report on those financial statements.
4A
Notwithstanding the requirements in paragraphs 2 and 3, an entity that has
applied IFRSs in a previous reporting period, but whose most recent previous
annual financial statements did not contain an explicit and unreserved
statement of compliance with IFRSs, must either apply this IFRS or else apply
IFRSs retrospectively in accordance with IAS 8 Accounting Policies, Changes in
Accounting Estimates and Errors as if the entity had never stopped applying IFRSs.
4B
When an entity does not elect to apply this IFRS in accordance with
paragraph 4A, the entity shall nevertheless apply the disclosure requirements in
paragraphs 23A–23B of IFRS 1, in addition to the disclosure requirements in
IAS 8.
5
This IFRS does not apply to changes in accounting policies made by an entity
that already applies IFRSs. Such changes are the subject of:
(a)
requirements on changes in accounting policies in IAS 8 Accounting
Policies, Changes in Accounting Estimates and Errors; and
(b)
specific transitional requirements in other IFRSs.
Recognition and measurement
Opening IFRS statement of financial position
6
An entity shall prepare and present an opening IFRS statement of financial position at
the date of transition to IFRSs. This is the starting point for its accounting in
accordance with IFRSs.
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IFRS 1
Accounting policies
7
An entity shall use the same accounting policies in its opening IFRS
statement of financial position and throughout all periods presented in
its first IFRS financial statements. Those accounting policies shall
comply with each IFRS effective at the end of its first IFRS reporting
period, except as specified in paragraphs 13–19 and Appendices B–E.
8
An entity shall not apply different versions of IFRSs that were effective at earlier
dates. An entity may apply a new IFRS that is not yet mandatory if that IFRS
permits early application.
Example: Consistent application of latest version of IFRSs
Background
The end of entity A’s first IFRS reporting period is 31 December 20X5.
Entity A decides to present comparative information in those financial
statements for one year only (see paragraph 21). Therefore, its date of
transition to IFRSs is the beginning of business on 1 January 20X4 (or,
equivalently, close of business on 31 December 20X3). Entity A presented
financial statements in accordance with its previous GAAP annually to
31 December each year up to, and including, 31 December 20X4.
Application of requirements
Entity A is required to apply the IFRSs effective for periods ending on
31 December 20X5 in:
(a)
preparing and presenting its opening IFRS statement of financial
position at 1 January 20X4; and
(b)
preparing and presenting its statement of financial position for
31 December 20X5 (including comparative amounts for 20X4),
statement of comprehensive income, statement of changes in equity
and statement of cash flows for the year to 31 December 20X5
(including comparative amounts for 20X4) and disclosures (including
comparative information for 20X4).
If a new IFRS is not yet mandatory but permits early application, entity A is
permitted, but not required, to apply that IFRS in its first IFRS financial
statements.
9
The transitional provisions in other IFRSs apply to changes in accounting
policies made by an entity that already uses IFRSs; they do not apply to a first-time
adopter’s transition to IFRSs, except as specified in Appendices B–E.
10
Except as described in paragraphs 13–19 and Appendices B–E, an entity shall, in
its opening IFRS statement of financial position:
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(a)
recognise all assets and liabilities whose recognition is required by IFRSs;
(b)
not recognise items as assets or liabilities if IFRSs do not permit such
recognition;
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IFRS 1
(c)
reclassify items that it recognised in accordance with previous GAAP as
one type of asset, liability or component of equity, but are a different
type of asset, liability or component of equity in accordance with IFRSs;
and
(d)
apply IFRSs in measuring all recognised assets and liabilities.
11
The accounting policies that an entity uses in its opening IFRS statement of
financial position may differ from those that it used for the same date using its
previous GAAP. The resulting adjustments arise from events and transactions
before the date of transition to IFRSs. Therefore, an entity shall recognise those
adjustments directly in retained earnings (or, if appropriate, another category of
equity) at the date of transition to IFRSs.
12
This IFRS establishes two categories of exceptions to the principle that an
entity’s opening IFRS statement of financial position shall comply with each
IFRS:
(a)
paragraphs 14–17 and Appendix B prohibit retrospective application of
some aspects of other IFRSs.
(b)
Appendices C–E grant exemptions from some requirements of other
IFRSs.
Exceptions to the retrospective application of other
IFRSs
13
This IFRS prohibits retrospective application of some aspects of other IFRSs.
These exceptions are set out in paragraphs 14–17 and Appendix B.
Estimates
14
An entity’s estimates in accordance with IFRSs at the date of transition to
IFRSs shall be consistent with estimates made for the same date in
accordance with previous GAAP (after adjustments to reflect any
difference in accounting policies), unless there is objective evidence that
those estimates were in error.
15
An entity may receive information after the date of transition to IFRSs about
estimates that it had made under previous GAAP. In accordance with
paragraph 14, an entity shall treat the receipt of that information in the same
way as non-adjusting events after the reporting period in accordance with IAS 10
Events after the Reporting Period. For example, assume that an entity’s date of
transition to IFRSs is 1 January 20X4 and new information on 15 July 20X4
requires the revision of an estimate made in accordance with previous GAAP at
31 December 20X3. The entity shall not reflect that new information in its
opening IFRS statement of financial position (unless the estimates need
adjustment for any differences in accounting policies or there is objective
evidence that the estimates were in error). Instead, the entity shall reflect that
new information in profit or loss (or, if appropriate, other comprehensive
income) for the year ended 31 December 20X4.
16
An entity may need to make estimates in accordance with IFRSs at the date of
transition to IFRSs that were not required at that date under previous GAAP. To
achieve consistency with IAS 10, those estimates in accordance with IFRSs shall
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reflect conditions that existed at the date of transition to IFRSs. In particular,
estimates at the date of transition to IFRSs of market prices, interest rates or
foreign exchange rates shall reflect market conditions at that date.
17
Paragraphs 14–16 apply to the opening IFRS statement of financial position.
They also apply to a comparative period presented in an entity’s first IFRS
financial statements, in which case the references to the date of transition to
IFRSs are replaced by references to the end of that comparative period.
Exemptions from other IFRSs
18
An entity may elect to use one or more of the exemptions contained in
Appendices C–E. An entity shall not apply these exemptions by analogy to other
items.
19
[Deleted]
Presentation and disclosure
20
This IFRS does not provide exemptions from the presentation and disclosure
requirements in other IFRSs.
Comparative information
21
An entity’s first IFRS financial statements shall include at least three statements
of financial position, two statements of profit or loss and other comprehensive
income, two separate statements of profit or loss (if presented), two statements
of cash flows and two statements of changes in equity and related notes,
including comparative information for all statements presented.
Non-IFRS comparative information and historical summaries
22
Some entities present historical summaries of selected data for periods before
the first period for which they present full comparative information in
accordance with IFRSs. This IFRS does not require such summaries to comply
with the recognition and measurement requirements of IFRSs. Furthermore,
some entities present comparative information in accordance with previous
GAAP as well as the comparative information required by IAS 1. In any financial
statements containing historical summaries or comparative information in
accordance with previous GAAP, an entity shall:
(a)
label the previous GAAP information prominently as not being prepared
in accordance with IFRSs; and
(b)
disclose the nature of the main adjustments that would make it comply
with IFRSs. An entity need not quantify those adjustments.
Explanation of transition to IFRSs
23
An entity shall explain how the transition from previous GAAP to IFRSs
affected its reported financial position, financial performance and cash
flows.
23A
An entity that has applied IFRSs in a previous period, as described in
paragraph 4A, shall disclose:
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23B
(a)
the reason it stopped applying IFRSs; and
(b)
the reason it is resuming the application of IFRSs.
When an entity, in accordance with paragraph 4A, does not elect to apply IFRS 1,
the entity shall explain the reasons for electing to apply IFRSs as if it had never
stopped applying IFRSs.
Reconciliations
24
To comply with paragraph 23, an entity’s first IFRS financial statements shall
include:
(a)
reconciliations of its equity reported in accordance with previous GAAP
to its equity in accordance with IFRSs for both of the following dates:
(i)
the date of transition to IFRSs; and
(ii)
the end of the latest period presented in the entity’s most recent
annual financial statements in accordance with previous GAAP.
(b)
a reconciliation to its total comprehensive income in accordance with
IFRSs for the latest period in the entity’s most recent annual financial
statements. The starting point for that reconciliation shall be total
comprehensive income in accordance with previous GAAP for the same
period or, if an entity did not report such a total, profit or loss under
previous GAAP.
(c)
if the entity recognised or reversed any impairment losses for the first
time in preparing its opening IFRS statement of financial position, the
disclosures that IAS 36 Impairment of Assets would have required if the
entity had recognised those impairment losses or reversals in the period
beginning with the date of transition to IFRSs.
25
The reconciliations required by paragraph 24(a) and (b) shall give sufficient
detail to enable users to understand the material adjustments to the statement
of financial position and statement of comprehensive income. If an entity
presented a statement of cash flows under its previous GAAP, it shall also
explain the material adjustments to the statement of cash flows.
26
If an entity becomes aware of errors made under previous GAAP, the
reconciliations required by paragraph 24(a) and (b) shall distinguish the
correction of those errors from changes in accounting policies.
27
IAS 8 does not apply to the changes in accounting policies an entity makes when
it adopts IFRSs or to changes in those policies until after it presents its first IFRS
financial statements. Therefore, IAS 8’s requirements about changes in
accounting policies do not apply in an entity’s first IFRS financial statements.
27A
If during the period covered by its first IFRS financial statements an entity
changes its accounting policies or its use of the exemptions contained in this
IFRS, it shall explain the changes between its first IFRS interim financial report
and its first IFRS financial statements, in accordance with paragraph 23, and it
shall update the reconciliations required by paragraph 24(a) and (b).
28
If an entity did not present financial statements for previous periods, its first
IFRS financial statements shall disclose that fact.
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Designation of financial assets or financial liabilities
29
An entity is permitted to designate a previously recognised financial asset as a
financial asset measured at fair value through profit or loss in accordance with
paragraph D19A. The entity shall disclose the fair value of financial assets so
designated at the date of designation and their classification and carrying
amount in the previous financial statements.
29A
An entity is permitted to designate a previously recognised financial liability as a
financial liability at fair value through profit or loss in accordance with
paragraph D19. The entity shall disclose the fair value of financial liabilities so
designated at the date of designation and their classification and carrying
amount in the previous financial statements.
Use of fair value as deemed cost
30
If an entity uses fair value in its opening IFRS statement of financial position as
deemed cost for an item of property, plant and equipment, an investment
property, an intangible asset or a right-of-use asset (see paragraphs D5 and D7),
the entity’s first IFRS financial statements shall disclose, for each line item in the
opening IFRS statement of financial position:
(a)
the aggregate of those fair values; and
(b)
the aggregate adjustment to the carrying amounts reported under
previous GAAP.
Use of deemed cost for investments in subsidiaries, joint ventures
and associates
31
Similarly, if an entity uses a deemed cost in its opening IFRS statement of
financial position for an investment in a subsidiary, joint venture or associate in
its separate financial statements (see paragraph D15), the entity’s first IFRS
separate financial statements shall disclose:
(a)
the aggregate deemed cost of those investments for which deemed cost is
their previous GAAP carrying amount;
(b)
the aggregate deemed cost of those investments for which deemed cost is
fair value; and
(c)
the aggregate adjustment to the carrying amounts reported under
previous GAAP.
Use of deemed cost for oil and gas assets
31A
If an entity uses the exemption in paragraph D8A(b) for oil and gas assets, it shall
disclose that fact and the basis on which carrying amounts determined under
previous GAAP were allocated.
Use of deemed cost for operations subject to rate regulation
31B
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If an entity uses the exemption in paragraph D8B for operations subject to rate
regulation, it shall disclose that fact and the basis on which carrying amounts
were determined under previous GAAP.
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Use of deemed cost after severe hyperinflation
31C
If an entity elects to measure assets and liabilities at fair value and to use that
fair value as the deemed cost in its opening IFRS statement of financial position
because of severe hyperinflation (see paragraphs D26–D30), the entity’s first IFRS
financial statements shall disclose an explanation of how, and why, the entity
had, and then ceased to have, a functional currency that has both of the
following characteristics:
(a)
a reliable general price index is not available to all entities with
transactions and balances in the currency.
(b)
exchangeability between the currency and a relatively stable foreign
currency does not exist.
Interim financial reports
32
To comply with paragraph 23, if an entity presents an interim financial report in
accordance with IAS 34 for part of the period covered by its first IFRS financial
statements, the entity shall satisfy the following requirements in addition to the
requirements of IAS 34:
(a)
33
Each such interim financial report shall, if the entity presented an
interim financial report for the comparable interim period of the
immediately preceding financial year, include:
(i)
a reconciliation of its equity in accordance with previous GAAP at
the end of that comparable interim period to its equity under
IFRSs at that date; and
(ii)
a reconciliation to its total comprehensive income in accordance
with IFRSs for that comparable interim period (current and year
to date). The starting point for that reconciliation shall be total
comprehensive income in accordance with previous GAAP for
that period or, if an entity did not report such a total, profit or
loss in accordance with previous GAAP.
(b)
In addition to the reconciliations required by (a), an entity’s first interim
financial report in accordance with IAS 34 for part of the period covered
by its first IFRS financial statements shall include the reconciliations
described in paragraph 24(a) and (b) (supplemented by the details
required by paragraphs 25 and 26) or a cross-reference to another
published document that includes these reconciliations.
(c)
If an entity changes its accounting policies or its use of the exemptions
contained in this IFRS, it shall explain the changes in each such interim
financial report in accordance with paragraph 23 and update the
reconciliations required by (a) and (b).
IAS 34 requires minimum disclosures, which are based on the assumption that
users of the interim financial report also have access to the most recent annual
financial statements. However, IAS 34 also requires an entity to disclose ‘any
events or transactions that are material to an understanding of the current
interim period’. Therefore, if a first-time adopter did not, in its most recent
annual financial statements in accordance with previous GAAP, disclose
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information material to an understanding of the current interim period, its
interim financial report shall disclose that information or include a
cross-reference to another published document that includes it.
Effective date
34
An entity shall apply this IFRS if its first IFRS financial statements are for a
period beginning on or after 1 July 2009. Earlier application is permitted.
35
An entity shall apply the amendments in paragraphs D1(n) and D23 for annual
periods beginning on or after 1 July 2009. If an entity applies IAS 23 Borrowing
Costs (as revised in 2007) for an earlier period, those amendments shall be
applied for that earlier period.
36
IFRS 3 Business Combinations (as revised in 2008) amended paragraphs 19, C1 and
C4(f) and (g). If an entity applies IFRS 3 (revised 2008) for an earlier period, the
amendments shall also be applied for that earlier period.
37
IAS 27 Consolidated and Separate Financial Statements (as amended in 2008) amended
paragraphs B1 and B7. If an entity applies IAS 27 (amended 2008) for an earlier
period, the amendments shall be applied for that earlier period.
38
Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate (Amendments
to IFRS 1 and IAS 27), issued in May 2008, added paragraphs 31, D1(g), D14 and
D15. An entity shall apply those paragraphs for annual periods beginning on or
after 1 July 2009. Earlier application is permitted. If an entity applies the
paragraphs for an earlier period, it shall disclose that fact.
39
Paragraph B7 was amended by Improvements to IFRSs issued in May 2008. An
entity shall apply those amendments for annual periods beginning on or after
1 July 2009. If an entity applies IAS 27 (amended 2008) for an earlier period, the
amendments shall be applied for that earlier period.
39A
Additional Exemptions for First-time Adopters (Amendments to IFRS 1), issued in July
2009, added paragraphs 31A, D8A, D9A and D21A and amended paragraph D1(c),
(d) and (l). An entity shall apply those amendments for annual periods
beginning on or after 1 January 2010. Earlier application is permitted. If an
entity applies the amendments for an earlier period it shall disclose that fact.
39B
[Deleted]
39C
IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments added
paragraph D25. An entity shall apply that amendment when it applies IFRIC 19.
39D
[Deleted]
39E
Improvements to IFRSs issued in May 2010 added paragraphs 27A, 31B and D8B and
amended paragraphs 27, 32, D1(c) and D8. An entity shall apply those
amendments for annual periods beginning on or after 1 January 2011. Earlier
application is permitted. If an entity applies the amendments for an earlier
period it shall disclose that fact. Entities that adopted IFRSs in periods before
the effective date of IFRS 1 or applied IFRS 1 in a previous period are permitted
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to apply the amendment to paragraph D8 retrospectively in the first annual
period after the amendment is effective. An entity applying paragraph D8
retrospectively shall disclose that fact.
39F
[Deleted]
39G
[Deleted]
39H
Severe Hyperinflation and Removal of Fixed Dates for First-time Adopters (Amendments to
IFRS 1), issued in December 2010, amended paragraphs B2, D1 and D20 and
added paragraphs 31C and D26–D30. An entity shall apply those amendments
for annual periods beginning on or after 1 July 2011. Earlier application is
permitted.
39I
IFRS 10 Consolidated Financial Statements and IFRS 11 Joint Arrangements, issued in
May 2011, amended paragraphs 31, B7, C1, D1, D14 and D15 and added
paragraph D31. An entity shall apply those amendments when it applies IFRS 10
and IFRS 11.
39J
IFRS 13 Fair Value Measurement, issued in May 2011, deleted paragraph 19,
amended the definition of fair value in Appendix A and amended
paragraphs D15 and D20. An entity shall apply those amendments when it
applies IFRS 13.
39K
Presentation of Items of Other Comprehensive Income (Amendments to IAS 1), issued in
June 2011, amended paragraph 21. An entity shall apply that amendment when
it applies IAS 1 as amended in June 2011.
39L
IAS 19 Employee Benefits (as amended in June 2011) amended paragraph D1 and
deleted paragraphs D10 and D11. An entity shall apply those amendments when
it applies IAS 19 (as amended in June 2011).
39M
IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine added
paragraph D32 and amended paragraph D1. An entity shall apply that
amendment when it applies IFRIC 20.
39N
Government Loans (Amendments to IFRS 1), issued in March 2012, added
paragraphs B1(f) and B10–B12. An entity shall apply those paragraphs for
annual periods beginning on or after 1 January 2013. Earlier application is
permitted.
39O
Paragraphs B10 and B11 refer to IFRS 9. If an entity applies this IFRS but does
not yet apply IFRS 9, the references in paragraphs B10 and B11 to IFRS 9 shall be
read as references to IAS 39 Financial Instruments: Recognition and Measurement.
39P
Annual Improvements 2009–2011 Cycle, issued in May 2012, added paragraphs 4A–4B
and 23A–23B. An entity shall apply that amendment retrospectively in
accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors
for annual periods beginning on or after 1 January 2013. Earlier application is
permitted. If an entity applies that amendment for an earlier period it shall
disclose that fact.
39Q
Annual Improvements 2009–2011 Cycle, issued in May 2012, amended
paragraph D23. An entity shall apply that amendment retrospectively in
accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors
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for annual periods beginning on or after 1 January 2013. Earlier application is
permitted. If an entity applies that amendment for an earlier period it shall
disclose that fact.
39R
Annual Improvements 2009–2011 Cycle, issued in May 2012, amended paragraph 21.
An entity shall apply that amendment retrospectively in accordance with IAS 8
Accounting Policies, Changes in Accounting Estimates and Errors for annual periods
beginning on or after 1 January 2013. Earlier application is permitted. If an
entity applies that amendment for an earlier period it shall disclose that fact.
39S
Consolidated Financial Statements, Joint Arrangements and Disclosure of Interests in Other
Entities: Transition Guidance (Amendments to IFRS 10, IFRS 11 and IFRS 12), issued
in June 2012, amended paragraph D31. An entity shall apply that amendment
when it applies IFRS 11 (as amended in June 2012).
39T
Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27), issued in October
2012, amended paragraphs D16, D17 and Appendix C. An entity shall apply
those amendments for annual periods beginning on or after 1 January 2014.
Earlier application of Investment Entities is permitted. If an entity applies those
amendments earlier it shall also apply all amendments included in Investment
Entities at the same time.
39U
[Deleted]
39V
IFRS 14 Regulatory Deferral Accounts, issued in January 2014, amended
paragraph D8B. An entity shall apply that amendment for annual periods
beginning on or after 1 January 2016. Earlier application is permitted. If an
entity applies IFRS 14 for an earlier period, the amendment shall be applied for
that earlier period.
39W
Accounting for Acquisitions of Interests in Joint Operations (Amendments to IFRS 11),
issued in May 2014, amended paragraph C5. An entity shall apply that
amendment in annual periods beginning on or after 1 January 2016. If an entity
applies related amendments to IFRS 11 from Accounting for Acquisitions of Interests
in Joint Operations (Amendments to IFRS 11) in an earlier period, the amendment
to paragraph C5 shall be applied in that earlier period.
39X
IFRS 15 Revenue from Contracts with Customers, issued in May 2014, amended
paragraph D1, deleted paragraph D24 and its related heading and added
paragraphs D34–D35 and their related heading. An entity shall apply those
amendments when it applies IFRS 15.
39Y
IFRS 9 Financial Instruments, as issued in July 2014, amended paragraphs 29,
B1–B6, D1, D14, D15, D19 and D20, deleted paragraphs 39B, 39G and 39U and
added paragraphs 29A, B8–B8G, B9, D19A–D19C, D33, E1 and E2. An entity shall
apply those amendments when it applies IFRS 9.
39Z
Equity Method in Separate Financial Statements (Amendments to IAS 27), issued in
August 2014, amended paragraph D14 and added paragraph D15A. An entity
shall apply those amendments for annual periods beginning on or after
1 January 2016. Earlier application is permitted. If an entity applies those
amendments for an earlier period, it shall disclose that fact.
39AA
[Deleted]
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39AB
IFRS 16 Leases, issued in January 2016, amended paragraphs 30, C4, D1, D7, D8B
and D9, deleted paragraph D9A and added paragraphs D9B–D9E. An entity shall
apply those amendments when it applies IFRS 16.
39AC
IFRIC 22 Foreign Currency Transactions and Advance Consideration added
paragraph D36 and amended paragraph D1. An entity shall apply that
amendment when it applies IFRIC 22.
39AD
Annual Improvements to IFRS Standards 2014–2016 Cycle, issued in December 2016,
amended paragraphs 39L and 39T and deleted paragraphs 39D, 39F, 39AA and
E3–E7. An entity shall apply those amendments for annual periods beginning
on or after 1 January 2018.
Withdrawal of IFRS 1 (issued 2003)
40
This IFRS supersedes IFRS 1 (issued in 2003 and amended at May 2008).
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Appendix A
Defined terms
This appendix is an integral part of the IFRS.
date of
transition to
IFRSs
The beginning of the earliest period for which an entity presents full
comparative information under IFRSs in its first IFRS financial
statements.
deemed cost
An amount used as a surrogate for cost or depreciated cost at a given
date. Subsequent depreciation or amortisation assumes that the entity
had initially recognised the asset or liability at the given date and that
its cost was equal to the deemed cost.
fair value
Fair value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market
participants at the measurement date. (See IFRS 13.)
first IFRS
financial
statements
The first annual financial statements in which an entity adopts
International Financial Reporting Standards (IFRSs), by an explicit
and unreserved statement of compliance with IFRSs.
first IFRS
reporting
The latest reporting period covered by an entity’s first IFRS financial
statements.
period
first-time
adopter
An entity that presents its first IFRS financial statements.
International
Financial
Standards and Interpretations issued by the International Accounting
Standards Board (IASB). They comprise:
Reporting
Standards
(a)
International Financial Reporting Standards;
(IFRSs)
(b)
International Accounting Standards;
(c)
IFRIC Interpretations; and
(d)
SIC Interpretations.(a)
opening IFRS
statement of
financial
position
An entity’s statement of financial position at the date of transition to
IFRSs.
previous GAAP
The basis of accounting that a first-time adopter used immediately
before adopting IFRSs.
(a) Definition of IFRSs amended after the name changes introduced by the revised Constitution of the
IFRS Foundation in 2010.
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Appendix B
Exceptions to the retrospective application of other IFRSs
This appendix is an integral part of the IFRS.
B1
An entity shall apply the following exceptions:
(a)
derecognition of financial assets and financial liabilities (paragraphs B2
and B3);
(b)
hedge accounting (paragraphs B4–B6);
(c)
non-controlling interests (paragraph B7);
(d)
classification and measurement of financial assets (paragraphs B8–B8C);
(e)
impairment of financial assets (paragraphs B8D–B8G);
(f)
embedded derivatives (paragraph B9); and
(g)
government loans (paragraphs B10–B12).
Derecognition of financial assets and financial liabilities
B2
Except as permitted by paragraph B3, a first-time adopter shall apply the
derecognition requirements in IFRS 9 prospectively for transactions occurring
on or after the date of transition to IFRSs. For example, if a first-time adopter
derecognised non-derivative financial assets or non-derivative financial
liabilities in accordance with its previous GAAP as a result of a transaction that
occurred before the date of transition to IFRSs, it shall not recognise those assets
and liabilities in accordance with IFRSs (unless they qualify for recognition as a
result of a later transaction or event).
B3
Despite paragraph B2, an entity may apply the derecognition requirements in
IFRS 9 retrospectively from a date of the entity’s choosing, provided that the
information needed to apply IFRS 9 to financial assets and financial liabilities
derecognised as a result of past transactions was obtained at the time of initially
accounting for those transactions.
Hedge accounting
B4
B5
As required by IFRS 9, at the date of transition to IFRSs an entity shall:
(a)
measure all derivatives at fair value; and
(b)
eliminate all deferred losses and gains arising on derivatives that were
reported in accordance with previous GAAP as if they were assets or
liabilities.
An entity shall not reflect in its opening IFRS statement of financial position a
hedging relationship of a type that does not qualify for hedge accounting in
accordance with IFRS 9 (for example, many hedging relationships where the
hedging instrument is a stand-alone written option or a net written option; or
where the hedged item is a net position in a cash flow hedge for another risk
than foreign currency risk). However, if an entity designated a net position as a
hedged item in accordance with previous GAAP, it may designate as a hedged
item in accordance with IFRSs an individual item within that net position, or a
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net position if that meets the requirements in paragraph 6.6.1 of IFRS 9,
provided that it does so no later than the date of transition to IFRSs.
B6
If, before the date of transition to IFRSs, an entity had designated a transaction
as a hedge but the hedge does not meet the conditions for hedge accounting in
IFRS 9, the entity shall apply paragraphs 6.5.6 and 6.5.7 of IFRS 9 to discontinue
hedge accounting. Transactions entered into before the date of transition to
IFRSs shall not be retrospectively designated as hedges.
Non-controlling interests
B7
A first-time adopter shall apply the following requirements of IFRS 10
prospectively from the date of transition to IFRSs:
(a)
the requirement in paragraph B94 that total comprehensive income is
attributed to the owners of the parent and to the non-controlling
interests even if this results in the non-controlling interests having a
deficit balance;
(b)
the requirements in paragraphs 23 and B96 for accounting for changes
in the parent’s ownership interest in a subsidiary that do not result in a
loss of control; and
(c)
the requirements in paragraphs B97–B99 for accounting for a loss of
control over a subsidiary, and the related requirements of paragraph 8A
of IFRS 5 Non-current Assets Held for Sale and Discontinued Operations.
However, if a first-time adopter elects to apply IFRS 3 retrospectively to past
business combinations, it shall also apply IFRS 10 in accordance with
paragraph C1 of this IFRS.
Classification and measurement of financial instruments
B8
An entity shall assess whether a financial asset meets the conditions in
paragraph 4.1.2 of IFRS 9 or the conditions in paragraph 4.1.2A of IFRS 9 on the
basis of the facts and circumstances that exist at the date of transition to IFRSs.
B8A
If it is impracticable to assess a modified time value of money element in
accordance with paragraphs B4.1.9B–B4.1.9D of IFRS 9 on the basis of the facts
and circumstances that exist at the date of transition to IFRSs, an entity shall
assess the contractual cash flow characteristics of that financial asset on the
basis of the facts and circumstances that existed at the date of transition to IFRSs
without taking into account the requirements related to the modification of the
time value of money element in paragraphs B4.1.9B–B4.1.9D of IFRS 9. (In this
case, the entity shall also apply paragraph 42R of IFRS 7 but references to
‘paragraph 7.2.4 of IFRS 9’ shall be read to mean this paragraph and references
to ‘initial recognition of the financial asset’ shall be read to mean ‘at the date of
transition to IFRSs’.)
B8B
If it is impracticable to assess whether the fair value of a prepayment feature is
insignificant in accordance with paragraph B4.1.12(c) of IFRS 9 on the basis of
the facts and circumstances that exist at the date of transition to IFRSs, an entity
shall assess the contractual cash flow characteristics of that financial asset on
the basis of the facts and circumstances that existed at the date of transition to
IFRSs without taking into account the exception for prepayment features in
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paragraph B4.1.12 of IFRS 9. (In this case, the entity shall also apply
paragraph 42S of IFRS 7 but references to ‘paragraph 7.2.5 of IFRS 9’ shall be read
to mean this paragraph and references to ‘initial recognition of the financial
asset’ shall be read to mean ‘at the date of transition to IFRSs’.)
B8C
If it is impracticable (as defined in IAS 8) for an entity to apply retrospectively
the effective interest method in IFRS 9, the fair value of the financial asset or the
financial liability at the date of transition to IFRSs shall be the new gross
carrying amount of that financial asset or the new amortised cost of that
financial liability at the date of transition to IFRSs.
Impairment of financial assets
B8D
An entity shall apply the impairment requirements in Section 5.5 of IFRS 9
retrospectively subject to paragraphs 7.2.15 and 7.2.18–7.2.20 of that IFRS.
B8E
At the date of transition to IFRSs, an entity shall use reasonable and supportable
information that is available without undue cost or effort to determine the
credit risk at the date that financial instruments were initially recognised (or for
loan commitments and financial guarantee contracts the date that the entity
became a party to the irrevocable commitment in accordance with
paragraph 5.5.6 of IFRS 9) and compare that to the credit risk at the date of
transition to IFRSs (also see paragraphs B7.2.2–B7.2.3 of IFRS 9).
B8F
When determining whether there has been a significant increase in credit risk
since initial recognition, an entity may apply:
B8G
(a)
the requirements in paragraph 5.5.10 and B5.5.22–B5.5.24 of IFRS 9; and
(b)
the rebuttable presumption in paragraph 5.5.11 of IFRS 9 for contractual
payments that are more than 30 days past due if an entity will apply the
impairment requirements by identifying significant increases in credit
risk since initial recognition for those financial instruments on the basis
of past due information.
If, at the date of transition to IFRSs, determining whether there has been a
significant increase in credit risk since the initial recognition of a financial
instrument would require undue cost or effort, an entity shall recognise a loss
allowance at an amount equal to lifetime expected credit losses at each
reporting date until that financial instrument is derecognised (unless that
financial instrument is low credit risk at a reporting date, in which case
paragraph B8F(a) applies).
Embedded derivatives
B9
A first-time adopter shall assess whether an embedded derivative is required to
be separated from the host contract and accounted for as a derivative on the
basis of the conditions that existed at the later of the date it first became a party
to the contract and the date a reassessment is required by paragraph B4.3.11 of
IFRS 9.
Government loans
B10
A first-time adopter shall classify all government loans received as a financial
liability or an equity instrument in accordance with IAS 32 Financial Instruments:
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Presentation. Except as permitted by paragraph B11, a first-time adopter shall
apply the requirements in IFRS 9 Financial Instruments and IAS 20 Accounting for
Government Grants and Disclosure of Government Assistance prospectively to
government loans existing at the date of transition to IFRSs and shall not
recognise the corresponding benefit of the government loan at a below-market
rate of interest as a government grant. Consequently, if a first-time adopter did
not, under its previous GAAP, recognise and measure a government loan at a
below-market rate of interest on a basis consistent with IFRS requirements, it
shall use its previous GAAP carrying amount of the loan at the date of transition
to IFRSs as the carrying amount of the loan in the opening IFRS statement of
financial position. An entity shall apply IFRS 9 to the measurement of such
loans after the date of transition to IFRSs.
B11
Despite paragraph B10, an entity may apply the requirements in IFRS 9 and
IAS 20 retrospectively to any government loan originated before the date of
transition to IFRSs, provided that the information needed to do so had been
obtained at the time of initially accounting for that loan.
B12
The requirements and guidance in paragraphs B10 and B11 do not preclude an
entity from being able to use the exemptions described in paragraphs D19–D19D
relating to the designation of previously recognised financial instruments at fair
value through profit or loss.
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Appendix C
Exemptions for business combinations
This appendix is an integral part of the IFRS. An entity shall apply the following requirements to
business combinations that the entity recognised before the date of transition to IFRSs. This Appendix
should only be applied to business combinations within the scope of IFRS 3 Business Combinations.
C1
A first-time adopter may elect not to apply IFRS 3 retrospectively to past business
combinations (business combinations that occurred before the date of transition
to IFRSs). However, if a first-time adopter restates any business combination to
comply with IFRS 3, it shall restate all later business combinations and shall also
apply IFRS 10 from that same date. For example, if a first-time adopter elects to
restate a business combination that occurred on 30 June 20X6, it shall restate all
business combinations that occurred between 30 June 20X6 and the date of
transition to IFRSs, and it shall also apply IFRS 10 from 30 June 20X6.
C2
An entity need not apply IAS 21 The Effects of Changes in Foreign Exchange Rates
retrospectively to fair value adjustments and goodwill arising in business
combinations that occurred before the date of transition to IFRSs. If the entity
does not apply IAS 21 retrospectively to those fair value adjustments and
goodwill, it shall treat them as assets and liabilities of the entity rather than as
assets and liabilities of the acquiree. Therefore, those goodwill and fair value
adjustments either are already expressed in the entity’s functional currency or
are non-monetary foreign currency items, which are reported using the
exchange rate applied in accordance with previous GAAP.
C3
An entity may apply IAS 21 retrospectively to fair value adjustments and
goodwill arising in either:
C4
(a)
all business combinations that occurred before the date of transition to
IFRSs; or
(b)
all business combinations that the entity elects to restate to comply with
IFRS 3, as permitted by paragraph C1 above.
If a first-time adopter does not apply IFRS 3 retrospectively to a past business
combination, this has the following consequences for that business
combination:
(a)
The first-time adopter shall keep the same classification (as an
acquisition by the legal acquirer, a reverse acquisition by the legal
acquiree, or a uniting of interests) as in its previous GAAP financial
statements.
(b)
The first-time adopter shall recognise all its assets and liabilities at the
date of transition to IFRSs that were acquired or assumed in a past
business combination, other than:
(i)
some financial assets and financial liabilities derecognised in
accordance with previous GAAP (see paragraph B2); and
(ii)
assets, including goodwill, and liabilities that were not
recognised in the acquirer’s consolidated statement of financial
position in accordance with previous GAAP and also would not
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qualify for recognition in accordance with IFRSs in the separate
statement of financial position of the acquiree (see (f)–(i) below).
The first-time adopter shall recognise any resulting change by adjusting
retained earnings (or, if appropriate, another category of equity), unless
the change results from the recognition of an intangible asset that was
previously subsumed within goodwill (see (g)(i) below).
(c)
1
The first-time adopter shall exclude from its opening IFRS statement of
financial position any item recognised in accordance with previous
GAAP that does not qualify for recognition as an asset or liability under
IFRSs. The first-time adopter shall account for the resulting change as
follows:
(i)
the first-time adopter may have classified a past business
combination as an acquisition and recognised as an intangible
asset an item that does not qualify for recognition as an asset in
accordance with IAS 38 Intangible Assets. It shall reclassify that
item (and, if any, the related deferred tax and non-controlling
interests) as part of goodwill (unless it deducted goodwill directly
from equity in accordance with previous GAAP, see (g)(i) and (i)
below).
(ii)
the first-time adopter shall recognise all other resulting changes
in retained earnings.1
(d)
IFRSs require subsequent measurement of some assets and liabilities on a
basis that is not based on original cost, such as fair value. The first-time
adopter shall measure these assets and liabilities on that basis in its
opening IFRS statement of financial position, even if they were acquired
or assumed in a past business combination. It shall recognise any
resulting change in the carrying amount by adjusting retained earnings
(or, if appropriate, another category of equity), rather than goodwill.
(e)
Immediately after the business combination, the carrying amount in
accordance with previous GAAP of assets acquired and liabilities
assumed in that business combination shall be their deemed cost in
accordance with IFRSs at that date. If IFRSs require a cost-based
measurement of those assets and liabilities at a later date, that deemed
cost shall be the basis for cost-based depreciation or amortisation from
the date of the business combination.
(f)
If an asset acquired, or liability assumed, in a past business combination
was not recognised in accordance with previous GAAP, it does not have a
deemed cost of zero in the opening IFRS statement of financial position.
Instead, the acquirer shall recognise and measure it in its consolidated
statement of financial position on the basis that IFRSs would require in
the statement of financial position of the acquiree. To illustrate: if the
acquirer had not, in accordance with its previous GAAP, capitalised
Such changes include reclassifications from or to intangible assets if goodwill was not recognised in
accordance with previous GAAP as an asset. This arises if, in accordance with previous GAAP, the
entity (a) deducted goodwill directly from equity or (b) did not treat the business combination as an
acquisition.
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leases acquired in a past business combination in which the acquiree was
a lessee, it shall capitalise those leases in its consolidated financial
statements, as IFRS 16 Leases would require the acquiree to do in its IFRS
statement of financial position. Similarly, if the acquirer had not, in
accordance with its previous GAAP, recognised a contingent liability that
still exists at the date of transition to IFRSs, the acquirer shall recognise
that contingent liability at that date unless IAS 37 Provisions, Contingent
Liabilities and Contingent Assets would prohibit its recognition in the
financial statements of the acquiree. Conversely, if an asset or liability
was subsumed in goodwill in accordance with previous GAAP but would
have been recognised separately under IFRS 3, that asset or liability
remains in goodwill unless IFRSs would require its recognition in the
financial statements of the acquiree.
(g)
(h)
The carrying amount of goodwill in the opening IFRS statement of
financial position shall be its carrying amount in accordance with
previous GAAP at the date of transition to IFRSs, after the following two
adjustments:
(i)
If required by (c)(i) above, the first-time adopter shall increase the
carrying amount of goodwill when it reclassifies an item that it
recognised as an intangible asset in accordance with previous
GAAP. Similarly, if (f) above requires the first-time adopter to
recognise an intangible asset that was subsumed in recognised
goodwill in accordance with previous GAAP, the first-time
adopter shall decrease the carrying amount of goodwill
accordingly (and, if applicable, adjust deferred tax and
non-controlling interests).
(ii)
Regardless of whether there is any indication that the goodwill
may be impaired, the first-time adopter shall apply IAS 36 in
testing the goodwill for impairment at the date of transition to
IFRSs and in recognising any resulting impairment loss in
retained earnings (or, if so required by IAS 36, in revaluation
surplus). The impairment test shall be based on conditions at the
date of transition to IFRSs.
No other adjustments shall be made to the carrying amount of goodwill
at the date of transition to IFRSs. For example, the first-time adopter
shall not restate the carrying amount of goodwill:
(i)
to exclude in-process research and development acquired in that
business combination (unless the related intangible asset would
qualify for recognition in accordance with IAS 38 in the
statement of financial position of the acquiree);
(ii)
to adjust previous amortisation of goodwill;
(iii)
to reverse adjustments to goodwill that IFRS 3 would not permit,
but were made in accordance with previous GAAP because of
adjustments to assets and liabilities between the date of the
business combination and the date of transition to IFRSs.
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(i)
(j)
(k)
C5
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If the first-time adopter recognised goodwill in accordance with previous
GAAP as a deduction from equity:
(i)
it shall not recognise that goodwill in its opening IFRS statement
of financial position. Furthermore, it shall not reclassify that
goodwill to profit or loss if it disposes of the subsidiary or if the
investment in the subsidiary becomes impaired.
(ii)
adjustments resulting from the subsequent resolution of a
contingency affecting the purchase consideration shall be
recognised in retained earnings.
In accordance with its previous GAAP, the first-time adopter may not
have consolidated a subsidiary acquired in a past business combination
(for example, because the parent did not regard it as a subsidiary in
accordance with previous GAAP or did not prepare consolidated
financial statements). The first-time adopter shall adjust the carrying
amounts of the subsidiary’s assets and liabilities to the amounts that
IFRSs would require in the subsidiary’s statement of financial position.
The deemed cost of goodwill equals the difference at the date of
transition to IFRSs between:
(i)
the parent’s interest in those adjusted carrying amounts; and
(ii)
the cost in the parent’s separate financial statements of its
investment in the subsidiary.
The measurement of non-controlling interests and deferred tax follows
from the measurement of other assets and liabilities. Therefore, the
above adjustments to recognised assets and liabilities affect
non-controlling interests and deferred tax.
The exemption for past business combinations also applies to past acquisitions
of investments in associates, interests in joint ventures and interests in joint
operations in which the activity of the joint operation constitutes a business, as
defined in IFRS 3. Furthermore, the date selected for paragraph C1 applies
equally for all such acquisitions.
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Appendix D
Exemptions from other IFRSs
This appendix is an integral part of the IFRS.
D1
An entity may elect to use one or more of the following exemptions:
(a)
share-based payment transactions (paragraphs D2 and D3);
(b)
insurance contracts (paragraph D4);
(c)
deemed cost (paragraphs D5–D8B);
(d)
leases (paragraphs D9 and D9B–D9E);
(e)
[deleted]
(f)
cumulative translation differences (paragraphs D12 and D13);
(g)
investments in subsidiaries,
(paragraphs D14–D15A);
(h)
assets and liabilities of subsidiaries, associates and joint ventures
(paragraphs D16 and D17);
(i)
compound financial instruments (paragraph D18);
(j)
designation of previously recognised financial instruments (paragraphs
D19–D19C);
(k)
fair value measurement of financial assets or financial liabilities at
initial recognition (paragraph D20);
(l)
decommissioning liabilities included in the cost of property, plant and
equipment (paragraphs D21 and D21A);
(m)
financial assets or intangible assets accounted for in accordance with
IFRIC 12 Service Concession Arrangements (paragraph D22);
(n)
borrowing costs (paragraph D23);
(o)
transfers of assets from customers (paragraph D24);
(p)
extinguishing
financial
(paragraph D25);
(q)
severe hyperinflation (paragraphs D26–D30);
(r)
joint arrangements (paragraph D31);
(s)
stripping costs in
(paragraph D32);
(t)
designation of contracts to buy or sell a non-financial item
(paragraph D33);
(u)
revenue (paragraphs D34 and D35); and
(v)
foreign
currency
(paragraph D36).
the
joint
liabilities
with
production
transactions
ventures
phase
and
and
equity
of
a
advance
associates
instruments
surface
mine
consideration
An entity shall not apply these exemptions by analogy to other items.
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Share-based payment transactions
D2
A first-time adopter is encouraged, but not required, to apply IFRS 2 Share-based
Payment to equity instruments that were granted on or before 7 November 2002.
A first-time adopter is also encouraged, but not required, to apply IFRS 2 to
equity instruments that were granted after 7 November 2002 and vested before
the later of (a) the date of transition to IFRSs and (b) 1 January 2005. However, if
a first-time adopter elects to apply IFRS 2 to such equity instruments, it may do
so only if the entity has disclosed publicly the fair value of those equity
instruments, determined at the measurement date, as defined in IFRS 2. For all
grants of equity instruments to which IFRS 2 has not been applied (eg equity
instruments granted on or before 7 November 2002), a first-time adopter shall
nevertheless disclose the information required by paragraphs 44 and 45 of
IFRS 2. If a first-time adopter modifies the terms or conditions of a grant of
equity instruments to which IFRS 2 has not been applied, the entity is not
required to apply paragraphs 26–29 of IFRS 2 if the modification occurred before
the date of transition to IFRSs.
D3
A first-time adopter is encouraged, but not required, to apply IFRS 2 to liabilities
arising from share-based payment transactions that were settled before the date
of transition to IFRSs. A first-time adopter is also encouraged, but not required,
to apply IFRS 2 to liabilities that were settled before 1 January 2005. For
liabilities to which IFRS 2 is applied, a first-time adopter is not required to
restate comparative information to the extent that the information relates to a
period or date that is earlier than 7 November 2002.
Insurance contracts
D4
A first-time adopter may apply the transitional provisions in IFRS 4 Insurance
Contracts. IFRS 4 restricts changes in accounting policies for insurance contracts,
including changes made by a first-time adopter.
Deemed cost
D5
An entity may elect to measure an item of property, plant and equipment at the
date of transition to IFRSs at its fair value and use that fair value as its deemed
cost at that date.
D6
A first-time adopter may elect to use a previous GAAP revaluation of an item of
property, plant and equipment at, or before, the date of transition to IFRSs as
deemed cost at the date of the revaluation, if the revaluation was, at the date of
the revaluation, broadly comparable to:
D7
(a)
fair value; or
(b)
cost or depreciated cost in accordance with IFRSs, adjusted to reflect, for
example, changes in a general or specific price index.
The elections in paragraphs D5 and D6 are also available for:
(a)
investment property, if an entity elects to use the cost model in IAS 40
Investment Property;
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(aa)
right-of-use assets (IFRS 16 Leases); and
(b)
intangible assets that meet:
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(i)
the recognition criteria in IAS
measurement of original cost); and
38
(including
reliable
(ii)
the criteria in IAS 38 for revaluation (including the existence of
an active market).
An entity shall not use these elections for other assets or for liabilities.
D8
D8A
A first-time adopter may have established a deemed cost in accordance with
previous GAAP for some or all of its assets and liabilities by measuring them at
their fair value at one particular date because of an event such as a privatisation
or initial public offering.
(a)
If the measurement date is at or before the date of transition to IFRSs, the
entity may use such event-driven fair value measurements as deemed
cost for IFRSs at the date of that measurement.
(b)
If the measurement date is after the date of transition to IFRSs, but
during the period covered by the first IFRS financial statements, the
event-driven fair value measurements may be used as deemed cost when
the event occurs. An entity shall recognise the resulting adjustments
directly in retained earnings (or if appropriate, another category of
equity) at the measurement date. At the date of transition to IFRSs, the
entity shall either establish the deemed cost by applying the criteria in
paragraphs D5–D7 or measure assets and liabilities in accordance with
the other requirements in this IFRS.
Under some national accounting requirements exploration and development
costs for oil and gas properties in the development or production phases are
accounted for in cost centres that include all properties in a large geographical
area. A first-time adopter using such accounting under previous GAAP may elect
to measure oil and gas assets at the date of transition to IFRSs on the following
basis:
(a)
exploration and evaluation assets at the amount determined under the
entity’s previous GAAP; and
(b)
assets in the development or production phases at the amount
determined for the cost centre under the entity’s previous GAAP. The
entity shall allocate this amount to the cost centre’s underlying assets
pro rata using reserve volumes or reserve values as of that date.
The entity shall test exploration and evaluation assets and assets in the
development and production phases for impairment at the date of transition to
IFRSs in accordance with IFRS 6 Exploration for and Evaluation of Mineral Resources or
IAS 36 respectively and, if necessary, reduce the amount determined in
accordance with (a) or (b) above. For the purposes of this paragraph, oil and gas
assets comprise only those assets used in the exploration, evaluation,
development or production of oil and gas.
D8B
Some entities hold items of property, plant and equipment, right-of-use assets or
intangible assets that are used, or were previously used, in operations subject to
rate regulation. The carrying amount of such items might include amounts that
were determined under previous GAAP but do not qualify for capitalisation in
accordance with IFRSs. If this is the case, a first-time adopter may elect to use
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the previous GAAP carrying amount of such an item at the date of transition to
IFRSs as deemed cost. If an entity applies this exemption to an item, it need not
apply it to all items. At the date of transition to IFRSs, an entity shall test for
impairment in accordance with IAS 36 each item for which this exemption is
used. For the purposes of this paragraph, operations are subject to rate
regulation if they are governed by a framework for establishing the prices that
can be charged to customers for goods or services and that framework is subject
to oversight and/or approval by a rate regulator (as defined in IFRS 14 Regulatory
Deferral Accounts).
Leases
D9
A first-time adopter may assess whether a contract existing at the date of
transition to IFRSs contains a lease by applying paragraphs 9–11 of IFRS 16 to
those contracts on the basis of facts and circumstances existing at that date.
D9A
[Deleted]
D9B
When a first-time adopter that is a lessee recognises lease liabilities and
right-of-use assets, it may apply the following approach to all of its leases (subject
to the practical expedients described in paragraph D9D):
(a)
measure a lease liability at the date of transition to IFRSs. A lessee
following this approach shall measure that lease liability at the present
value of the remaining lease payments (see paragraph D9E), discounted
using the lessee’s incremental borrowing rate (see paragraph D9E) at the
date of transition to IFRSs.
(b)
measure a right-of-use asset at the date of transition to IFRSs. The lessee
shall choose, on a lease-by-lease basis, to measure that right-of-use asset
at either:
(c)
(i)
its carrying amount as if IFRS 16 had been applied since the
commencement date of the lease (see paragraph D9E), but
discounted using the lessee’s incremental borrowing rate at the
date of transition to IFRSs; or
(ii)
an amount equal to the lease liability, adjusted by the amount of
any prepaid or accrued lease payments relating to that lease
recognised in the statement of financial position immediately
before the date of transition to IFRSs.
apply IAS 36 to right-of-use assets at the date of transition to IFRSs.
D9C
Notwithstanding the requirements in paragraph D9B, a first-time adopter that is
a lessee shall measure the right-of-use asset at fair value at the date of transition
to IFRSs for leases that meet the definition of investment property in IAS 40 and
are measured using the fair value model in IAS 40 from the date of transition to
IFRSs.
D9D
A first-time adopter that is a lessee may do one or more of the following at the
date of transition to IFRSs, applied on a lease-by-lease basis:
(a)
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apply a single discount rate to a portfolio of leases with reasonably
similar characteristics (for example, a similar remaining lease term for a
similar class of underlying asset in a similar economic environment).
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(b)
elect not to apply the requirements in paragraph D9B to leases for which
the lease term (see paragraph D9E) ends within 12 months of the date of
transition to IFRSs. Instead, the entity shall account for (including
disclosure of information about) these leases as if they were short-term
leases accounted for in accordance with paragraph 6 of IFRS 16.
(c)
elect not to apply the requirements in paragraph D9B to leases for which
the underlying asset is of low value (as described in paragraphs B3–B8 of
IFRS 16). Instead, the entity shall account for (including disclosure of
information about) these leases in accordance with paragraph 6 of
IFRS 16.
(d)
exclude initial direct costs (see paragraph D9E) from the measurement of
the right-of-use asset at the date of transition to IFRSs.
(e)
use hindsight, such as in determining the lease term if the contract
contains options to extend or terminate the lease.
D9E
Lease payments, lessee, lessee’s incremental borrowing rate, commencement
date of the lease, initial direct costs and lease term are defined terms in IFRS 16
and are used in this Standard with the same meaning.
D10–
D11
[Deleted]
Cumulative translation differences
D12
D13
IAS 21 requires an entity:
(a)
to recognise some translation differences in other comprehensive
income and accumulate these in a separate component of equity; and
(b)
on disposal of a foreign operation, to reclassify the cumulative
translation difference for that foreign operation (including, if applicable,
gains and losses on related hedges) from equity to profit or loss as part of
the gain or loss on disposal.
However, a first-time adopter need not comply with these requirements for
cumulative translation differences that existed at the date of transition to IFRSs.
If a first-time adopter uses this exemption:
(a)
the cumulative translation differences for all foreign operations are
deemed to be zero at the date of transition to IFRSs; and
(b)
the gain or loss on a subsequent disposal of any foreign operation shall
exclude translation differences that arose before the date of transition to
IFRSs and shall include later translation differences.
Investments in subsidiaries, joint ventures and
associates
D14
When an entity prepares separate financial statements, IAS 27 requires it to
account for its investments in subsidiaries, joint ventures and associates either:
(a)
at cost;
(b)
in accordance with IFRS 9; or
(c)
using the equity method as described in IAS 28.
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D15
If a first-time adopter measures such an investment at cost in accordance with
IAS 27, it shall measure that investment at one of the following amounts in its
separate opening IFRS statement of financial position:
(a)
cost determined in accordance with IAS 27; or
(b)
deemed cost. The deemed cost of such an investment shall be its:
(i)
fair value at the entity’s date of transition to IFRSs in its separate
financial statements; or
(ii)
previous GAAP carrying amount at that date.
A first-time adopter may choose either (i) or (ii) above to measure its
investment in each subsidiary, joint venture or associate that it elects to
measure using a deemed cost.
D15A
If a first-time adopter accounts for such an investment using the equity method
procedures as described in IAS 28:
(a)
the first-time adopter applies the exemption for past business
combinations (Appendix C) to the acquisition of the investment.
(b)
if the entity becomes a first-time adopter for its separate financial
statements earlier than for its consolidated financial statements, and
(i)
later than its parent, the entity shall apply paragraph D16 in its
separate financial statements.
(ii)
later than its subsidiary, the entity shall apply paragraph D17 in
its separate financial statements.
Assets and liabilities of subsidiaries, associates and
joint ventures
D16
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If a subsidiary becomes a first-time adopter later than its parent, the subsidiary
shall, in its financial statements, measure its assets and liabilities at either:
(a)
the carrying amounts that would be included in the parent’s
consolidated financial statements, based on the parent’s date of
transition to IFRSs, if no adjustments were made for consolidation
procedures and for the effects of the business combination in which the
parent acquired the subsidiary (this election is not available to a
subsidiary of an investment entity, as defined in IFRS 10, that is required
to be measured at fair value through profit or loss); or
(b)
the carrying amounts required by the rest of this IFRS, based on the
subsidiary’s date of transition to IFRSs. These carrying amounts could
differ from those described in (a):
(i)
when the exemptions in this IFRS result in measurements that
depend on the date of transition to IFRSs.
(ii)
when the accounting policies used in the subsidiary’s financial
statements differ from those in the consolidated financial
statements.
For example, the subsidiary may use as its
accounting policy the cost model in IAS 16 Property, Plant and
Equipment, whereas the group may use the revaluation model.
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A similar election is available to an associate or joint venture that
becomes a first-time adopter later than an entity that has significant
influence or joint control over it.
D17
However, if an entity becomes a first-time adopter later than its subsidiary (or
associate or joint venture) the entity shall, in its consolidated financial
statements, measure the assets and liabilities of the subsidiary (or associate or
joint venture) at the same carrying amounts as in the financial statements of the
subsidiary (or associate or joint venture), after adjusting for consolidation and
equity accounting adjustments and for the effects of the business combination
in which the entity acquired the subsidiary. Notwithstanding this requirement,
a non-investment entity parent shall not apply the exception to consolidation
that is used by any investment entity subsidiaries. Similarly, if a parent becomes
a first-time adopter for its separate financial statements earlier or later than for
its consolidated financial statements, it shall measure its assets and liabilities at
the same amounts in both financial statements, except for consolidation
adjustments.
Compound financial instruments
D18
IAS 32 Financial Instruments: Presentation requires an entity to split a compound
financial instrument at inception into separate liability and equity components.
If the liability component is no longer outstanding, retrospective application of
IAS 32 involves separating two portions of equity. The first portion is in retained
earnings and represents the cumulative interest accreted on the liability
component. The other portion represents the original equity component.
However, in accordance with this IFRS, a first-time adopter need not separate
these two portions if the liability component is no longer outstanding at the
date of transition to IFRSs.
Designation of previously recognised financial
instruments
D19
IFRS 9 permits a financial liability (provided it meets certain criteria) to be
designated as a financial liability at fair value through profit or loss. Despite
this requirement an entity is permitted to designate, at the date of transition to
IFRSs, any financial liability as at fair value through profit or loss provided the
liability meets the criteria in paragraph 4.2.2 of IFRS 9 at that date.
D19A
An entity may designate a financial asset as measured at fair value through
profit or loss in accordance with paragraph 4.1.5 of IFRS 9 on the basis of the
facts and circumstances that exist at the date of transition to IFRSs.
D19B
An entity may designate an investment in an equity instrument as at fair value
through other comprehensive income in accordance with paragraph 5.7.5 of
IFRS 9 on the basis of the facts and circumstances that exist at the date of
transition to IFRSs.
D19C
For a financial liability that is designated as a financial liability at fair value
through profit or loss, an entity shall determine whether the treatment in
paragraph 5.7.7 of IFRS 9 would create an accounting mismatch in profit or loss
on the basis of the facts and circumstances that exist at the date of transition to
IFRSs.
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Fair value measurement of financial assets or financial
liabilities at initial recognition
D20
Despite the requirements of paragraphs 7 and 9, an entity may apply the
requirements in paragraph B5.1.2A(b) of IFRS 9 prospectively to transactions
entered into on or after the date of transition to IFRSs.
Decommissioning liabilities included in the cost of
property, plant and equipment
D21
D21A
IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities requires
specified changes in a decommissioning, restoration or similar liability to be
added to or deducted from the cost of the asset to which it relates; the adjusted
depreciable amount of the asset is then depreciated prospectively over its
remaining useful life. A first-time adopter need not comply with these
requirements for changes in such liabilities that occurred before the date of
transition to IFRSs. If a first-time adopter uses this exemption, it shall:
(a)
measure the liability as at the date of transition to IFRSs in accordance
with IAS 37;
(b)
to the extent that the liability is within the scope of IFRIC 1, estimate the
amount that would have been included in the cost of the related asset
when the liability first arose, by discounting the liability to that date
using its best estimate of the historical risk-adjusted discount rate(s) that
would have applied for that liability over the intervening period; and
(c)
calculate the accumulated depreciation on that amount, as at the date of
transition to IFRSs, on the basis of the current estimate of the useful life
of the asset, using the depreciation policy adopted by the entity in
accordance with IFRSs.
An entity that uses the exemption in paragraph D8A(b) (for oil and gas assets in
the development or production phases accounted for in cost centres that include
all properties in a large geographical area under previous GAAP) shall, instead of
applying paragraph D21 or IFRIC 1:
(a)
measure decommissioning, restoration and similar liabilities as at the
date of transition to IFRSs in accordance with IAS 37; and
(b)
recognise directly in retained earnings any difference between that
amount and the carrying amount of those liabilities at the date of
transition to IFRSs determined under the entity’s previous GAAP.
Financial assets or intangible assets accounted for in
accordance with IFRIC 12
D22
A first-time adopter may apply the transitional provisions in IFRIC 12.
Borrowing costs
D23
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A first-time adopter can elect to apply the requirements of IAS 23 from the date
of transition or from an earlier date as permitted by paragraph 28 of IAS 23.
From the date on which an entity that applies this exemption begins to apply
IAS 23, the entity:
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D24
(a)
shall not restate the borrowing cost component that was capitalised
under previous GAAP and that was included in the carrying amount of
assets at that date; and
(b)
shall account for borrowing costs incurred on or after that date in
accordance with IAS 23, including those borrowing costs incurred on or
after that date on qualifying assets already under construction.
[Deleted]
Extinguishing financial liabilities with equity instruments
D25
A first-time adopter may apply the transitional provisions in IFRIC 19
Extinguishing Financial Liabilities with Equity Instruments.
Severe hyperinflation
D26
If an entity has a functional currency that was, or is, the currency of a
hyperinflationary economy, it shall determine whether it was subject to severe
hyperinflation before the date of transition to IFRSs. This applies to entities that
are adopting IFRSs for the first time, as well as entities that have previously
applied IFRSs.
D27
The currency of a hyperinflationary economy is subject to severe hyperinflation
if it has both of the following characteristics:
(a)
a reliable general price index is not available to all entities with
transactions and balances in the currency.
(b)
exchangeability between the currency and a relatively stable foreign
currency does not exist.
D28
The functional currency of an entity ceases to be subject to severe hyperinflation
on the functional currency normalisation date. That is the date when the
functional currency no longer has either, or both, of the characteristics in
paragraph D27, or when there is a change in the entity’s functional currency to
a currency that is not subject to severe hyperinflation.
D29
When an entity’s date of transition to IFRSs is on, or after, the functional
currency normalisation date, the entity may elect to measure all assets and
liabilities held before the functional currency normalisation date at fair value on
the date of transition to IFRSs. The entity may use that fair value as the deemed
cost of those assets and liabilities in the opening IFRS statement of financial
position.
D30
When the functional currency normalisation date falls within a 12-month
comparative period, the comparative period may be less than 12 months,
provided that a complete set of financial statements (as required by
paragraph 10 of IAS 1) is provided for that shorter period.
Joint arrangements
D31
A first-time adopter may apply the transition provisions in IFRS 11 with the
following exceptions:
(a)
When applying the transition provisions in IFRS 11, a first-time adopter
shall apply these provisions at the date of transition to IFRS.
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(b)
When changing from proportionate consolidation to the equity method,
a first-time adopter shall test for impairment the investment in
accordance with IAS 36 as at the date of transition to IFRS, regardless of
whether there is any indication that the investment may be impaired.
Any resulting impairment shall be recognised as an adjustment to
retained earnings at the date of transition to IFRS.
Stripping costs in the production phase of a surface
mine
D32
A first-time adopter may apply the transitional provisions set out in
paragraphs A1 to A4 of IFRIC 20 Stripping Costs in the Production Phase of a Surface
Mine. In that paragraph, reference to the effective date shall be interpreted as
1 January 2013 or the beginning of the first IFRS reporting period, whichever is
later.
Designation of contracts to buy or sell a non-financial
item
D33
IFRS 9 permits some contracts to buy or sell a non-financial item to be
designated at inception as measured at fair value through profit or loss
(see paragraph 2.5 of IFRS 9). Despite this requirement an entity is permitted to
designate, at the date of transition to IFRSs, contracts that already exist on that
date as measured at fair value through profit or loss but only if they meet the
requirements of paragraph 2.5 of IFRS 9 at that date and the entity designates all
similar contracts.
Revenue
D34
A first-time adopter may apply the transition provisions in paragraph C5 of
IFRS 15. In those paragraphs references to the ‘date of initial application’ shall
be interpreted as the beginning of the first IFRS reporting period. If a first-time
adopter decides to apply those transition provisions, it shall also apply
paragraph C6 of IFRS 15.
D35
A first-time adopter is not required to restate contracts that were completed
before the earliest period presented. A completed contract is a contract for
which the entity has transferred all of the goods or services identified in
accordance with previous GAAP.
Foreign Currency Transactions and Advance
Consideration
D36
A first-time adopter need not apply IFRIC 22 Foreign Currency Transactions and
Advance Consideration to assets, expenses and income in the scope of that
Interpretation initially recognised before the date of transition to IFRS
Standards.
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Appendix E
Short-term exemptions from IFRSs
This appendix is an integral part of the IFRS.
Exemption from the requirement to restate comparative
information for IFRS 9
E1
If an entity’s first IFRS reporting period begins before 1 January 2019 and the
entity applies the completed version of IFRS 9 (issued in 2014), the comparative
information in the entity’s first IFRS financial statements need not comply with
IFRS 7 Financial Instruments: Disclosure or the completed version of IFRS 9 (issued in
2014), to the extent that the disclosures required by IFRS 7 relate to items within
the scope of IFRS 9. For such entities, references to the ‘date of transition to
IFRSs’ shall mean, in the case of IFRS 7 and IFRS 9 (2014) only, the beginning of
the first IFRS reporting period.
E2
An entity that chooses to present comparative information that does not comply
with IFRS 7 and the completed version of IFRS 9 (issued in 2014) in its first year
of transition shall:
E3–
E7
(a)
apply the requirements of its previous GAAP in place of the requirements
of IFRS 9 to comparative information about items within the scope of
IFRS 9.
(b)
disclose this fact together with the basis used to prepare this
information.
(c)
treat any adjustment between the statement of financial position at the
comparative period’s reporting date (ie the statement of financial
position that includes comparative information under previous GAAP)
and the statement of financial position at the start of the first IFRS
reporting period (ie the first period that includes information that
complies with IFRS 7 and the completed version of IFRS 9 (issued in
2014)) as arising from a change in accounting policy and give the
disclosures required by paragraph 28(a)–(e) and (f)(i) of IAS 8.
Paragraph 28(f)(i) applies only to amounts presented in the statement of
financial position at the comparative period’s reporting date.
(d)
apply paragraph 17(c) of IAS 1 to provide additional disclosures when
compliance with the specific requirements in IFRSs is insufficient to
enable users to understand the impact of particular transactions, other
events and conditions on the entity’s financial position and financial
performance.
[Deleted]
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IFRS 2
IFRS 2
Share-based Payment
In February 2004 the International Accounting Standards Board (the Board) issued IFRS 2
Share-based Payment. The Board amended IFRS 2 to clarify its scope in January 2008 and to
incorporate the guidance contained in two related Interpretations (IFRIC 8 Scope of IFRS 2
and IFRIC 11 IFRS 2—Group and Treasury Share Transactions) in June 2009.
In June 2016 the Board issued Classification and Measurement of Share-based Payment Transactions
(Amendments to IFRS 2). This amended IFRS 2 to clarify the accounting for (a) the effects of
vesting and non-vesting conditions on the measurement of cash-settled share-based
payments; (b) share-based payment transactions with a net settlement feature for
withholding tax obligations; and (c) a modification to the terms and conditions of a
share-based payment that changes the classification of the transaction from cash-settled to
equity-settled.
Other Standards have made minor consequential amendments to IFRS 2. They include
IFRS 10 Consolidated Financial Statements (issued May 2011), IFRS 11 Joint Arrangements (issued
May 2011), IFRS 13 Fair Value Measurement (issued May 2011), Annual Improvements to IFRSs
2010–2012 Cycle (issued December 2013) and IFRS 9 Financial Instruments (issued July 2014).
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CONTENTS
from paragraph
INTERNATIONAL FINANCIAL REPORTING STANDARD 2
SHARE-BASED PAYMENT
OBJECTIVE
1
SCOPE
2
RECOGNITION
7
EQUITY-SETTLED SHARE-BASED PAYMENT TRANSACTIONS
10
Overview
10
Transactions in which services are received
14
Transactions measured by reference to the fair value of the equity
instruments granted
16
Modifications to the terms and conditions on which equity instruments were
granted, including cancellations and settlements
26
CASH-SETTLED SHARE-BASED PAYMENT TRANSACTIONS
30
Treatment of vesting and non-vesting conditions
33A
SHARE-BASED PAYMENT TRANSACTIONS WITH A NET SETTLEMENT
FEATURE FOR WITHHOLDING TAX OBLIGATIONS
33E
SHARE-BASED PAYMENT TRANSACTIONS WITH CASH ALTERNATIVES
34
Share-based payment transactions in which the terms of the arrangement
provide the counterparty with a choice of settlement
35
Share-based payment transactions in which the terms of the arrangement
provide the entity with a choice of settlement
41
SHARE-BASED PAYMENT TRANSACTIONS AMONG GROUP ENTITIES (2009
AMENDMENTS)
43A
DISCLOSURES
44
TRANSITIONAL PROVISIONS
53
EFFECTIVE DATE
60
WITHDRAWAL OF INTERPRETATIONS
64
APPENDICES
A Defined terms
B Application guidance
C Amendments to other IFRSs
FOR THE ACCOMPANYING DOCUMENTS LISTED BELOW, SEE PART B OF THIS
EDITION
APPROVAL BY THE BOARD OF IFRS 2 ISSUED IN FEBRUARY 2004
APPROVAL BY THE BOARD OF AMENDMENTS TO IFRS 2:
Vesting Conditions and Cancellations issued in January 2008
Group Cash-settled Share-based Payment Transactions issued in June 2009
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Classification and Measurement of Share-based Payment Transactions
(Amendments to IFRS 2) issued in June 2016
BASIS FOR CONCLUSIONS
IMPLEMENTATION GUIDANCE
TABLE OF CONCORDANCE
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IFRS 2
International Financial Reporting Standard 2 Share-based Payment (IFRS 2) is set out in
paragraphs 1–64 and Appendices A–C. All the paragraphs have equal authority.
Paragraphs in bold type state the main principles. Terms defined in Appendix A are in
italics the first time they appear in the Standard. Definitions of other terms are given in
the Glossary for International Financial Reporting Standards. IFRS 2 should be read in
the context of its objective and the Basis for Conclusions, the Preface to International
Financial Reporting Standards and the Conceptual Framework for Financial Reporting. IAS 8
Accounting Policies, Changes in Accounting Estimates and Errors provides a basis for selecting
and applying accounting policies in the absence of explicit guidance.
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International Financial Reporting Standard 2
Share-based Payment
Objective
1
The objective of this IFRS is to specify the financial reporting by an entity when
it undertakes a share-based payment transaction. In particular, it requires an entity
to reflect in its profit or loss and financial position the effects of share-based
payment transactions, including expenses associated with transactions in which
share options are granted to employees.
Scope
2
An entity shall apply this IFRS in accounting for all share-based payment
transactions, whether or not the entity can identify specifically some or all of
the goods or services received, including:
(a)
equity-settled share-based payment transactions,
(b)
cash-settled share-based payment transactions, and
(c)
transactions in which the entity receives or acquires goods or services
and the terms of the arrangement provide either the entity or the
supplier of those goods or services with a choice of whether the entity
settles the transaction in cash (or other assets) or by issuing equity
instruments,
except as noted in paragraphs 3A–6. In the absence of specifically identifiable
goods or services, other circumstances may indicate that goods or services have
been (or will be) received, in which case this IFRS applies.
3
[Deleted]
3A
A share-based payment transaction may be settled by another group entity (or a
shareholder of any group entity) on behalf of the entity receiving or acquiring
the goods or services. Paragraph 2 also applies to an entity that
(a)
receives goods or services when another entity in the same group (or a
shareholder of any group entity) has the obligation to settle the
share-based payment transaction, or
(b)
has an obligation to settle a share-based payment transaction when
another entity in the same group receives the goods or services
unless the transaction is clearly for a purpose other than payment for goods or
services supplied to the entity receiving them.
4
For the purposes of this IFRS, a transaction with an employee (or other party) in
his/her capacity as a holder of equity instruments of the entity is not a
share-based payment transaction. For example, if an entity grants all holders of
a particular class of its equity instruments the right to acquire additional equity
instruments of the entity at a price that is less than the fair value of those equity
instruments, and an employee receives such a right because he/she is a holder of
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equity instruments of that particular class, the granting or exercise of that right
is not subject to the requirements of this IFRS.
5
As noted in paragraph 2, this IFRS applies to share-based payment transactions
in which an entity acquires or receives goods or services. Goods includes
inventories, consumables, property, plant and equipment, intangible assets and
other non-financial assets. However, an entity shall not apply this IFRS to
transactions in which the entity acquires goods as part of the net assets acquired
in a business combination as defined by IFRS 3 Business Combinations (as revised in
2008), in a combination of entities or businesses under common control as
described in paragraphs B1–B4 of IFRS 3, or the contribution of a business on the
formation of a joint venture as defined by IFRS 11 Joint Arrangements. Hence,
equity instruments issued in a business combination in exchange for control of
the acquiree are not within the scope of this IFRS. However, equity instruments
granted to employees of the acquiree in their capacity as employees (eg in return
for continued service) are within the scope of this IFRS. Similarly, the
cancellation, replacement or other modification of share-based payment
arrangements because of a business combination or other equity restructuring
shall be accounted for in accordance with this IFRS. IFRS 3 provides guidance on
determining whether equity instruments issued in a business combination are
part of the consideration transferred in exchange for control of the acquiree
(and therefore within the scope of IFRS 3) or are in return for continued service
to be recognised in the post-combination period (and therefore within the scope
of this IFRS).
6
This IFRS does not apply to share-based payment transactions in which the entity
receives or acquires goods or services under a contract within the scope of
paragraphs 8–10 of IAS 32 Financial Instruments: Presentation (as revised in 2003)1 or
paragraphs 2.4–2.7 of IFRS 9 Financial Instruments.
6A
This IFRS uses the term ‘fair value’ in a way that differs in some respects from
the definition of fair value in IFRS 13 Fair Value Measurement. Therefore, when
applying IFRS 2 an entity measures fair value in accordance with this IFRS, not
IFRS 13.
Recognition
7
An entity shall recognise the goods or services received or acquired in a
share-based payment transaction when it obtains the goods or as the
services are received. The entity shall recognise a corresponding increase
in equity if the goods or services were received in an equity-settled
share-based payment transaction, or a liability if the goods or services
were acquired in a cash-settled share-based payment transaction.
8
When the goods or services received or acquired in a share-based payment
transaction do not qualify for recognition as assets, they shall be
recognised as expenses.
9
Typically, an expense arises from the consumption of goods or services. For
example, services are typically consumed immediately, in which case an expense
1
The title of IAS 32 was amended in 2005.
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is recognised as the counterparty renders service. Goods might be consumed
over a period of time or, in the case of inventories, sold at a later date, in which
case an expense is recognised when the goods are consumed or sold. However,
sometimes it is necessary to recognise an expense before the goods or services
are consumed or sold, because they do not qualify for recognition as assets. For
example, an entity might acquire goods as part of the research phase of a project
to develop a new product. Although those goods have not been consumed, they
might not qualify for recognition as assets under the applicable IFRS.
Equity-settled share-based payment transactions
Overview
10
For equity-settled share-based payment transactions, the entity shall
measure the goods or services received, and the corresponding increase in
equity, directly, at the fair value of the goods or services received, unless
that fair value cannot be estimated reliably. If the entity cannot estimate
reliably the fair value of the goods or services received, the entity shall
measure their value, and the corresponding increase in equity, indirectly,
by reference to2 the fair value of the equity instruments granted.
11
To apply the requirements of paragraph 10 to transactions with employees and
others providing similar services,3 the entity shall measure the fair value of the
services received by reference to the fair value of the equity instruments granted,
because typically it is not possible to estimate reliably the fair value of the
services received, as explained in paragraph 12. The fair value of those equity
instruments shall be measured at grant date.
12
Typically, shares, share options or other equity instruments are granted to
employees as part of their remuneration package, in addition to a cash salary
and other employment benefits. Usually, it is not possible to measure directly
the services received for particular components of the employee’s remuneration
package. It might also not be possible to measure the fair value of the total
remuneration package independently, without measuring directly the fair value
of the equity instruments granted. Furthermore, shares or share options are
sometimes granted as part of a bonus arrangement, rather than as a part of basic
remuneration, eg as an incentive to the employees to remain in the entity’s
employ or to reward them for their efforts in improving the entity’s
performance. By granting shares or share options, in addition to other
remuneration, the entity is paying additional remuneration to obtain additional
benefits. Estimating the fair value of those additional benefits is likely to be
difficult. Because of the difficulty of measuring directly the fair value of the
services received, the entity shall measure the fair value of the employee services
received by reference to the fair value of the equity instruments granted.
2
This IFRS uses the phrase ‘by reference to’ rather than ‘at’, because the transaction is ultimately
measured by multiplying the fair value of the equity instruments granted, measured at the date
specified in paragraph 11 or 13 (whichever is applicable), by the number of equity instruments that
vest, as explained in paragraph 19.
3
In the remainder of this IFRS, all references to employees also include others providing similar
services.
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13
To apply the requirements of paragraph 10 to transactions with parties other
than employees, there shall be a rebuttable presumption that the fair value of
the goods or services received can be estimated reliably. That fair value shall be
measured at the date the entity obtains the goods or the counterparty renders
service. In rare cases, if the entity rebuts this presumption because it cannot
estimate reliably the fair value of the goods or services received, the entity shall
measure the goods or services received, and the corresponding increase in
equity, indirectly, by reference to the fair value of the equity instruments
granted, measured at the date the entity obtains the goods or the counterparty
renders service.
13A
In particular, if the identifiable consideration received (if any) by the entity
appears to be less than the fair value of the equity instruments granted or
liability incurred, typically this situation indicates that other consideration
(ie unidentifiable goods or services) has been (or will be) received by the entity.
The entity shall measure the identifiable goods or services received in
accordance with this IFRS. The entity shall measure the unidentifiable goods or
services received (or to be received) as the difference between the fair value of the
share-based payment and the fair value of any identifiable goods or services
received (or to be received). The entity shall measure the unidentifiable goods or
services received at the grant date. However, for cash-settled transactions, the
liability shall be remeasured at the end of each reporting period until it is
settled in accordance with paragraphs 30–33.
Transactions in which services are received
14
If the equity instruments granted vest immediately, the counterparty is not
required to complete a specified period of service before becoming
unconditionally entitled to those equity instruments. In the absence of evidence
to the contrary, the entity shall presume that services rendered by the
counterparty as consideration for the equity instruments have been received. In
this case, on grant date the entity shall recognise the services received in full,
with a corresponding increase in equity.
15
If the equity instruments granted do not vest until the counterparty completes a
specified period of service, the entity shall presume that the services to be
rendered by the counterparty as consideration for those equity instruments will
be received in the future, during the vesting period. The entity shall account for
those services as they are rendered by the counterparty during the vesting
period, with a corresponding increase in equity. For example:
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(a)
if an employee is granted share options conditional upon completing
three years’ service, then the entity shall presume that the services to be
rendered by the employee as consideration for the share options will be
received in the future, over that three-year vesting period.
(b)
if an employee is granted share options conditional upon the
achievement of a performance condition and remaining in the entity’s
employ until that performance condition is satisfied, and the length of
the vesting period varies depending on when that performance
condition is satisfied, the entity shall presume that the services to be
rendered by the employee as consideration for the share options will be
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received in the future, over the expected vesting period. The entity shall
estimate the length of the expected vesting period at grant date, based
on the most likely outcome of the performance condition. If the
performance condition is a market condition, the estimate of the length of
the expected vesting period shall be consistent with the assumptions
used in estimating the fair value of the options granted, and shall not be
subsequently revised. If the performance condition is not a market
condition, the entity shall revise its estimate of the length of the vesting
period, if necessary, if subsequent information indicates that the length
of the vesting period differs from previous estimates.
Transactions measured by reference to the fair value of
the equity instruments granted
Determining the fair value of equity instruments granted
16
For transactions measured by reference to the fair value of the equity
instruments granted, an entity shall measure the fair value of equity
instruments granted at the measurement date, based on market prices if available,
taking into account the terms and conditions upon which those equity
instruments were granted (subject to the requirements of paragraphs 19–22).
17
If market prices are not available, the entity shall estimate the fair value of the
equity instruments granted using a valuation technique to estimate what the
price of those equity instruments would have been on the measurement date in
an arm’s length transaction between knowledgeable, willing parties. The
valuation technique shall be consistent with generally accepted valuation
methodologies for pricing financial instruments, and shall incorporate all
factors and assumptions that knowledgeable, willing market participants would
consider in setting the price (subject to the requirements of paragraphs 19–22).
18
Appendix B contains further guidance on the measurement of the fair value of
shares and share options, focusing on the specific terms and conditions that are
common features of a grant of shares or share options to employees.
Treatment of vesting conditions
19
A grant of equity instruments might be conditional upon satisfying specified
vesting conditions. For example, a grant of shares or share options to an
employee is typically conditional on the employee remaining in the entity’s
employ for a specified period of time. There might be performance conditions
that must be satisfied, such as the entity achieving a specified growth in profit
or a specified increase in the entity’s share price. Vesting conditions, other than
market conditions, shall not be taken into account when estimating the fair
value of the shares or share options at the measurement date. Instead, vesting
conditions, other than market conditions, shall be taken into account by
adjusting the number of equity instruments included in the measurement of the
transaction amount so that, ultimately, the amount recognised for goods or
services received as consideration for the equity instruments granted shall be
based on the number of equity instruments that eventually vest. Hence, on a
cumulative basis, no amount is recognised for goods or services received if the
equity instruments granted do not vest because of failure to satisfy a vesting
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condition, other than a market condition, for example, the counterparty fails to
complete a specified service period, or a performance condition is not satisfied,
subject to the requirements of paragraph 21.
20
To apply the requirements of paragraph 19, the entity shall recognise an amount
for the goods or services received during the vesting period based on the best
available estimate of the number of equity instruments expected to vest and
shall revise that estimate, if necessary, if subsequent information indicates that
the number of equity instruments expected to vest differs from previous
estimates. On vesting date, the entity shall revise the estimate to equal the
number of equity instruments that ultimately vested, subject to the
requirements of paragraph 21.
21
Market conditions, such as a target share price upon which vesting
(or exercisability) is conditioned, shall be taken into account when estimating
the fair value of the equity instruments granted. Therefore, for grants of equity
instruments with market conditions, the entity shall recognise the goods or
services received from a counterparty who satisfies all other vesting conditions
(eg services received from an employee who remains in service for the specified
period of service), irrespective of whether that market condition is satisfied.
Treatment of non-vesting conditions
21A
Similarly, an entity shall take into account all non-vesting conditions when
estimating the fair value of the equity instruments granted. Therefore, for
grants of equity instruments with non-vesting conditions, the entity shall
recognise the goods or services received from a counterparty that satisfies all
vesting conditions that are not market conditions (eg services received from an
employee who remains in service for the specified period of service), irrespective
of whether those non-vesting conditions are satisfied.
Treatment of a reload feature
22
For options with a reload feature, the reload feature shall not be taken into
account when estimating the fair value of options granted at the measurement
date. Instead, a reload option shall be accounted for as a new option grant, if and
when a reload option is subsequently granted.
After vesting date
23
Having recognised the goods or services received in accordance with
paragraphs 10–22, and a corresponding increase in equity, the entity shall make
no subsequent adjustment to total equity after vesting date. For example, the
entity shall not subsequently reverse the amount recognised for services
received from an employee if the vested equity instruments are later forfeited or,
in the case of share options, the options are not exercised. However, this
requirement does not preclude the entity from recognising a transfer within
equity, ie a transfer from one component of equity to another.
If the fair value of the equity instruments cannot be estimated
reliably
24
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equity instruments granted. In rare cases, the entity may be unable to estimate
reliably the fair value of the equity instruments granted at the measurement
date, in accordance with the requirements in paragraphs 16–22. In these rare
cases only, the entity shall instead:
25
(a)
measure the equity instruments at their intrinsic value, initially at the
date the entity obtains the goods or the counterparty renders service and
subsequently at the end of each reporting period and at the date of final
settlement, with any change in intrinsic value recognised in profit or
loss. For a grant of share options, the share-based payment arrangement
is finally settled when the options are exercised, are forfeited (eg upon
cessation of employment) or lapse (eg at the end of the option’s life).
(b)
recognise the goods or services received based on the number of equity
instruments that ultimately vest or (where applicable) are ultimately
exercised. To apply this requirement to share options, for example, the
entity shall recognise the goods or services received during the vesting
period, if any, in accordance with paragraphs 14 and 15, except that the
requirements in paragraph 15(b) concerning a market condition do not
apply. The amount recognised for goods or services received during the
vesting period shall be based on the number of share options expected to
vest. The entity shall revise that estimate, if necessary, if subsequent
information indicates that the number of share options expected to vest
differs from previous estimates. On vesting date, the entity shall revise
the estimate to equal the number of equity instruments that ultimately
vested. After vesting date, the entity shall reverse the amount recognised
for goods or services received if the share options are later forfeited, or
lapse at the end of the share option’s life.
If an entity applies paragraph 24, it is not necessary to apply paragraphs 26–29,
because any modifications to the terms and conditions on which the equity
instruments were granted will be taken into account when applying the
intrinsic value method set out in paragraph 24. However, if an entity settles a
grant of equity instruments to which paragraph 24 has been applied:
(a)
if the settlement occurs during the vesting period, the entity shall
account for the settlement as an acceleration of vesting, and shall
therefore recognise immediately the amount that would otherwise have
been recognised for services received over the remainder of the vesting
period.
(b)
any payment made on settlement shall be accounted for as the
repurchase of equity instruments, ie as a deduction from equity, except
to the extent that the payment exceeds the intrinsic value of the equity
instruments, measured at the repurchase date. Any such excess shall be
recognised as an expense.
Modifications to the terms and conditions on which
equity instruments were granted, including cancellations
and settlements
26
An entity might modify the terms and conditions on which the equity
instruments were granted. For example, it might reduce the exercise price of
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options granted to employees (ie reprice the options), which increases the fair
value of those options. The requirements in paragraphs 27–29 to account for the
effects of modifications are expressed in the context of share-based payment
transactions with employees. However, the requirements shall also be applied
to share-based payment transactions with parties other than employees that are
measured by reference to the fair value of the equity instruments granted. In
the latter case, any references in paragraphs 27–29 to grant date shall instead
refer to the date the entity obtains the goods or the counterparty renders service.
27
The entity shall recognise, as a minimum, the services received measured at the
grant date fair value of the equity instruments granted, unless those equity
instruments do not vest because of failure to satisfy a vesting condition (other
than a market condition) that was specified at grant date. This applies
irrespective of any modifications to the terms and conditions on which the
equity instruments were granted, or a cancellation or settlement of that grant of
equity instruments. In addition, the entity shall recognise the effects of
modifications that increase the total fair value of the share-based payment
arrangement or are otherwise beneficial to the employee. Guidance on applying
this requirement is given in Appendix B.
28
If a grant of equity instruments is cancelled or settled during the vesting period
(other than a grant cancelled by forfeiture when the vesting conditions are not
satisfied):
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(a)
the entity shall account for the cancellation or settlement as an
acceleration of vesting, and shall therefore recognise immediately the
amount that otherwise would have been recognised for services received
over the remainder of the vesting period.
(b)
any payment made to the employee on the cancellation or settlement of
the grant shall be accounted for as the repurchase of an equity interest,
ie as a deduction from equity, except to the extent that the payment
exceeds the fair value of the equity instruments granted, measured at the
repurchase date. Any such excess shall be recognised as an expense.
However, if the share-based payment arrangement included liability
components, the entity shall remeasure the fair value of the liability at
the date of cancellation or settlement. Any payment made to settle the
liability component shall be accounted for as an extinguishment of the
liability.
(c)
if new equity instruments are granted to the employee and, on the date
when those new equity instruments are granted, the entity identifies the
new equity instruments granted as replacement equity instruments for
the cancelled equity instruments, the entity shall account for the
granting of replacement equity instruments in the same way as a
modification of the original grant of equity instruments, in accordance
with paragraph 27 and the guidance in Appendix B. The incremental
fair value granted is the difference between the fair value of the
replacement equity instruments and the net fair value of the cancelled
equity instruments, at the date the replacement equity instruments are
granted. The net fair value of the cancelled equity instruments is their
fair value, immediately before the cancellation, less the amount of any
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payment made to the employee on cancellation of the equity
instruments that is accounted for as a deduction from equity in
accordance with (b) above. If the entity does not identify new equity
instruments granted as replacement equity instruments for the
cancelled equity instruments, the entity shall account for those new
equity instruments as a new grant of equity instruments.
28A
If an entity or counterparty can choose whether to meet a non-vesting condition,
the entity shall treat the entity’s or counterparty’s failure to meet that
non-vesting condition during the vesting period as a cancellation.
29
If an entity repurchases vested equity instruments, the payment made to the
employee shall be accounted for as a deduction from equity, except to the extent
that the payment exceeds the fair value of the equity instruments repurchased,
measured at the repurchase date. Any such excess shall be recognised as an
expense.
Cash-settled share-based payment transactions
30
For cash-settled share-based payment transactions, the entity shall
measure the goods or services acquired and the liability incurred at the
fair value of the liability, subject to the requirements of paragraphs
31–33D. Until the liability is settled, the entity shall remeasure the fair
value of the liability at the end of each reporting period and at the date of
settlement, with any changes in fair value recognised in profit or loss for
the period.
31
For example, an entity might grant share appreciation rights to employees as
part of their remuneration package, whereby the employees will become
entitled to a future cash payment (rather than an equity instrument), based on
the increase in the entity’s share price from a specified level over a specified
period of time. Alternatively, an entity might grant to its employees a right to
receive a future cash payment by granting to them a right to shares (including
shares to be issued upon the exercise of share options) that are redeemable,
either mandatorily (for example, upon cessation of employment) or at the
employee’s option. These arrangements are examples of cash-settled share-based
payment transactions. Share appreciation rights are used to illustrate some of
the requirements in paragraphs 32–33D; however, the requirements in those
paragraphs apply to all cash-settled share-based payment transactions.
32
The entity shall recognise the services received, and a liability to pay for those
services, as the employees render service. For example, some share appreciation
rights vest immediately, and the employees are therefore not required to
complete a specified period of service to become entitled to the cash payment.
In the absence of evidence to the contrary, the entity shall presume that the
services rendered by the employees in exchange for the share appreciation rights
have been received. Thus, the entity shall recognise immediately the services
received and a liability to pay for them. If the share appreciation rights do not
vest until the employees have completed a specified period of service, the entity
shall recognise the services received, and a liability to pay for them, as the
employees render service during that period.
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33
The liability shall be measured, initially and at the end of each reporting period
until settled, at the fair value of the share appreciation rights, by applying an
option pricing model, taking into account the terms and conditions on which
the share appreciation rights were granted, and the extent to which the
employees have rendered service to date—subject to the requirements of
paragraphs 33A–33D. An entity might modify the terms and conditions on
which a cash-settled share-based payment is granted.
Guidance for a
modification of a share-based payment transaction that changes its classification
from cash-settled to equity-settled is given in paragraphs B44A–B44C in
Appendix B.
Treatment of vesting and non-vesting conditions
33A
A cash-settled share-based payment transaction might be conditional upon
satisfying specified vesting conditions. There might be performance conditions
that must be satisfied, such as the entity achieving a specified growth in profit
or a specified increase in the entity’s share price. Vesting conditions, other than
market conditions, shall not be taken into account when estimating the fair
value of the cash-settled share-based payment at the measurement date. Instead,
vesting conditions, other than market conditions, shall be taken into account by
adjusting the number of awards included in the measurement of the liability
arising from the transaction.
33B
To apply the requirements in paragraph 33A, the entity shall recognise an
amount for the goods or services received during the vesting period. That
amount shall be based on the best available estimate of the number of awards
that are expected to vest. The entity shall revise that estimate, if necessary, if
subsequent information indicates that the number of awards that are expected
to vest differs from previous estimates. On the vesting date, the entity shall
revise the estimate to equal the number of awards that ultimately vested.
33C
Market conditions, such as a target share price upon which vesting (or
exercisability) is conditioned, as well as non-vesting conditions, shall be taken
into account when estimating the fair value of the cash-settled share-based
payment granted and when remeasuring the fair value at the end of each
reporting period and at the date of settlement.
33D
As a result of applying paragraphs 30–33C, the cumulative amount ultimately
recognised for goods or services received as consideration for the cash-settled
share-based payment is equal to the cash that is paid.
Share-based payment transactions with a net settlement feature
for withholding tax obligations
33E
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Tax laws or regulations may oblige an entity to withhold an amount for an
employee’s tax obligation associated with a share-based payment and transfer
that amount, normally in cash, to the tax authority on the employee’s behalf. To
fulfil this obligation, the terms of the share-based payment arrangement may
permit or require the entity to withhold the number of equity instruments
equal to the monetary value of the employee’s tax obligation from the total
number of equity instruments that otherwise would have been issued to the
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employee upon exercise (or vesting) of the share-based payment (ie the
share-based payment arrangement has a ‘net settlement feature’).
33F
As an exception to the requirements in paragraph 34, the transaction described
in paragraph 33E shall be classified in its entirety as an equity-settled
share-based payment transaction if it would have been so classified in the
absence of the net settlement feature.
33G
The entity applies paragraph 29 of this Standard to account for the withholding
of shares to fund the payment to the tax authority in respect of the employee’s
tax obligation associated with the share-based payment. Therefore, the payment
made shall be accounted for as a deduction from equity for the shares withheld,
except to the extent that the payment exceeds the fair value at the net
settlement date of the equity instruments withheld.
33H
The exception in paragraph 33F does not apply to:
(a)
a share-based payment arrangement with a net settlement feature for
which there is no obligation on the entity under tax laws or regulations
to withhold an amount for an employee’s tax obligation associated with
that share-based payment; or
(b)
any equity instruments that the entity withholds in excess of the
employee’s tax obligation associated with the share-based payment
(ie the entity withheld an amount of shares that exceeds the monetary
value of the employee’s tax obligation). Such excess shares withheld
shall be accounted for as a cash-settled share-based payment when this
amount is paid in cash (or other assets) to the employee.
Share-based payment transactions with cash alternatives
34
For share-based payment transactions in which the terms of the
arrangement provide either the entity or the counterparty with the
choice of whether the entity settles the transaction in cash (or other
assets) or by issuing equity instruments, the entity shall account for that
transaction, or the components of that transaction, as a cash-settled
share-based payment transaction if, and to the extent that, the entity has
incurred a liability to settle in cash or other assets, or as an equity-settled
share-based payment transaction if, and to the extent that, no such
liability has been incurred.
Share-based payment transactions in which the terms of
the arrangement provide the counterparty with a choice
of settlement
35
4
If an entity has granted the counterparty the right to choose whether a
share-based payment transaction is settled in cash4 or by issuing equity
instruments, the entity has granted a compound financial instrument, which
includes a debt component (ie the counterparty’s right to demand payment in
cash) and an equity component (ie the counterparty’s right to demand
settlement in equity instruments rather than in cash). For transactions with
In paragraphs 35–43, all references to cash also include other assets of the entity.
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parties other than employees, in which the fair value of the goods or services
received is measured directly, the entity shall measure the equity component of
the compound financial instrument as the difference between the fair value of
the goods or services received and the fair value of the debt component, at the
date when the goods or services are received.
36
For other transactions, including transactions with employees, the entity shall
measure the fair value of the compound financial instrument at the
measurement date, taking into account the terms and conditions on which the
rights to cash or equity instruments were granted.
37
To apply paragraph 36, the entity shall first measure the fair value of the debt
component, and then measure the fair value of the equity component—taking
into account that the counterparty must forfeit the right to receive cash in order
to receive the equity instrument. The fair value of the compound financial
instrument is the sum of the fair values of the two components. However,
share-based payment transactions in which the counterparty has the choice of
settlement are often structured so that the fair value of one settlement
alternative is the same as the other. For example, the counterparty might have
the choice of receiving share options or cash-settled share appreciation rights.
In such cases, the fair value of the equity component is zero, and hence the fair
value of the compound financial instrument is the same as the fair value of the
debt component. Conversely, if the fair values of the settlement alternatives
differ, the fair value of the equity component usually will be greater than zero,
in which case the fair value of the compound financial instrument will be
greater than the fair value of the debt component.
38
The entity shall account separately for the goods or services received or acquired
in respect of each component of the compound financial instrument. For the
debt component, the entity shall recognise the goods or services acquired, and a
liability to pay for those goods or services, as the counterparty supplies goods or
renders service, in accordance with the requirements applying to cash-settled
share-based payment transactions (paragraphs 30–33).
For the equity
component (if any), the entity shall recognise the goods or services received, and
an increase in equity, as the counterparty supplies goods or renders service, in
accordance with the requirements applying to equity-settled share-based
payment transactions (paragraphs 10–29).
39
At the date of settlement, the entity shall remeasure the liability to its fair value.
If the entity issues equity instruments on settlement rather than paying cash,
the liability shall be transferred direct to equity, as the consideration for the
equity instruments issued.
40
If the entity pays in cash on settlement rather than issuing equity instruments,
that payment shall be applied to settle the liability in full. Any equity
component previously recognised shall remain within equity. By electing to
receive cash on settlement, the counterparty forfeited the right to receive equity
instruments. However, this requirement does not preclude the entity from
recognising a transfer within equity, ie a transfer from one component of equity
to another.
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Share-based payment transactions in which the terms of
the arrangement provide the entity with a choice of
settlement
41
For a share-based payment transaction in which the terms of the arrangement
provide an entity with the choice of whether to settle in cash or by issuing
equity instruments, the entity shall determine whether it has a present
obligation to settle in cash and account for the share-based payment transaction
accordingly. The entity has a present obligation to settle in cash if the choice of
settlement in equity instruments has no commercial substance (eg because the
entity is legally prohibited from issuing shares), or the entity has a past practice
or a stated policy of settling in cash, or generally settles in cash whenever the
counterparty asks for cash settlement.
42
If the entity has a present obligation to settle in cash, it shall account for the
transaction in accordance with the requirements applying to cash-settled
share-based payment transactions, in paragraphs 30–33.
43
If no such obligation exists, the entity shall account for the transaction in
accordance with the requirements applying to equity-settled share-based
payment transactions, in paragraphs 10–29. Upon settlement:
(a)
if the entity elects to settle in cash, the cash payment shall be accounted
for as the repurchase of an equity interest, ie as a deduction from equity,
except as noted in (c) below.
(b)
if the entity elects to settle by issuing equity instruments, no further
accounting is required (other than a transfer from one component of
equity to another, if necessary), except as noted in (c) below.
(c)
if the entity elects the settlement alternative with the higher fair value,
as at the date of settlement, the entity shall recognise an additional
expense for the excess value given, ie the difference between the cash
paid and the fair value of the equity instruments that would otherwise
have been issued, or the difference between the fair value of the equity
instruments issued and the amount of cash that would otherwise have
been paid, whichever is applicable.
Share-based payment transactions among group entities
(2009 amendments)
43A
For share-based payment transactions among group entities, in its separate or
individual financial statements, the entity receiving the goods or services shall
measure the goods or services received as either an equity-settled or a
cash-settled share-based payment transaction by assessing:
(a)
the nature of the awards granted, and
(b)
its own rights and obligations.
The amount recognised by the entity receiving the goods or services may differ
from the amount recognised by the consolidated group or by another group
entity settling the share-based payment transaction.
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43B
The entity receiving the goods or services shall measure the goods or services
received as an equity-settled share-based payment transaction when:
(a)
the awards granted are its own equity instruments, or
(b)
the entity has no obligation to settle the share-based payment
transaction.
The entity shall subsequently remeasure such an equity-settled share-based
payment transaction only for changes in non-market vesting conditions in
accordance with paragraphs 19–21. In all other circumstances, the entity
receiving the goods or services shall measure the goods or services received as a
cash-settled share-based payment transaction.
43C
The entity settling a share-based payment transaction when another entity in
the group receives the goods or services shall recognise the transaction as an
equity-settled share-based payment transaction only if it is settled in the entity’s
own equity instruments. Otherwise, the transaction shall be recognised as a
cash-settled share-based payment transaction.
43D
Some group transactions involve repayment arrangements that require one
group entity to pay another group entity for the provision of the share-based
payments to the suppliers of goods or services. In such cases, the entity that
receives the goods or services shall account for the share-based payment
transaction in accordance with paragraph 43B regardless of intragroup
repayment arrangements.
Disclosures
44
An entity shall disclose information that enables users of the financial
statements to understand the nature and extent of share-based payment
arrangements that existed during the period.
45
To give effect to the principle in paragraph 44, the entity shall disclose at least
the following:
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(a)
a description of each type of share-based payment arrangement that
existed at any time during the period, including the general terms and
conditions of each arrangement, such as vesting requirements, the
maximum term of options granted, and the method of settlement
(eg whether in cash or equity). An entity with substantially similar types
of share-based payment arrangements may aggregate this information,
unless separate disclosure of each arrangement is necessary to satisfy the
principle in paragraph 44.
(b)
the number and weighted average exercise prices of share options for
each of the following groups of options:
(i)
outstanding at the beginning of the period;
(ii)
granted during the period;
(iii)
forfeited during the period;
(iv)
exercised during the period;
(v)
expired during the period;
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(vi)
outstanding at the end of the period; and
(vii)
exercisable at the end of the period.
(c)
for share options exercised during the period, the weighted average
share price at the date of exercise. If options were exercised on a regular
basis throughout the period, the entity may instead disclose the
weighted average share price during the period.
(d)
for share options outstanding at the end of the period, the range of
exercise prices and weighted average remaining contractual life. If the
range of exercise prices is wide, the outstanding options shall be divided
into ranges that are meaningful for assessing the number and timing of
additional shares that may be issued and the cash that may be received
upon exercise of those options.
46
An entity shall disclose information that enables users of the financial
statements to understand how the fair value of the goods or services
received, or the fair value of the equity instruments granted, during the
period was determined.
47
If the entity has measured the fair value of goods or services received as
consideration for equity instruments of the entity indirectly, by reference to the
fair value of the equity instruments granted, to give effect to the principle in
paragraph 46, the entity shall disclose at least the following:
(a)
(b)
for share options granted during the period, the weighted average fair
value of those options at the measurement date and information on how
that fair value was measured, including:
(i)
the option pricing model used and the inputs to that model,
including the weighted average share price, exercise price,
expected volatility, option life, expected dividends, the risk-free
interest rate and any other inputs to the model, including the
method used and the assumptions made to incorporate the
effects of expected early exercise;
(ii)
how expected volatility was determined, including an
explanation of the extent to which expected volatility was based
on historical volatility; and
(iii)
whether and how any other features of the option grant were
incorporated into the measurement of fair value, such as a
market condition.
for other equity instruments granted during the period (ie other than
share options), the number and weighted average fair value of those
equity instruments at the measurement date, and information on how
that fair value was measured, including:
(i)
if fair value was not measured on the basis of an observable
market price, how it was determined;
(ii)
whether and how expected dividends were incorporated into the
measurement of fair value; and
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(iii)
(c)
whether and how any other features of the equity instruments
granted were incorporated into the measurement of fair value.
for share-based payment arrangements that were modified during the
period:
(i)
an explanation of those modifications;
(ii)
the incremental fair value granted (as a result of those
modifications); and
(iii)
information on how the incremental fair value granted was
measured, consistently with the requirements set out in (a) and
(b) above, where applicable.
48
If the entity has measured directly the fair value of goods or services received
during the period, the entity shall disclose how that fair value was determined,
eg whether fair value was measured at a market price for those goods or services.
49
If the entity has rebutted the presumption in paragraph 13, it shall disclose that
fact, and give an explanation of why the presumption was rebutted.
50
An entity shall disclose information that enables users of the financial
statements to understand the effect of share-based payment transactions
on the entity’s profit or loss for the period and on its financial position.
51
To give effect to the principle in paragraph 50, the entity shall disclose at least
the following:
52
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(a)
the total expense recognised for the period arising from share-based
payment transactions in which the goods or services received did not
qualify for recognition as assets and hence were recognised immediately
as an expense, including separate disclosure of that portion of the total
expense that arises from transactions accounted for as equity-settled
share-based payment transactions;
(b)
for liabilities arising from share-based payment transactions:
(i)
the total carrying amount at the end of the period; and
(ii)
the total intrinsic value at the end of the period of liabilities for
which the counterparty’s right to cash or other assets had vested
by the end of the period (eg vested share appreciation rights).
If the information required to be disclosed by this Standard does not satisfy the
principles in paragraphs 44, 46 and 50, the entity shall disclose such additional
information as is necessary to satisfy them. For example, if an entity has
classified any share-based payment transactions as equity-settled in accordance
with paragraph 33F, the entity shall disclose an estimate of the amount that it
expects to transfer to the tax authority to settle the employee’s tax obligation
when it is necessary to inform users about the future cash flow effects associated
with the share-based payment arrangement.
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Transitional provisions
53
For equity-settled share-based payment transactions, the entity shall apply this
IFRS to grants of shares, share options or other equity instruments that were
granted after 7 November 2002 and had not yet vested at the effective date of
this IFRS.
54
The entity is encouraged, but not required, to apply this IFRS to other grants of
equity instruments if the entity has disclosed publicly the fair value of those
equity instruments, determined at the measurement date.
55
For all grants of equity instruments to which this IFRS is applied, the entity shall
restate comparative information and, where applicable, adjust the opening
balance of retained earnings for the earliest period presented.
56
For all grants of equity instruments to which this IFRS has not been applied
(eg equity instruments granted on or before 7 November 2002), the entity shall
nevertheless disclose the information required by paragraphs 44 and 45.
57
If, after the IFRS becomes effective, an entity modifies the terms or conditions of
a grant of equity instruments to which this IFRS has not been applied, the entity
shall nevertheless apply paragraphs 26–29 to account for any such
modifications.
58
For liabilities arising from share-based payment transactions existing at the
effective date of this IFRS, the entity shall apply the IFRS retrospectively. For
these liabilities, the entity shall restate comparative information, including
adjusting the opening balance of retained earnings in the earliest period
presented for which comparative information has been restated, except that the
entity is not required to restate comparative information to the extent that the
information relates to a period or date that is earlier than 7 November 2002.
59
The entity is encouraged, but not required, to apply retrospectively the IFRS to
other liabilities arising from share-based payment transactions, for example, to
liabilities that were settled during a period for which comparative information
is presented.
59A
An entity shall apply the amendments in paragraphs 30–31, 33–33H and
B44A–B44C as set out below. Prior periods shall not be restated.
(a)
The amendments in paragraphs B44A–B44C apply only to modifications
that occur on or after the date that an entity first applies the
amendments.
(b)
The amendments in paragraphs 30–31 and 33–33D apply to share-based
payment transactions that are unvested at the date that an entity first
applies the amendments and to share-based payment transactions with a
grant date on or after the date that an entity first applies the
amendments. For unvested share-based payment transactions granted
prior to the date that an entity first applies the amendments, an entity
shall remeasure the liability at that date and recognise the effect of the
remeasurement in opening retained earnings (or other component of
equity, as appropriate) of the reporting period in which the amendments
are first applied.
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(c)
59B
The amendments in paragraphs 33E–33H and the amendment to
paragraph 52 apply to share-based payment transactions that are
unvested (or vested but unexercised), at the date that an entity first
applies the amendments and to share-based payment transactions with a
grant date on or after the date that an entity first applies the
amendments. For unvested (or vested but unexercised) share-based
payment transactions (or components thereof) that were previously
classified as cash-settled share-based payments but now are classified as
equity-settled in accordance with the amendments, an entity shall
reclassify the carrying value of the share-based payment liability to
equity at the date that it first applies the amendments.
Notwithstanding the requirements in paragraph 59A, an entity may apply the
amendments in paragraph 63D retrospectively, subject to the transitional
provisions in paragraphs 53–59 of this Standard, in accordance with IAS 8
Accounting Policies, Changes in Accounting Estimates and Errors if and only if it is
possible without hindsight. If an entity elects retrospective application, it must
do so for all of the amendments made by Classification and Measurement of
Share-based Payment Transactions (Amendments to IFRS 2).
Effective date
60
An entity shall apply this IFRS for annual periods beginning on or after
1 January 2005. Earlier application is encouraged. If an entity applies the IFRS
for a period beginning before 1 January 2005, it shall disclose that fact.
61
IFRS 3 (as revised in 2008) and Improvements to IFRSs issued in April 2009 amended
paragraph 5. An entity shall apply those amendments for annual periods
beginning on or after 1 July 2009. Earlier application is permitted. If an entity
applies IFRS 3 (revised 2008) for an earlier period, the amendments shall also be
applied for that earlier period.
62
An entity shall apply the following amendments retrospectively in annual
periods beginning on or after 1 January 2009:
(a)
the requirements in paragraph 21A in respect of the treatment of
non-vesting conditions;
(b)
the revised definitions of ‘vest’ and ‘vesting conditions’ in Appendix A;
(c)
the amendments in paragraphs 28 and 28A in respect of cancellations.
Earlier application is permitted. If an entity applies these amendments for a
period beginning before 1 January 2009, it shall disclose that fact.
63
An entity shall apply the following amendments made by Group Cash-settled
Share-based Payment Transactions issued in June 2009 retrospectively, subject to the
transitional provisions in paragraphs 53–59, in accordance with IAS 8 for annual
periods beginning on or after 1 January 2010:
(a)
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the amendment of paragraph 2, the deletion of paragraph 3 and the
addition of paragraphs 3A and 43A–43D and of paragraphs B45, B47,
B50, B54, B56–B58 and B60 in Appendix B in respect of the accounting
for transactions among group entities.
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(b)
the revised definitions in Appendix A of the following terms:
●
cash-settled share-based payment transaction,
●
equity-settled share-based payment transaction,
●
share-based payment arrangement, and
●
share-based payment transaction.
If the information necessary for retrospective application is not available, an
entity shall reflect in its separate or individual financial statements the amounts
previously recognised in the group’s consolidated financial statements. Earlier
application is permitted. If an entity applies the amendments for a period
beginning before 1 January 2010, it shall disclose that fact.
63A
IFRS 10 Consolidated Financial Statements and IFRS 11, issued in May 2011, amended
paragraph 5 and Appendix A. An entity shall apply those amendments when it
applies IFRS 10 and IFRS 11.
63B
Annual Improvements to IFRSs 2010–2012 Cycle, issued in December 2013, amended
paragraphs 15 and 19. In Appendix A, the definitions of ‘vesting conditions’ and
‘market condition’ were amended and the definitions of ‘performance
condition’ and ‘service condition’ were added. An entity shall prospectively apply
that amendment to share-based payment transactions for which the grant date
is on or after 1 July 2014. Earlier application is permitted. If an entity applies
that amendment for an earlier period it shall disclose that fact.
63C
IFRS 9, as issued in July 2014, amended paragraph 6. An entity shall apply that
amendment when it applies IFRS 9.
63D
Classification and Measurement of Share-based Payment Transactions (Amendments to
IFRS 2), issued in June 2016, amended paragraphs 19, 30–31, 33, 52 and 63 and
added paragraphs 33A–33H, 59A–59B, 63D and B44A–B44C and their related
headings. An entity shall apply those amendments for annual periods
beginning on or after 1 January 2018. Earlier application is permitted. If an
entity applies the amendments for an earlier period, it shall disclose that fact.
Withdrawal of Interpretations
64
Group Cash-settled Share-based Payment Transactions issued in June 2009 supersedes
IFRIC 8 Scope of IFRS 2 and IFRIC 11 IFRS 2—Group and Treasury Share Transactions.
The amendments made by that document incorporated the previous
requirements set out in IFRIC 8 and IFRIC 11 as follows:
(a)
amended paragraph 2 and added paragraph 13A in respect of the
accounting for transactions in which the entity cannot identify
specifically some or all of the goods or services received. Those
requirements were effective for annual periods beginning on or after
1 May 2006.
(b)
added paragraphs B46, B48, B49, B51–B53, B55, B59 and B61 in
Appendix B in respect of the accounting for transactions among group
entities. Those requirements were effective for annual periods beginning
on or after 1 March 2007.
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Those requirements were applied retrospectively in accordance with the
requirements of IAS 8, subject to the transitional provisions of IFRS 2.
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Appendix A
Defined terms
This appendix is an integral part of the IFRS.
cash-settled
share-based payment
transaction
A share-based payment transaction in which the entity
acquires goods or services by incurring a liability to transfer cash
or other assets to the supplier of those goods or services for
amounts that are based on the price (or value) of equity
instruments (including shares or share options) of the entity or
another group entity.
employees and others
providing similar
services
Individuals who render personal services to the entity and either
(a) the individuals are regarded as employees for legal or tax
purposes, (b) the individuals work for the entity under its
direction in the same way as individuals who are regarded as
employees for legal or tax purposes, or (c) the services rendered
are similar to those rendered by employees. For example, the
term encompasses all management personnel, ie those persons
having authority and responsibility for planning, directing and
controlling the activities of the entity, including non-executive
directors.
equity instrument
A contract that evidences a residual interest in the assets of an
entity after deducting all of its liabilities.5
equity instrument
granted
The right (conditional or unconditional) to an equity
instrument of the entity conferred by the entity on another
party, under a share-based payment arrangement.
equity-settled
share-based payment
transaction
A share-based payment transaction in which the entity
fair value
5
(a)
receives goods or services as consideration for its own
equity instruments (including shares or share
options), or
(b)
receives goods or services but has no obligation to settle
the transaction with the supplier.
The amount for which an asset could be exchanged, a liability
settled, or an equity instrument granted could be exchanged,
between knowledgeable, willing parties in an arm’s length
transaction.
The Conceptual Framework for Financial Reporting defines a liability as a present obligation of the entity
arising from past events, the settlement of which is expected to result in an outflow from the entity
of resources embodying economic benefits (ie an outflow of cash or other assets of the entity).
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grant date
The date at which the entity and another party (including an
employee) agree to a share-based payment arrangement,
being when the entity and the counterparty have a shared
understanding of the terms and conditions of the arrangement.
At grant date the entity confers on the counterparty the right to
cash, other assets, or equity instruments of the entity, provided
the specified vesting conditions, if any, are met. If that
agreement is subject to an approval process (for example, by
shareholders), grant date is the date when that approval is
obtained.
intrinsic value
The difference between the fair value of the shares to which the
counterparty has the (conditional or unconditional) right to
subscribe or which it has the right to receive, and the price (if
any) the counterparty is (or will be) required to pay for those
shares. For example, a share option with an exercise price of
CU15,6 on a share with a fair value of CU20, has an intrinsic value
of CU5.
market condition
A performance condition upon which the exercise price,
vesting or exercisability of an equity instrument depends that is
related to the market price (or value) of the entity’s equity
instruments (or the equity instruments of another entity in the
same group), such as:
(a)
attaining a specified share price or a specified amount of
intrinsic value of a share option; or
(b)
achieving a specified target that is based on the market
price (or value) of the entity’s equity instruments (or the
equity instruments of another entity in the same group)
relative to an index of market prices of equity
instruments of other entities.
A market condition requires the counterparty to complete a
specified period of service (ie a service condition); the service
requirement can be explicit or implicit.
measurement date
6
The date at which the fair value of the equity instruments
granted is measured for the purposes of this IFRS. For
transactions with employees and others providing similar
services, the measurement date is grant date. For transactions
with parties other than employees (and those providing similar
services), the measurement date is the date the entity obtains the
goods or the counterparty renders service.
In this appendix, monetary amounts are denominated in ‘currency units (CU)’.
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performance condition
A vesting condition that requires:
(a)
the counterparty to complete a specified period of service
(ie a service condition); the service requirement can be
explicit or implicit; and
(b)
specified performance target(s) to be met while the
counterparty is rendering the service required in (a).
The period of achieving the performance target(s):
(a)
shall not extend beyond the end of the service period; and
(b)
may start before the service period on the condition that
the commencement date of the performance target is not
substantially before the commencement of the service
period.
A performance target is defined by reference to:
(a)
the entity’s own operations (or activities) or the
operations or activities of another entity in the same
group (ie a non-market condition); or
(b)
the price (or value) of the entity’s equity instruments or
the equity instruments of another entity in the same
group (including shares and share options) (ie a market
condition).
A performance target might relate either to the performance of
the entity as a whole or to some part of the entity (or part of the
group), such as a division or an individual employee.
reload feature
A feature that provides for an automatic grant of additional
share options whenever the option holder exercises previously
granted options using the entity’s shares, rather than cash, to
satisfy the exercise price.
reload option
A new share option granted when a share is used to satisfy the
exercise price of a previous share option.
service condition
A vesting condition that requires the counterparty to complete
a specified period of service during which services are provided to
the entity. If the counterparty, regardless of the reason, ceases to
provide service during the vesting period, it has failed to satisfy
the condition.
A service condition does not require a
performance target to be met.
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share-based payment
arrangement
An agreement between the entity (or another group7 entity or
any shareholder of any group entity) and another party
(including an employee) that entitles the other party to receive
(a)
cash or other assets of the entity for amounts that are
based on the price (or value) of equity instruments
(including shares or share options) of the entity or
another group entity, or
(b)
equity instruments (including shares or share options)
of the entity or another group entity,
provided the specified vesting conditions, if any, are met.
share-based payment
transaction
A transaction in which the entity
(a)
receives goods or services from the supplier of those
goods or services (including an employee) in a
share-based payment arrangement, or
(b)
incurs an obligation to settle the transaction with the
supplier in a share-based payment arrangement when
another group entity receives those goods or services.
share option
A contract that gives the holder the right, but not the obligation,
to subscribe to the entity’s shares at a fixed or determinable price
for a specified period of time.
vest
To become an entitlement. Under a share-based payment
arrangement, a counterparty’s right to receive cash, other assets
or equity instruments of the entity vests when the
counterparty’s entitlement is no longer conditional on the
satisfaction of any vesting conditions.
vesting condition
A condition that determines whether the entity receives the
services that entitle the counterparty to receive cash, other assets
or equity instruments of the entity, under a share-based
payment arrangement. A vesting condition is either a service
condition or a performance condition.
vesting period
The period during which all the specified vesting conditions of
a share-based payment arrangement are to be satisfied.
7
A ‘group’ is defined in Appendix A of IFRS 10 Consolidated Financial Statements as ‘a parent and its
subsidiaries’ from the perspective of the reporting entity’s ultimate parent.
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Appendix B
Application guidance
This appendix is an integral part of the IFRS.
Estimating the fair value of equity instruments granted
B1
Paragraphs B2–B41 of this appendix discuss measurement of the fair value of
shares and share options granted, focusing on the specific terms and conditions
that are common features of a grant of shares or share options to employees.
Therefore, it is not exhaustive. Furthermore, because the valuation issues
discussed below focus on shares and share options granted to employees, it is
assumed that the fair value of the shares or share options is measured at grant
date. However, many of the valuation issues discussed below (eg determining
expected volatility) also apply in the context of estimating the fair value of
shares or share options granted to parties other than employees at the date the
entity obtains the goods or the counterparty renders service.
Shares
B2
For shares granted to employees, the fair value of the shares shall be measured at
the market price of the entity’s shares (or an estimated market price, if the
entity’s shares are not publicly traded), adjusted to take into account the terms
and conditions upon which the shares were granted (except for vesting
conditions that are excluded from the measurement of fair value in accordance
with paragraphs 19–21).
B3
For example, if the employee is not entitled to receive dividends during the
vesting period, this factor shall be taken into account when estimating the fair
value of the shares granted. Similarly, if the shares are subject to restrictions on
transfer after vesting date, that factor shall be taken into account, but only to
the extent that the post-vesting restrictions affect the price that a
knowledgeable, willing market participant would pay for that share. For
example, if the shares are actively traded in a deep and liquid market,
post-vesting transfer restrictions may have little, if any, effect on the price that a
knowledgeable, willing market participant would pay for those shares.
Restrictions on transfer or other restrictions that exist during the vesting period
shall not be taken into account when estimating the grant date fair value of the
shares granted, because those restrictions stem from the existence of vesting
conditions, which are accounted for in accordance with paragraphs 19–21.
Share options
B4
For share options granted to employees, in many cases market prices are not
available, because the options granted are subject to terms and conditions that
do not apply to traded options. If traded options with similar terms and
conditions do not exist, the fair value of the options granted shall be estimated
by applying an option pricing model.
B5
The entity shall consider factors that knowledgeable, willing market
participants would consider in selecting the option pricing model to apply. For
example, many employee options have long lives, are usually exercisable during
the period between vesting date and the end of the options’ life, and are often
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exercised early. These factors should be considered when estimating the grant
date fair value of the options. For many entities, this might preclude the use of
the Black-Scholes-Merton formula, which does not allow for the possibility of
exercise before the end of the option’s life and may not adequately reflect the
effects of expected early exercise. It also does not allow for the possibility that
expected volatility and other model inputs might vary over the option’s life.
However, for share options with relatively short contractual lives, or that must
be exercised within a short period of time after vesting date, the factors
identified above may not apply. In these instances, the Black-Scholes-Merton
formula may produce a value that is substantially the same as a more flexible
option pricing model.
B6
All option pricing models take into account, as a minimum, the following
factors:
(a)
the exercise price of the option;
(b)
the life of the option;
(c)
the current price of the underlying shares;
(d)
the expected volatility of the share price;
(e)
the dividends expected on the shares (if appropriate); and
(f)
the risk-free interest rate for the life of the option.
B7
Other factors that knowledgeable, willing market participants would consider in
setting the price shall also be taken into account (except for vesting conditions
and reload features that are excluded from the measurement of fair value in
accordance with paragraphs 19–22).
B8
For example, a share option granted to an employee typically cannot be
exercised during specified periods (eg during the vesting period or during
periods specified by securities regulators). This factor shall be taken into
account if the option pricing model applied would otherwise assume that the
option could be exercised at any time during its life. However, if an entity uses
an option pricing model that values options that can be exercised only at the
end of the options’ life, no adjustment is required for the inability to exercise
them during the vesting period (or other periods during the options’ life),
because the model assumes that the options cannot be exercised during those
periods.
B9
Similarly, another factor common to employee share options is the possibility of
early exercise of the option, for example, because the option is not freely
transferable, or because the employee must exercise all vested options upon
cessation of employment. The effects of expected early exercise shall be taken
into account, as discussed in paragraphs B16–B21.
B10
Factors that a knowledgeable, willing market participant would not consider in
setting the price of a share option (or other equity instrument) shall not be taken
into account when estimating the fair value of share options (or other equity
instruments) granted. For example, for share options granted to employees,
factors that affect the value of the option from the individual employee’s
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perspective only are not relevant to estimating the price that would be set by a
knowledgeable, willing market participant.
Inputs to option pricing models
B11
In estimating the expected volatility of and dividends on the underlying shares,
the objective is to approximate the expectations that would be reflected in a
current market or negotiated exchange price for the option. Similarly, when
estimating the effects of early exercise of employee share options, the objective
is to approximate the expectations that an outside party with access to detailed
information about employees’ exercise behaviour would develop based on
information available at the grant date.
B12
Often, there is likely to be a range of reasonable expectations about future
volatility, dividends and exercise behaviour. If so, an expected value should be
calculated, by weighting each amount within the range by its associated
probability of occurrence.
B13
Expectations about the future are generally based on experience, modified if the
future is reasonably expected to differ from the past. In some circumstances,
identifiable factors may indicate that unadjusted historical experience is a
relatively poor predictor of future experience. For example, if an entity with two
distinctly different lines of business disposes of the one that was significantly
less risky than the other, historical volatility may not be the best information on
which to base reasonable expectations for the future.
B14
In other circumstances, historical information may not be available. For
example, a newly listed entity will have little, if any, historical data on the
volatility of its share price. Unlisted and newly listed entities are discussed
further below.
B15
In summary, an entity should not simply base estimates of volatility, exercise
behaviour and dividends on historical information without considering the
extent to which the past experience is expected to be reasonably predictive of
future experience.
Expected early exercise
B16
Employees often exercise share options early, for a variety of reasons. For
example, employee share options are typically non-transferable. This often
causes employees to exercise their share options early, because that is the only
way for the employees to liquidate their position. Also, employees who cease
employment are usually required to exercise any vested options within a short
period of time, otherwise the share options are forfeited. This factor also causes
the early exercise of employee share options. Other factors causing early
exercise are risk aversion and lack of wealth diversification.
B17
The means by which the effects of expected early exercise are taken into account
depends upon the type of option pricing model applied. For example, expected
early exercise could be taken into account by using an estimate of the option’s
expected life (which, for an employee share option, is the period of time from
grant date to the date on which the option is expected to be exercised) as an
input into an option pricing model (eg the Black-Scholes-Merton formula).
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Alternatively, expected early exercise could be modelled in a binomial or similar
option pricing model that uses contractual life as an input.
B18
Factors to consider in estimating early exercise include:
(a)
the length of the vesting period, because the share option typically
cannot be exercised until the end of the vesting period. Hence,
determining the valuation implications of expected early exercise is
based on the assumption that the options will vest. The implications of
vesting conditions are discussed in paragraphs 19–21.
(b)
the average length of time similar options have remained outstanding in
the past.
(c)
the price of the underlying shares. Experience may indicate that the
employees tend to exercise options when the share price reaches a
specified level above the exercise price.
(d)
the employee’s level within the organisation. For example, experience
might indicate that higher-level employees tend to exercise options later
than lower-level employees (discussed further in paragraph B21).
(e)
expected volatility of the underlying shares. On average, employees
might tend to exercise options on highly volatile shares earlier than on
shares with low volatility.
B19
As noted in paragraph B17, the effects of early exercise could be taken into
account by using an estimate of the option’s expected life as an input into an
option pricing model. When estimating the expected life of share options
granted to a group of employees, the entity could base that estimate on an
appropriately weighted average expected life for the entire employee group or
on appropriately weighted average lives for subgroups of employees within the
group, based on more detailed data about employees’ exercise behaviour
(discussed further below).
B20
Separating an option grant into groups for employees with relatively
homogeneous exercise behaviour is likely to be important. Option value is not a
linear function of option term; value increases at a decreasing rate as the term
lengthens. For example, if all other assumptions are equal, although a two-year
option is worth more than a one-year option, it is not worth twice as much. That
means that calculating estimated option value on the basis of a single weighted
average life that includes widely differing individual lives would overstate the
total fair value of the share options granted. Separating options granted into
several groups, each of which has a relatively narrow range of lives included in
its weighted average life, reduces that overstatement.
B21
Similar considerations apply when using a binomial or similar model. For
example, the experience of an entity that grants options broadly to all levels of
employees might indicate that top-level executives tend to hold their options
longer than middle-management employees hold theirs and that lower-level
employees tend to exercise their options earlier than any other group. In
addition, employees who are encouraged or required to hold a minimum
amount of their employer’s equity instruments, including options, might on
average exercise options later than employees not subject to that provision. In
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those situations, separating options by groups of recipients with relatively
homogeneous exercise behaviour will result in a more accurate estimate of the
total fair value of the share options granted.
Expected volatility
B22
Expected volatility is a measure of the amount by which a price is expected to
fluctuate during a period. The measure of volatility used in option pricing
models is the annualised standard deviation of the continuously compounded
rates of return on the share over a period of time. Volatility is typically
expressed in annualised terms that are comparable regardless of the time period
used in the calculation, for example, daily, weekly or monthly price
observations.
B23
The rate of return (which may be positive or negative) on a share for a period
measures how much a shareholder has benefited from dividends and
appreciation (or depreciation) of the share price.
B24
The expected annualised volatility of a share is the range within which the
continuously compounded annual rate of return is expected to fall
approximately two-thirds of the time. For example, to say that a share with an
expected continuously compounded rate of return of 12 per cent has a volatility
of 30 per cent means that the probability that the rate of return on the share for
one year will be between –18 per cent (12% – 30%) and 42 per cent (12% + 30%) is
approximately two-thirds. If the share price is CU100 at the beginning of the
year and no dividends are paid, the year-end share price would be expected to be
between CU83.53 (CU100 × e–0.18) and CU152.20 (CU100 × e0.42) approximately
two-thirds of the time.
B25
Factors to consider in estimating expected volatility include:
(a)
implied volatility from traded share options on the entity’s shares, or
other traded instruments of the entity that include option features (such
as convertible debt), if any.
(b)
the historical volatility of the share price over the most recent period
that is generally commensurate with the expected term of the option
(taking into account the remaining contractual life of the option and the
effects of expected early exercise).
(c)
the length of time an entity’s shares have been publicly traded. A newly
listed entity might have a high historical volatility, compared with
similar entities that have been listed longer. Further guidance for newly
listed entities is given below.
(d)
the tendency of volatility to revert to its mean, ie its long-term average
level, and other factors indicating that expected future volatility might
differ from past volatility. For example, if an entity’s share price was
extraordinarily volatile for some identifiable period of time because of a
failed takeover bid or a major restructuring, that period could be
disregarded in computing historical average annual volatility.
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(e)
appropriate and regular intervals for price observations. The price
observations should be consistent from period to period. For example,
an entity might use the closing price for each week or the highest price
for the week, but it should not use the closing price for some weeks and
the highest price for other weeks. Also, the price observations should be
expressed in the same currency as the exercise price.
Newly listed entities
B26
As noted in paragraph B25, an entity should consider historical volatility of the
share price over the most recent period that is generally commensurate with the
expected option term. If a newly listed entity does not have sufficient
information on historical volatility, it should nevertheless compute historical
volatility for the longest period for which trading activity is available. It could
also consider the historical volatility of similar entities following a comparable
period in their lives. For example, an entity that has been listed for only one
year and grants options with an average expected life of five years might
consider the pattern and level of historical volatility of entities in the same
industry for the first six years in which the shares of those entities were publicly
traded.
Unlisted entities
B27
An unlisted entity will not have historical information to consider when
estimating expected volatility. Some factors to consider instead are set out
below.
B28
In some cases, an unlisted entity that regularly issues options or shares to
employees (or other parties) might have set up an internal market for its shares.
The volatility of those share prices could be considered when estimating
expected volatility.
B29
Alternatively, the entity could consider the historical or implied volatility of
similar listed entities, for which share price or option price information is
available, to use when estimating expected volatility. This would be appropriate
if the entity has based the value of its shares on the share prices of similar listed
entities.
B30
If the entity has not based its estimate of the value of its shares on the share
prices of similar listed entities, and has instead used another valuation
methodology to value its shares, the entity could derive an estimate of expected
volatility consistent with that valuation methodology. For example, the entity
might value its shares on a net asset or earnings basis. It could consider the
expected volatility of those net asset values or earnings.
Expected dividends
B31
Whether expected dividends should be taken into account when measuring the
fair value of shares or options granted depends on whether the counterparty is
entitled to dividends or dividend equivalents.
B32
For example, if employees were granted options and are entitled to dividends on
the underlying shares or dividend equivalents (which might be paid in cash or
applied to reduce the exercise price) between grant date and exercise date, the
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options granted should be valued as if no dividends will be paid on the
underlying shares, ie the input for expected dividends should be zero.
B33
Similarly, when the grant date fair value of shares granted to employees is
estimated, no adjustment is required for expected dividends if the employee is
entitled to receive dividends paid during the vesting period.
B34
Conversely, if the employees are not entitled to dividends or dividend
equivalents during the vesting period (or before exercise, in the case of an
option), the grant date valuation of the rights to shares or options should take
expected dividends into account. That is to say, when the fair value of an option
grant is estimated, expected dividends should be included in the application of
an option pricing model. When the fair value of a share grant is estimated, that
valuation should be reduced by the present value of dividends expected to be
paid during the vesting period.
B35
Option pricing models generally call for expected dividend yield. However, the
models may be modified to use an expected dividend amount rather than a
yield. An entity may use either its expected yield or its expected payments. If
the entity uses the latter, it should consider its historical pattern of increases in
dividends. For example, if an entity’s policy has generally been to increase
dividends by approximately 3 per cent per year, its estimated option value
should not assume a fixed dividend amount throughout the option’s life unless
there is evidence that supports that assumption.
B36
Generally, the assumption about expected dividends should be based on publicly
available information. An entity that does not pay dividends and has no plans to
do so should assume an expected dividend yield of zero. However, an emerging
entity with no history of paying dividends might expect to begin paying
dividends during the expected lives of its employee share options. Those entities
could use an average of their past dividend yield (zero) and the mean dividend
yield of an appropriately comparable peer group.
Risk-free interest rate
B37
Typically, the risk-free interest rate is the implied yield currently available on
zero-coupon government issues of the country in whose currency the exercise
price is expressed, with a remaining term equal to the expected term of the
option being valued (based on the option’s remaining contractual life and taking
into account the effects of expected early exercise). It may be necessary to use an
appropriate substitute, if no such government issues exist or circumstances
indicate that the implied yield on zero-coupon government issues is not
representative of the risk-free interest rate (for example, in high inflation
economies).
Also, an appropriate substitute should be used if market
participants would typically determine the risk-free interest rate by using that
substitute, rather than the implied yield of zero-coupon government issues,
when estimating the fair value of an option with a life equal to the expected
term of the option being valued.
Capital structure effects
B38
Typically, third parties, not the entity, write traded share options. When these
share options are exercised, the writer delivers shares to the option holder.
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Those shares are acquired from existing shareholders. Hence the exercise of
traded share options has no dilutive effect.
B39
In contrast, if share options are written by the entity, new shares are issued
when those share options are exercised (either actually issued or issued in
substance, if shares previously repurchased and held in treasury are used).
Given that the shares will be issued at the exercise price rather than the current
market price at the date of exercise, this actual or potential dilution might
reduce the share price, so that the option holder does not make as large a gain
on exercise as on exercising an otherwise similar traded option that does not
dilute the share price.
B40
Whether this has a significant effect on the value of the share options granted
depends on various factors, such as the number of new shares that will be issued
on exercise of the options compared with the number of shares already issued.
Also, if the market already expects that the option grant will take place, the
market may have already factored the potential dilution into the share price at
the date of grant.
B41
However, the entity should consider whether the possible dilutive effect of the
future exercise of the share options granted might have an impact on their
estimated fair value at grant date. Option pricing models can be adapted to take
into account this potential dilutive effect.
Modifications to equity-settled share-based payment
arrangements
B42
Paragraph 27 requires that, irrespective of any modifications to the terms and
conditions on which the equity instruments were granted, or a cancellation or
settlement of that grant of equity instruments, the entity should recognise, as a
minimum, the services received measured at the grant date fair value of the
equity instruments granted, unless those equity instruments do not vest because
of failure to satisfy a vesting condition (other than a market condition) that was
specified at grant date. In addition, the entity should recognise the effects of
modifications that increase the total fair value of the share-based payment
arrangement or are otherwise beneficial to the employee.
B43
To apply the requirements of paragraph 27:
(a)
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if the modification increases the fair value of the equity instruments
granted (eg by reducing the exercise price), measured immediately
before and after the modification, the entity shall include the
incremental fair value granted in the measurement of the amount
recognised for services received as consideration for the equity
instruments granted. The incremental fair value granted is the
difference between the fair value of the modified equity instrument and
that of the original equity instrument, both estimated as at the date of
the modification. If the modification occurs during the vesting period,
the incremental fair value granted is included in the measurement of the
amount recognised for services received over the period from the
modification date until the date when the modified equity instruments
vest, in addition to the amount based on the grant date fair value of the
original equity instruments, which is recognised over the remainder of
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the original vesting period. If the modification occurs after vesting date,
the incremental fair value granted is recognised immediately, or over the
vesting period if the employee is required to complete an additional
period of service before becoming unconditionally entitled to those
modified equity instruments.
B44
(b)
similarly, if the modification increases the number of equity instruments
granted, the entity shall include the fair value of the additional equity
instruments granted, measured at the date of the modification, in the
measurement of the amount recognised for services received as
consideration for the equity instruments granted, consistently with the
requirements in (a) above. For example, if the modification occurs
during the vesting period, the fair value of the additional equity
instruments granted is included in the measurement of the amount
recognised for services received over the period from the modification
date until the date when the additional equity instruments vest, in
addition to the amount based on the grant date fair value of the equity
instruments originally granted, which is recognised over the remainder
of the original vesting period.
(c)
if the entity modifies the vesting conditions in a manner that is
beneficial to the employee, for example, by reducing the vesting period
or by modifying or eliminating a performance condition (other than a
market condition, changes to which are accounted for in accordance
with (a) above), the entity shall take the modified vesting conditions into
account when applying the requirements of paragraphs 19–21.
Furthermore, if the entity modifies the terms or conditions of the equity
instruments granted in a manner that reduces the total fair value of the
share-based payment arrangement, or is not otherwise beneficial to the
employee, the entity shall nevertheless continue to account for the services
received as consideration for the equity instruments granted as if that
modification had not occurred (other than a cancellation of some or all the
equity instruments granted, which shall be accounted for in accordance with
paragraph 28). For example:
(a)
if the modification reduces the fair value of the equity instruments
granted, measured immediately before and after the modification, the
entity shall not take into account that decrease in fair value and shall
continue to measure the amount recognised for services received as
consideration for the equity instruments based on the grant date fair
value of the equity instruments granted.
(b)
if the modification reduces the number of equity instruments granted to
an employee, that reduction shall be accounted for as a cancellation of
that portion of the grant, in accordance with the requirements of
paragraph 28.
(c)
if the entity modifies the vesting conditions in a manner that is not
beneficial to the employee, for example, by increasing the vesting period
or by modifying or adding a performance condition (other than a market
condition, changes to which are accounted for in accordance with (a)
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above), the entity shall not take the modified vesting conditions into
account when applying the requirements of paragraphs 19–21.
Accounting for a modification of a share-based payment
transaction that changes its classification from
cash-settled to equity-settled
B44A
If the terms and conditions of a cash-settled share-based payment transaction are
modified with the result that it becomes an equity-settled share-based payment
transaction, the transaction is accounted for as such from the date of the
modification. Specifically:
(a)
The equity-settled share-based payment transaction is measured by
reference to the fair value of the equity instruments granted at the
modification date. The equity-settled share-based payment transaction is
recognised in equity on the modification date to the extent to which
goods or services have been received.
(b)
The liability for the cash-settled share-based payment transaction as at
the modification date is derecognised on that date.
(c)
Any difference between the carrying amount of the liability derecognised
and the amount of equity recognised on the modification date is
recognised immediately in profit or loss.
B44B
If, as a result of the modification, the vesting period is extended or shortened,
the application of the requirements in paragraph B44A reflect the modified
vesting period. The requirements in paragraph B44A apply even if the
modification occurs after the vesting period.
B44C
A cash-settled share-based payment transaction may be cancelled or settled
(other than a transaction cancelled by forfeiture when the vesting conditions are
not satisfied). If equity instruments are granted and, on that grant date, the
entity identifies them as a replacement for the cancelled cash-settled share-based
payment, the entity shall apply paragraphs B44A and B44B.
Share-based payment transactions among group entities
(2009 amendments)
B45
Paragraphs 43A–43C address the accounting for share-based payment
transactions among group entities in each entity’s separate or individual
financial statements.
Paragraphs B46–B61 discuss how to apply the
requirements in paragraphs 43A–43C. As noted in paragraph 43D, share-based
payment transactions among group entities may take place for a variety of
reasons depending on facts and circumstances. Therefore, this discussion is not
exhaustive and assumes that when the entity receiving the goods or services has
no obligation to settle the transaction, the transaction is a parent’s equity
contribution to the subsidiary, regardless of any intragroup repayment
arrangements.
B46
Although the discussion below focuses on transactions with employees, it also
applies to similar share-based payment transactions with suppliers of goods or
services other than employees. An arrangement between a parent and its
subsidiary may require the subsidiary to pay the parent for the provision of the
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equity instruments to the employees. The discussion below does not address
how to account for such an intragroup payment arrangement.
B47
Four issues are commonly encountered in share-based payment transactions
among group entities. For convenience, the examples below discuss the issues
in terms of a parent and its subsidiary.
Share-based payment arrangements involving an entity’s own
equity instruments
B48
B49
B50
The first issue is whether the following transactions involving an entity’s own
equity instruments should be accounted for as equity-settled or as cash-settled in
accordance with the requirements of this IFRS:
(a)
an entity grants to its employees rights to equity instruments of the
entity (eg share options), and either chooses or is required to buy equity
instruments (ie treasury shares) from another party, to satisfy its
obligations to its employees; and
(b)
an entity’s employees are granted rights to equity instruments of the
entity (eg share options), either by the entity itself or by its shareholders,
and the shareholders of the entity provide the equity instruments
needed.
The entity shall account for share-based payment transactions in which it
receives services as consideration for its own equity instruments as
equity-settled. This applies regardless of whether the entity chooses or is
required to buy those equity instruments from another party to satisfy its
obligations to its employees under the share-based payment arrangement. It
also applies regardless of whether:
(a)
the employee’s rights to the entity’s equity instruments were granted by
the entity itself or by its shareholder(s); or
(b)
the share-based payment arrangement was settled by the entity itself or
by its shareholder(s).
If the shareholder has an obligation to settle the transaction with its investee’s
employees, it provides equity instruments of its investee rather than its own.
Therefore, if its investee is in the same group as the shareholder, in accordance
with paragraph 43C, the shareholder shall measure its obligation in accordance
with the requirements applicable to cash-settled share-based payment
transactions in the shareholder’s separate financial statements and those
applicable to equity-settled share-based payment transactions in the
shareholder’s consolidated financial statements.
Share-based payment arrangements involving equity instruments
of the parent
B51
The second issue concerns share-based payment transactions between two or
more entities within the same group involving an equity instrument of another
group entity. For example, employees of a subsidiary are granted rights to
equity instruments of its parent as consideration for the services provided to the
subsidiary.
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B52
Therefore, the second issue concerns the following share-based payment
arrangements:
(a)
a parent grants rights to its equity instruments directly to the employees
of its subsidiary: the parent (not the subsidiary) has the obligation to
provide the employees of the subsidiary with the equity instruments;
and
(b)
a subsidiary grants rights to equity instruments of its parent to its
employees: the subsidiary has the obligation to provide its employees
with the equity instruments.
A parent grants rights to its equity instruments to the employees of its
subsidiary (paragraph B52(a))
B53
The subsidiary does not have an obligation to provide its parent’s equity
instruments to the subsidiary’s employees. Therefore, in accordance with
paragraph 43B, the subsidiary shall measure the services received from its
employees in accordance with the requirements applicable to equity-settled
share-based payment transactions, and recognise a corresponding increase in
equity as a contribution from the parent.
B54
The parent has an obligation to settle the transaction with the subsidiary’s
employees by providing the parent’s own equity instruments. Therefore, in
accordance with paragraph 43C, the parent shall measure its obligation in
accordance with the requirements applicable to equity-settled share-based
payment transactions.
A subsidiary grants rights to equity instruments of its parent to its
employees (paragraph B52(b))
B55
Because the subsidiary does not meet either of the conditions in paragraph 43B,
it shall account for the transaction with its employees as cash-settled. This
requirement applies irrespective of how the subsidiary obtains the equity
instruments to satisfy its obligations to its employees.
Share-based payment arrangements involving cash-settled
payments to employees
B56
B57
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The third issue is how an entity that receives goods or services from its suppliers
(including employees) should account for share-based arrangements that are
cash-settled when the entity itself does not have any obligation to make the
required payments to its suppliers. For example, consider the following
arrangements in which the parent (not the entity itself) has an obligation to
make the required cash payments to the employees of the entity:
(a)
the employees of the entity will receive cash payments that are linked to
the price of its equity instruments.
(b)
the employees of the entity will receive cash payments that are linked to
the price of its parent’s equity instruments.
The subsidiary does not have an obligation to settle the transaction with its
employees. Therefore, the subsidiary shall account for the transaction with its
employees as equity-settled, and recognise a corresponding increase in equity as
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a contribution from its parent. The subsidiary shall remeasure the cost of the
transaction subsequently for any changes resulting from non-market vesting
conditions not being met in accordance with paragraphs 19–21. This differs
from the measurement of the transaction as cash-settled in the consolidated
financial statements of the group.
B58
Because the parent has an obligation to settle the transaction with the
employees, and the consideration is cash, the parent (and the consolidated
group) shall measure its obligation in accordance with the requirements
applicable to cash-settled share-based payment transactions in paragraph 43C.
Transfer of employees between group entities
B59
The fourth issue relates to group share-based payment arrangements that
involve employees of more than one group entity. For example, a parent might
grant rights to its equity instruments to the employees of its subsidiaries,
conditional upon the completion of continuing service with the group for a
specified period. An employee of one subsidiary might transfer employment to
another subsidiary during the specified vesting period without the employee’s
rights to equity instruments of the parent under the original share-based
payment arrangement being affected. If the subsidiaries have no obligation to
settle the share-based payment transaction with their employees, they account
for it as an equity-settled transaction. Each subsidiary shall measure the services
received from the employee by reference to the fair value of the equity
instruments at the date the rights to those equity instruments were originally
granted by the parent as defined in Appendix A, and the proportion of the
vesting period the employee served with each subsidiary.
B60
If the subsidiary has an obligation to settle the transaction with its employees in
its parent’s equity instruments, it accounts for the transaction as cash-settled.
Each subsidiary shall measure the services received on the basis of grant date fair
value of the equity instruments for the proportion of the vesting period the
employee served with each subsidiary. In addition, each subsidiary shall
recognise any change in the fair value of the equity instruments during the
employee’s service period with each subsidiary.
B61
Such an employee, after transferring between group entities, may fail to satisfy a
vesting condition other than a market condition as defined in Appendix A,
eg the employee leaves the group before completing the service period. In this
case, because the vesting condition is service to the group, each subsidiary shall
adjust the amount previously recognised in respect of the services received from
the employee in accordance with the principles in paragraph 19. Hence, if the
rights to the equity instruments granted by the parent do not vest because of an
employee’s failure to meet a vesting condition other than a market condition,
no amount is recognised on a cumulative basis for the services received from
that employee in the financial statements of any group entity.
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Appendix C
Amendments to other IFRSs
The amendments in this appendix become effective for annual financial statements covering periods
beginning on or after 1 January 2005. If an entity applies this Standard for an earlier period, these
amendments become effective for that earlier period.
*****
The amendments contained in this appendix when this Standard was issued in 2004 have been
incorporated into the relevant Standards published in this volume.
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IFRS 3
Business Combinations
In April 2001 the International Accounting Standards Board (the Board) adopted IAS 22
Business Combinations, which had originally been issued by the International Accounting
Standards Committee in October 1998. IAS 22 was itself a revised version of IAS 22 Business
Combinations that was issued in November 1983.
In March 2004 the Board replaced IAS 22 and three related Interpretations (SIC-9 Business
Combinations—Classification either as Acquisitions or Unitings of Interests, SIC-22 Business
Combinations—Subsequent Adjustment of Fair Values and Goodwill Initially Reported and SIC-28
Business Combinations—‘Date of Exchange’ and Fair Value of Equity Instruments) when it issued
IFRS 3 Business Combinations.
Minor amendments were made to IFRS 3 in March 2004 by IFRS 5 Non-current Assets Held for
Sale and Discontinued Operations and IAS 1 Presentation of Financial Statements (as revised in
September 2007), which amended the terminology used throughout the Standards,
including IFRS 3.
In January 2008 the Board issued a revised IFRS 3.
Other Standards have made minor consequential amendments to IFRS 3. They include
Improvements to IFRSs (issued in May 2010), IFRS 10 Consolidated Financial Statements (issued
May 2011), IFRS 13 Fair Value Measurement (issued May 2011), Investment Entities (Amendments
to IFRS 10, IFRS 12 and IAS 27) (issued October 2012), IFRS 9 Financial Instruments (Hedge
Accounting and amendments to IFRS 9, IFRS 7 and IAS 39) (issued November 2013), Annual
Improvements to IFRSs 2010–2012 Cycle (issued December 2013), Annual Improvements to IFRSs
2011–2013 Cycle (issued December 2013), IFRS 15 Revenue from Contracts with Customers (issued
May 2014), IFRS 9 Financial Instruments (issued July 2014) and IFRS 16 Leases (issued
January 2016).
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IFRS 3
CONTENTS
from paragraph
INTERNATIONAL FINANCIAL REPORTING STANDARD 3
BUSINESS COMBINATIONS
OBJECTIVE
1
SCOPE
2
IDENTIFYING A BUSINESS COMBINATION
3
THE ACQUISITION METHOD
4
Identifying the acquirer
6
Determining the acquisition date
8
Recognising and measuring the identifiable assets acquired, the liabilities
assumed and any non-controlling interest in the acquiree
10
Recognising and measuring goodwill or a gain from a bargain purchase
32
Additional guidance for applying the acquisition method to particular types
of business combinations
41
Measurement period
45
Determining what is part of the business combination transaction
51
SUBSEQUENT MEASUREMENT AND ACCOUNTING
54
Reacquired rights
55
Contingent liabilities
56
Indemnification assets
57
Contingent consideration
58
DISCLOSURES
59
EFFECTIVE DATE AND TRANSITION
64
Effective date
64
Transition
65
REFERENCE TO IFRS 9
67A
WITHDRAWAL OF IFRS 3 (2004)
68
APPENDICES
A Defined terms
B Application guidance
C Amendments to other IFRSs
FOR THE ACCOMPANYING DOCUMENTS LISTED BELOW, SEE PART B OF THIS
EDITION
APPROVAL BY THE BOARD OF IFRS 3 ISSUED IN JANUARY 2008
BASIS FOR CONCLUSIONS
APPENDIX
Amendments to the Basis for Conclusions on other IFRSs
DISSENTING OPINIONS
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ILLUSTRATIVE EXAMPLES
APPENDIX
Amendments to guidance on other IFRSs
COMPARISON OF IFRS 3 (AS REVISED IN 2008) AND SFAS 141(R)
TABLE OF CONCORDANCE
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IFRS 3
International Financial Reporting Standard 3 Business Combinations (IFRS 3) is set out in
paragraphs 1–68 and Appendices A–C. All the paragraphs have equal authority.
Paragraphs in bold type state the main principles. Terms defined in Appendix A are in
italics the first time they appear in the IFRS. Definitions of other terms are given in the
Glossary for International Financial Reporting Standards. IFRS 3 should be read in the
context of its objective and the Basis for Conclusions, the Preface to International Financial
Reporting Standards and the Conceptual Framework for Financial Reporting. IAS 8 Accounting
Policies, Changes in Accounting Estimates and Errors provides a basis for selecting and applying
accounting policies in the absence of explicit guidance.
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International Financial Reporting Standard 3
Business Combinations
Objective
1
The objective of this IFRS is to improve the relevance, reliability and
comparability of the information that a reporting entity provides in its financial
statements about a business combination and its effects. To accomplish that, this
IFRS establishes principles and requirements for how the acquirer:
(a)
recognises and measures in its financial statements the identifiable assets
acquired, the liabilities assumed and any non-controlling interest in the
acquiree;
(b)
recognises and measures the goodwill acquired in the business
combination or a gain from a bargain purchase; and
(c)
determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination.
Scope
2
2A
This IFRS applies to a transaction or other event that meets the definition of a
business combination. This IFRS does not apply to:
(a)
the accounting for the formation of a joint arrangement in the financial
statements of the joint arrangement itself.
(b)
the acquisition of an asset or a group of assets that does not constitute a
business. In such cases the acquirer shall identify and recognise the
individual identifiable assets acquired (including those assets that meet
the definition of, and recognition criteria for, intangible assets in IAS 38
Intangible Assets) and liabilities assumed. The cost of the group shall be
allocated to the individual identifiable assets and liabilities on the basis
of their relative fair values at the date of purchase. Such a transaction or
event does not give rise to goodwill.
(c)
a combination of entities or businesses under common control
(paragraphs B1–B4 provide related application guidance).
The requirements of this Standard do not apply to the acquisition by an
investment entity, as defined in IFRS 10 Consolidated Financial Statements, of an
investment in a subsidiary that is required to be measured at fair value through
profit or loss.
Identifying a business combination
3
An entity shall determine whether a transaction or other event is a
business combination by applying the definition in this IFRS, which
requires that the assets acquired and liabilities assumed constitute a
business. If the assets acquired are not a business, the reporting entity
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shall account for the transaction or other event as an asset acquisition.
Paragraphs B5–B12 provide guidance on identifying a business
combination and the definition of a business.
The acquisition method
4
An entity shall account for each business combination by applying the
acquisition method.
5
Applying the acquisition method requires:
(a)
identifying the acquirer;
(b)
determining the acquisition date;
(c)
recognising and measuring the identifiable assets acquired, the
liabilities assumed and any non-controlling interest in the acquiree; and
(d)
recognising and measuring goodwill or a gain from a bargain purchase.
Identifying the acquirer
6
For each business combination, one of the combining entities shall be
identified as the acquirer.
7
The guidance in IFRS 10 shall be used to identify the acquirer—the entity that
obtains control of another entity, ie the acquiree. If a business combination has
occurred but applying the guidance in IFRS 10 does not clearly indicate which of
the combining entities is the acquirer, the factors in paragraphs B14–B18 shall
be considered in making that determination.
Determining the acquisition date
8
The acquirer shall identify the acquisition date, which is the date on
which it obtains control of the acquiree.
9
The date on which the acquirer obtains control of the acquiree is generally the
date on which the acquirer legally transfers the consideration, acquires the
assets and assumes the liabilities of the acquiree—the closing date. However, the
acquirer might obtain control on a date that is either earlier or later than the
closing date. For example, the acquisition date precedes the closing date if a
written agreement provides that the acquirer obtains control of the acquiree on
a date before the closing date. An acquirer shall consider all pertinent facts and
circumstances in identifying the acquisition date.
Recognising and measuring the identifiable assets
acquired, the liabilities assumed and any non-controlling
interest in the acquiree
Recognition principle
10
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As of the acquisition date, the acquirer shall recognise, separately from
goodwill, the identifiable assets acquired, the liabilities assumed and any
non-controlling interest in the acquiree. Recognition of identifiable
assets acquired and liabilities assumed is subject to the conditions
specified in paragraphs 11 and 12.
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Recognition conditions
11
To qualify for recognition as part of applying the acquisition method, the
identifiable assets acquired and liabilities assumed must meet the definitions of
assets and liabilities in the Framework1 for the Preparation and Presentation of
Financial Statements at the acquisition date. For example, costs the acquirer
expects but is not obliged to incur in the future to effect its plan to exit an
activity of an acquiree or to terminate the employment of or relocate an
acquiree’s employees are not liabilities at the acquisition date. Therefore, the
acquirer does not recognise those costs as part of applying the acquisition
method. Instead, the acquirer recognises those costs in its post-combination
financial statements in accordance with other IFRSs.
12
In addition, to qualify for recognition as part of applying the acquisition
method, the identifiable assets acquired and liabilities assumed must be part of
what the acquirer and the acquiree (or its former owners) exchanged in the
business combination transaction rather than the result of separate
transactions. The acquirer shall apply the guidance in paragraphs 51–53 to
determine which assets acquired or liabilities assumed are part of the exchange
for the acquiree and which, if any, are the result of separate transactions to be
accounted for in accordance with their nature and the applicable IFRSs.
13
The acquirer’s application of the recognition principle and conditions may
result in recognising some assets and liabilities that the acquiree had not
previously recognised as assets and liabilities in its financial statements. For
example, the acquirer recognises the acquired identifiable intangible assets,
such as a brand name, a patent or a customer relationship, that the acquiree did
not recognise as assets in its financial statements because it developed them
internally and charged the related costs to expense.
14
Paragraphs B31–B40 provide guidance on recognising intangible assets.
Paragraphs 22–28B specify the types of identifiable assets and liabilities that
include items for which this IFRS provides limited exceptions to the recognition
principle and conditions.
Classifying or designating identifiable assets acquired and liabilities
assumed in a business combination
15
At the acquisition date, the acquirer shall classify or designate the
identifiable assets acquired and liabilities assumed as necessary to apply
other IFRSs subsequently. The acquirer shall make those classifications
or designations on the basis of the contractual terms, economic
conditions, its operating or accounting policies and other pertinent
conditions as they exist at the acquisition date.
16
In some situations, IFRSs provide for different accounting depending on how an
entity classifies or designates a particular asset or liability. Examples of
1
IASC’s Framework for the Preparation and Presentation of Financial Statements was adopted by the IASB in
2001. In September 2010 the IASB replaced the Framework with the Conceptual Framework for Financial
Reporting.
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classifications or designations that the acquirer shall make on the basis of the
pertinent conditions as they exist at the acquisition date include but are not
limited to:
17
(a)
classification of particular financial assets and liabilities as measured at
fair value through profit or loss or at amortised cost, or as a financial
asset measured at fair value through other comprehensive income in
accordance with IFRS 9 Financial Instruments;
(b)
designation of a derivative instrument as a hedging instrument in
accordance with IFRS 9; and
(c)
assessment of whether an embedded derivative should be separated from
a host contract in accordance with IFRS 9 (which is a matter of
‘classification’ as this IFRS uses that term).
This IFRS provides two exceptions to the principle in paragraph 15:
(a)
classification of a lease contract in which the acquiree is the lessor as
either an operating lease or a finance lease in accordance with IFRS 16
Leases; and
(b)
classification of a contract as an insurance contract in accordance with
IFRS 4 Insurance Contracts.
The acquirer shall classify those contracts on the basis of the contractual terms
and other factors at the inception of the contract (or, if the terms of the contract
have been modified in a manner that would change its classification, at the date
of that modification, which might be the acquisition date).
Measurement principle
18
The acquirer shall measure the identifiable assets acquired and the
liabilities assumed at their acquisition-date fair values.
19
For each business combination, the acquirer shall measure at the acquisition
date components of non-controlling interests in the acquiree that are present
ownership interests and entitle their holders to a proportionate share of the
entity’s net assets in the event of liquidation at either:
(a)
fair value; or
(b)
the present ownership instruments’ proportionate share in the
recognised amounts of the acquiree’s identifiable net assets.
All other components of non-controlling interests shall be measured at their
acquisition-date fair values, unless another measurement basis is required by
IFRSs.
20
Paragraphs 24–31 specify the types of identifiable assets and liabilities that
include items for which this IFRS provides limited exceptions to the
measurement principle.
Exceptions to the recognition or measurement principles
21
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This IFRS provides limited exceptions to its recognition and measurement
principles. Paragraphs 22–31 specify both the particular items for which
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exceptions are provided and the nature of those exceptions. The acquirer shall
account for those items by applying the requirements in paragraphs 22–31,
which will result in some items being:
(a)
recognised either by applying recognition conditions in addition to those
in paragraphs 11 and 12 or by applying the requirements of other IFRSs,
with results that differ from applying the recognition principle and
conditions.
(b)
measured at an amount other than their acquisition-date fair values.
Exception to the recognition principle
Contingent liabilities
22
23
IAS 37 Provisions, Contingent Liabilities and Contingent Assets defines a contingent
liability as:
(a)
a possible obligation that arises from past events and whose existence
will be confirmed only by the occurrence or non-occurrence of one or
more uncertain future events not wholly within the control of the entity;
or
(b)
a present obligation that arises from past events but is not recognised
because:
(i)
it is not probable that an outflow of resources embodying
economic benefits will be required to settle the obligation; or
(ii)
the amount of the obligation cannot be measured with sufficient
reliability.
The requirements in IAS 37 do not apply in determining which contingent
liabilities to recognise as of the acquisition date. Instead, the acquirer shall
recognise as of the acquisition date a contingent liability assumed in a business
combination if it is a present obligation that arises from past events and its fair
value can be measured reliably. Therefore, contrary to IAS 37, the acquirer
recognises a contingent liability assumed in a business combination at the
acquisition date even if it is not probable that an outflow of resources
embodying economic benefits will be required to settle the obligation.
Paragraph 56 provides guidance on the subsequent accounting for contingent
liabilities.
Exceptions to both the recognition and measurement principles
Income taxes
24
The acquirer shall recognise and measure a deferred tax asset or liability arising
from the assets acquired and liabilities assumed in a business combination in
accordance with IAS 12 Income Taxes.
25
The acquirer shall account for the potential tax effects of temporary differences
and carryforwards of an acquiree that exist at the acquisition date or arise as a
result of the acquisition in accordance with IAS 12.
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Employee benefits
26
The acquirer shall recognise and measure a liability (or asset, if any) related to
the acquiree’s employee benefit arrangements in accordance with IAS 19
Employee Benefits.
Indemnification assets
27
The seller in a business combination may contractually indemnify the acquirer
for the outcome of a contingency or uncertainty related to all or part of a
specific asset or liability. For example, the seller may indemnify the acquirer
against losses above a specified amount on a liability arising from a particular
contingency; in other words, the seller will guarantee that the acquirer’s
liability will not exceed a specified amount. As a result, the acquirer obtains an
indemnification asset. The acquirer shall recognise an indemnification asset at
the same time that it recognises the indemnified item measured on the same
basis as the indemnified item, subject to the need for a valuation allowance for
uncollectible amounts. Therefore, if the indemnification relates to an asset or a
liability that is recognised at the acquisition date and measured at its
acquisition-date fair value, the acquirer shall recognise the indemnification
asset at the acquisition date measured at its acquisition-date fair value. For an
indemnification asset measured at fair value, the effects of uncertainty about
future cash flows because of collectibility considerations are included in the fair
value measure and a separate valuation allowance is not necessary
(paragraph B41 provides related application guidance).
28
In some circumstances, the indemnification may relate to an asset or a liability
that is an exception to the recognition or measurement principles. For example,
an indemnification may relate to a contingent liability that is not recognised at
the acquisition date because its fair value is not reliably measurable at that date.
Alternatively, an indemnification may relate to an asset or a liability, for
example, one that results from an employee benefit, that is measured on a basis
other than acquisition-date fair value.
In those circumstances, the
indemnification asset shall be recognised and measured using assumptions
consistent with those used to measure the indemnified item, subject to
management’s assessment of the collectibility of the indemnification asset and
any contractual limitations on the indemnified amount. Paragraph 57 provides
guidance on the subsequent accounting for an indemnification asset.
Leases in which the acquiree is the lessee
28A
28B
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The acquirer shall recognise right-of-use assets and lease liabilities for leases
identified in accordance with IFRS 16 in which the acquiree is the lessee. The
acquirer is not required to recognise right-of-use assets and lease liabilities for:
(a)
leases for which the lease term (as defined in IFRS 16) ends within
12 months of the acquisition date; or
(b)
leases for which the underlying asset is of low value (as described in
paragraphs B3–B8 of IFRS 16).
The acquirer shall measure the lease liability at the present value of the
remaining lease payments (as defined in IFRS 16) as if the acquired lease were a
new lease at the acquisition date. The acquirer shall measure the right-of-use
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asset at the same amount as the lease liability, adjusted to reflect favourable or
unfavourable terms of the lease when compared with market terms.
Exceptions to the measurement principle
Reacquired rights
29
The acquirer shall measure the value of a reacquired right recognised as an
intangible asset on the basis of the remaining contractual term of the related
contract regardless of whether market participants would consider potential
contractual renewals when measuring its fair value. Paragraphs B35 and B36
provide related application guidance.
Share-based payment transactions
30
The acquirer shall measure a liability or an equity instrument related to
share-based payment transactions of the acquiree or the replacement of an
acquiree’s share-based payment transactions with share-based payment
transactions of the acquirer in accordance with the method in IFRS 2 Share-based
Payment at the acquisition date. (This IFRS refers to the result of that method as
the ‘market-based measure’ of the share-based payment transaction.)
Assets held for sale
31
The acquirer shall measure an acquired non-current asset (or disposal group)
that is classified as held for sale at the acquisition date in accordance with IFRS 5
Non-current Assets Held for Sale and Discontinued Operations at fair value less costs to
sell in accordance with paragraphs 15–18 of that IFRS.
Recognising and measuring goodwill or a gain from a
bargain purchase
32
The acquirer shall recognise goodwill as of the acquisition date measured
as the excess of (a) over (b) below:
(a)
(b)
33
the aggregate of:
(i)
the consideration transferred measured in accordance with
this IFRS, which generally requires acquisition-date fair
value (see paragraph 37);
(ii)
the amount of any non-controlling interest in the acquiree
measured in accordance with this IFRS; and
(iii)
in a business combination achieved in stages (see
paragraphs 41 and 42), the acquisition-date fair value of the
acquirer’s previously held equity interest in the acquiree.
the net of the acquisition-date amounts of the identifiable assets
acquired and the liabilities assumed measured in accordance with
this IFRS.
In a business combination in which the acquirer and the acquiree (or its former
owners) exchange only equity interests, the acquisition-date fair value of the
acquiree’s equity interests may be more reliably measurable than the
acquisition-date fair value of the acquirer’s equity interests. If so, the acquirer
shall determine the amount of goodwill by using the acquisition-date fair value
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of the acquiree’s equity interests instead of the acquisition-date fair value of the
equity interests transferred. To determine the amount of goodwill in a business
combination in which no consideration is transferred, the acquirer shall use the
acquisition-date fair value of the acquirer’s interest in the acquiree in place of
the acquisition-date fair value of the consideration transferred
(paragraph 32(a)(i)). Paragraphs B46–B49 provide related application guidance.
Bargain purchases
34
Occasionally, an acquirer will make a bargain purchase, which is a business
combination in which the amount in paragraph 32(b) exceeds the aggregate of
the amounts specified in paragraph 32(a). If that excess remains after applying
the requirements in paragraph 36, the acquirer shall recognise the resulting
gain in profit or loss on the acquisition date. The gain shall be attributed to the
acquirer.
35
A bargain purchase might happen, for example, in a business combination that
is a forced sale in which the seller is acting under compulsion. However, the
recognition or measurement exceptions for particular items discussed in
paragraphs 22–31 may also result in recognising a gain (or change the amount
of a recognised gain) on a bargain purchase.
36
Before recognising a gain on a bargain purchase, the acquirer shall reassess
whether it has correctly identified all of the assets acquired and all of the
liabilities assumed and shall recognise any additional assets or liabilities that are
identified in that review. The acquirer shall then review the procedures used to
measure the amounts this IFRS requires to be recognised at the acquisition date
for all of the following:
(a)
the identifiable assets acquired and liabilities assumed;
(b)
the non-controlling interest in the acquiree, if any;
(c)
for a business combination achieved in stages, the acquirer’s previously
held equity interest in the acquiree; and
(d)
the consideration transferred.
The objective of the review is to ensure that the measurements appropriately
reflect consideration of all available information as of the acquisition date.
Consideration transferred
37
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The consideration transferred in a business combination shall be measured at
fair value, which shall be calculated as the sum of the acquisition-date fair
values of the assets transferred by the acquirer, the liabilities incurred by the
acquirer to former owners of the acquiree and the equity interests issued by the
acquirer. (However, any portion of the acquirer’s share-based payment awards
exchanged for awards held by the acquiree’s employees that is included in
consideration transferred in the business combination shall be measured in
accordance with paragraph 30 rather than at fair value.) Examples of potential
forms of consideration include cash, other assets, a business or a subsidiary of
the acquirer, contingent consideration, ordinary or preference equity instruments,
options, warrants and member interests of mutual entities.
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38
The consideration transferred may include assets or liabilities of the acquirer
that have carrying amounts that differ from their fair values at the acquisition
date (for example, non-monetary assets or a business of the acquirer). If so, the
acquirer shall remeasure the transferred assets or liabilities to their fair values
as of the acquisition date and recognise the resulting gains or losses, if any, in
profit or loss. However, sometimes the transferred assets or liabilities remain
within the combined entity after the business combination (for example,
because the assets or liabilities were transferred to the acquiree rather than to
its former owners), and the acquirer therefore retains control of them. In that
situation, the acquirer shall measure those assets and liabilities at their carrying
amounts immediately before the acquisition date and shall not recognise a gain
or loss in profit or loss on assets or liabilities it controls both before and after the
business combination.
Contingent consideration
39
The consideration the acquirer transfers in exchange for the acquiree includes
any asset or liability resulting from a contingent consideration arrangement (see
paragraph 37). The acquirer shall recognise the acquisition-date fair value of
contingent consideration as part of the consideration transferred in exchange
for the acquiree.
40
The acquirer shall classify an obligation to pay contingent consideration that
meets the definition of a financial instrument as a financial liability or as equity
on the basis of the definitions of an equity instrument and a financial liability in
paragraph 11 of IAS 32 Financial Instruments: Presentation. The acquirer shall
classify as an asset a right to the return of previously transferred consideration if
specified conditions are met.
Paragraph 58 provides guidance on the
subsequent accounting for contingent consideration.
Additional guidance for applying the acquisition method
to particular types of business combinations
A business combination achieved in stages
41
An acquirer sometimes obtains control of an acquiree in which it held an equity
interest immediately before the acquisition date. For example, on 31 December
20X1, Entity A holds a 35 per cent non-controlling equity interest in Entity B. On
that date, Entity A purchases an additional 40 per cent interest in Entity B,
which gives it control of Entity B. This IFRS refers to such a transaction as a
business combination achieved in stages, sometimes also referred to as a step
acquisition.
42
In a business combination achieved in stages, the acquirer shall remeasure its
previously held equity interest in the acquiree at its acquisition-date fair value
and recognise the resulting gain or loss, if any, in profit or loss or other
comprehensive income, as appropriate. In prior reporting periods, the acquirer
may have recognised changes in the value of its equity interest in the acquiree in
other comprehensive income. If so, the amount that was recognised in other
comprehensive income shall be recognised on the same basis as would be
required if the acquirer had disposed directly of the previously held equity
interest.
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A business combination achieved without the transfer of
consideration
43
44
An acquirer sometimes obtains control of an acquiree without transferring
consideration.
The acquisition method of accounting for a business
combination applies to those combinations. Such circumstances include:
(a)
The acquiree repurchases a sufficient number of its own shares for an
existing investor (the acquirer) to obtain control.
(b)
Minority veto rights lapse that previously kept the acquirer from
controlling an acquiree in which the acquirer held the majority voting
rights.
(c)
The acquirer and acquiree agree to combine their businesses by contract
alone. The acquirer transfers no consideration in exchange for control of
an acquiree and holds no equity interests in the acquiree, either on the
acquisition date or previously. Examples of business combinations
achieved by contract alone include bringing two businesses together in a
stapling arrangement or forming a dual listed corporation.
In a business combination achieved by contract alone, the acquirer shall
attribute to the owners of the acquiree the amount of the acquiree’s net assets
recognised in accordance with this IFRS. In other words, the equity interests in
the acquiree held by parties other than the acquirer are a non-controlling
interest in the acquirer’s post-combination financial statements even if the
result is that all of the equity interests in the acquiree are attributed to the
non-controlling interest.
Measurement period
45
If the initial accounting for a business combination is incomplete by the
end of the reporting period in which the combination occurs, the
acquirer shall report in its financial statements provisional amounts for
the items for which the accounting is incomplete.
During the
measurement period, the acquirer shall retrospectively adjust the
provisional amounts recognised at the acquisition date to reflect new
information obtained about facts and circumstances that existed as of
the acquisition date and, if known, would have affected the measurement
of the amounts recognised as of that date. During the measurement
period, the acquirer shall also recognise additional assets or liabilities if
new information is obtained about facts and circumstances that existed
as of the acquisition date and, if known, would have resulted in the
recognition of those assets and liabilities as of that date.
The
measurement period ends as soon as the acquirer receives the
information it was seeking about facts and circumstances that existed as
of the acquisition date or learns that more information is not obtainable.
However, the measurement period shall not exceed one year from the
acquisition date.
46
The measurement period is the period after the acquisition date during which
the acquirer may adjust the provisional amounts recognised for a business
combination. The measurement period provides the acquirer with a reasonable
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time to obtain the information necessary to identify and measure the following
as of the acquisition date in accordance with the requirements of this IFRS:
(a)
the identifiable assets acquired, liabilities
non-controlling interest in the acquiree;
assumed
and
any
(b)
the consideration transferred for the acquiree (or the other amount used
in measuring goodwill);
(c)
in a business combination achieved in stages, the equity interest in the
acquiree previously held by the acquirer; and
(d)
the resulting goodwill or gain on a bargain purchase.
47
The acquirer shall consider all pertinent factors in determining whether
information obtained after the acquisition date should result in an adjustment
to the provisional amounts recognised or whether that information results from
events that occurred after the acquisition date. Pertinent factors include the
date when additional information is obtained and whether the acquirer can
identify a reason for a change to provisional amounts. Information that is
obtained shortly after the acquisition date is more likely to reflect circumstances
that existed at the acquisition date than is information obtained several months
later. For example, unless an intervening event that changed its fair value can
be identified, the sale of an asset to a third party shortly after the acquisition
date for an amount that differs significantly from its provisional fair value
measured at that date is likely to indicate an error in the provisional amount.
48
The acquirer recognises an increase (decrease) in the provisional amount
recognised for an identifiable asset (liability) by means of a decrease (increase) in
goodwill. However, new information obtained during the measurement period
may sometimes result in an adjustment to the provisional amount of more than
one asset or liability. For example, the acquirer might have assumed a liability
to pay damages related to an accident in one of the acquiree’s facilities, part or
all of which are covered by the acquiree’s liability insurance policy. If the
acquirer obtains new information during the measurement period about the
acquisition-date fair value of that liability, the adjustment to goodwill resulting
from a change to the provisional amount recognised for the liability would be
offset (in whole or in part) by a corresponding adjustment to goodwill resulting
from a change to the provisional amount recognised for the claim receivable
from the insurer.
49
During the measurement period, the acquirer shall recognise adjustments to the
provisional amounts as if the accounting for the business combination had been
completed at the acquisition date. Thus, the acquirer shall revise comparative
information for prior periods presented in financial statements as needed,
including making any change in depreciation, amortisation or other income
effects recognised in completing the initial accounting.
50
After the measurement period ends, the acquirer shall revise the accounting for
a business combination only to correct an error in accordance with IAS 8
Accounting Policies, Changes in Accounting Estimates and Errors.
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Determining what is part of the business combination
transaction
51
The acquirer and the acquiree may have a pre-existing relationship or
other arrangement before negotiations for the business combination
began, or they may enter into an arrangement during the negotiations
that is separate from the business combination. In either situation, the
acquirer shall identify any amounts that are not part of what the acquirer
and the acquiree (or its former owners) exchanged in the business
combination, ie amounts that are not part of the exchange for the
acquiree. The acquirer shall recognise as part of applying the acquisition
method only the consideration transferred for the acquiree and the assets
acquired and liabilities assumed in the exchange for the acquiree.
Separate transactions shall be accounted for in accordance with the
relevant IFRSs.
52
A transaction entered into by or on behalf of the acquirer or primarily for the
benefit of the acquirer or the combined entity, rather than primarily for the
benefit of the acquiree (or its former owners) before the combination, is likely to
be a separate transaction. The following are examples of separate transactions
that are not to be included in applying the acquisition method:
(a)
a transaction that in effect settles pre-existing relationships between the
acquirer and acquiree;
(b)
a transaction that remunerates employees or former owners of the
acquiree for future services; and
(c)
a transaction that reimburses the acquiree or its former owners for
paying the acquirer’s acquisition-related costs.
Paragraphs B50–B62 provide related application guidance.
Acquisition-related costs
53
Acquisition-related costs are costs the acquirer incurs to effect a business
combination. Those costs include finder’s fees; advisory, legal, accounting,
valuation and other professional or consulting fees; general administrative
costs, including the costs of maintaining an internal acquisitions department;
and costs of registering and issuing debt and equity securities. The acquirer
shall account for acquisition-related costs as expenses in the periods in which
the costs are incurred and the services are received, with one exception. The
costs to issue debt or equity securities shall be recognised in accordance with
IAS 32 and IFRS 9.
Subsequent measurement and accounting
54
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In general, an acquirer shall subsequently measure and account for assets
acquired, liabilities assumed or incurred and equity instruments issued
in a business combination in accordance with other applicable IFRSs for
those items, depending on their nature. However, this IFRS provides
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guidance on subsequently measuring and accounting for the following
assets acquired, liabilities assumed or incurred and equity instruments
issued in a business combination:
(a)
reacquired rights;
(b)
contingent liabilities recognised as of the acquisition date;
(c)
indemnification assets; and
(d)
contingent consideration.
Paragraph B63 provides related application guidance.
Reacquired rights
55
A reacquired right recognised as an intangible asset shall be amortised over the
remaining contractual period of the contract in which the right was granted.
An acquirer that subsequently sells a reacquired right to a third party shall
include the carrying amount of the intangible asset in determining the gain or
loss on the sale.
Contingent liabilities
56
After initial recognition and until the liability is settled, cancelled or expires, the
acquirer shall measure a contingent liability recognised in a business
combination at the higher of:
(a)
the amount that would be recognised in accordance with IAS 37; and
(b)
the amount initially recognised less, if appropriate, the cumulative
amount of income recognised in accordance with the principles of
IFRS 15 Revenue from Contracts with Customers.
This requirement does not apply to contracts accounted for in accordance with
IFRS 9.
Indemnification assets
57
At the end of each subsequent reporting period, the acquirer shall measure an
indemnification asset that was recognised at the acquisition date on the same
basis as the indemnified liability or asset, subject to any contractual limitations
on its amount and, for an indemnification asset that is not subsequently
measured at its fair value, management’s assessment of the collectibility of the
indemnification asset. The acquirer shall derecognise the indemnification asset
only when it collects the asset, sells it or otherwise loses the right to it.
Contingent consideration
58
Some changes in the fair value of contingent consideration that the acquirer
recognises after the acquisition date may be the result of additional information
that the acquirer obtained after that date about facts and circumstances that
existed at the acquisition date. Such changes are measurement period
adjustments in accordance with paragraphs 45–49. However, changes resulting
from events after the acquisition date, such as meeting an earnings target,
reaching a specified share price or reaching a milestone on a research and
development project, are not measurement period adjustments. The acquirer
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shall account for changes in the fair value of contingent consideration that are
not measurement period adjustments as follows:
(a)
Contingent consideration classified as equity shall not be remeasured
and its subsequent settlement shall be accounted for within equity.
(b)
Other contingent consideration that:
(i)
is within the scope of IFRS 9 shall be measured at fair value at
each reporting date and changes in fair value shall be recognised
in profit or loss in accordance with IFRS 9.
(ii)
is not within the scope of IFRS 9 shall be measured at fair value at
each reporting date and changes in fair value shall be recognised
in profit or loss.
Disclosures
59
The acquirer shall disclose information that enables users of its financial
statements to evaluate the nature and financial effect of a business
combination that occurs either:
(a)
during the current reporting period; or
(b)
after the end of the reporting period but before the financial
statements are authorised for issue.
60
To meet the objective in paragraph 59, the acquirer shall disclose the
information specified in paragraphs B64—B66.
61
The acquirer shall disclose information that enables users of its financial
statements to evaluate the financial effects of adjustments recognised in
the current reporting period that relate to business combinations that
occurred in the period or previous reporting periods.
62
To meet the objective in paragraph 61, the acquirer shall disclose the
information specified in paragraph B67.
63
If the specific disclosures required by this and other IFRSs do not meet the
objectives set out in paragraphs 59 and 61, the acquirer shall disclose whatever
additional information is necessary to meet those objectives.
Effective date and transition
Effective date
64
This IFRS shall be applied prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting period
beginning on or after 1 July 2009. Earlier application is permitted. However,
this IFRS shall be applied only at the beginning of an annual reporting period
that begins on or after 30 June 2007. If an entity applies this IFRS before 1 July
2009, it shall disclose that fact and apply IAS 27 (as amended in 2008) at the
same time.
64A
[Deleted]
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64B
Improvements to IFRSs issued in May 2010 amended paragraphs 19, 30 and B56 and
added paragraphs B62A and B62B. An entity shall apply those amendments for
annual periods beginning on or after 1 July 2010. Earlier application is
permitted. If an entity applies the amendments for an earlier period it shall
disclose that fact. Application should be prospective from the date when the
entity first applied this IFRS.
64C
Paragraphs 65A–65E were added by Improvements to IFRSs issued in May 2010. An
entity shall apply those amendments for annual periods beginning on or after
1 July 2010. Earlier application is permitted. If an entity applies the
amendments for an earlier period it shall disclose that fact. The amendments
shall be applied to contingent consideration balances arising from business
combinations with an acquisition date prior to the application of this IFRS, as
issued in 2008.
64D
[Deleted]
64E
IFRS 10, issued in May 2011, amended paragraphs 7, B13, B63(e) and Appendix A.
An entity shall apply those amendments when it applies IFRS 10.
64F
IFRS 13 Fair Value Measurement, issued in May 2011, amended paragraphs 20, 29,
33, 47, amended the definition of fair value in Appendix A and amended
paragraphs B22, B40, B43–B46, B49 and B64. An entity shall apply those
amendments when it applies IFRS 13.
64G
Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27), issued in October
2012, amended paragraph 7 and added paragraph 2A. An entity shall apply
those amendments for annual periods beginning on or after 1 January 2014.
Earlier application of Investment Entities is permitted. If an entity applies these
amendments earlier it shall also apply all amendments included in Investment
Entities at the same time.
64H
[Deleted]
64I
Annual Improvements to IFRSs 2010–2012 Cycle, issued in December 2013, amended
paragraphs 40 and 58 and added paragraph 67A and its related heading. An
entity shall apply that amendment prospectively to business combinations for
which the acquisition date is on or after 1 July 2014. Earlier application is
permitted. An entity may apply the amendment earlier provided that IFRS 9 and
IAS 37 (both as amended by Annual Improvements to IFRSs 2010–2012 Cycle) have also
been applied. If an entity applies that amendment earlier it shall disclose that
fact.
64J
Annual Improvements Cycle 2011–2013 issued in December 2013 amended
paragraph 2(a). An entity shall apply that amendment prospectively for annual
periods beginning on or after 1 July 2014. Earlier application is permitted. If an
entity applies that amendment for an earlier period it shall disclose that fact.
64K
IFRS 15 Revenue from Contracts with Customers, issued in May 2014, amended
paragraph 56. An entity shall apply that amendment when it applies IFRS 15.
64L
IFRS 9, as issued in July 2014, amended paragraphs 16, 42, 53, 56, 58 and B41
and deleted paragraphs 64A, 64D and 64H. An entity shall apply those
amendments when it applies IFRS 9.
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64M
IFRS 16, issued in January 2016, amended paragraphs 14, 17, B32 and B42,
deleted paragraphs B28–B30 and their related heading and added paragraphs
28A–28B and their related heading. An entity shall apply those amendments
when it applies IFRS 16.
Transition
65
Assets and liabilities that arose from business combinations whose acquisition
dates preceded the application of this IFRS shall not be adjusted upon
application of this IFRS.
65A
Contingent consideration balances arising from business combinations whose
acquisition dates preceded the date when an entity first applied this IFRS as
issued in 2008 shall not be adjusted upon first application of this IFRS.
Paragraphs 65B–65E shall be applied in the subsequent accounting for those
balances. Paragraphs 65B–65E shall not apply to the accounting for contingent
consideration balances arising from business combinations with acquisition
dates on or after the date when the entity first applied this IFRS as issued in
2008. In paragraphs 65B–65E business combination refers exclusively to
business combinations whose acquisition date preceded the application of this
IFRS as issued in 2008.
65B
If a business combination agreement provides for an adjustment to the cost of
the combination contingent on future events, the acquirer shall include the
amount of that adjustment in the cost of the combination at the acquisition
date if the adjustment is probable and can be measured reliably.
65C
A business combination agreement may allow for adjustments to the cost of the
combination that are contingent on one or more future events. The adjustment
might, for example, be contingent on a specified level of profit being maintained
or achieved in future periods, or on the market price of the instruments issued
being maintained. It is usually possible to estimate the amount of any such
adjustment at the time of initially accounting for the combination without
impairing the reliability of the information, even though some uncertainty
exists. If the future events do not occur or the estimate needs to be revised, the
cost of the business combination shall be adjusted accordingly.
65D
However, when a business combination agreement provides for such an
adjustment, that adjustment is not included in the cost of the combination at
the time of initially accounting for the combination if it either is not probable or
cannot be measured reliably. If that adjustment subsequently becomes probable
and can be measured reliably, the additional consideration shall be treated as an
adjustment to the cost of the combination.
65E
In some circumstances, the acquirer may be required to make a subsequent
payment to the seller as compensation for a reduction in the value of the assets
given, equity instruments issued or liabilities incurred or assumed by the
acquirer in exchange for control of the acquiree. This is the case, for example,
when the acquirer guarantees the market price of equity or debt instruments
issued as part of the cost of the business combination and is required to issue
additional equity or debt instruments to restore the originally determined cost.
In such cases, no increase in the cost of the business combination is recognised.
In the case of equity instruments, the fair value of the additional payment is
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offset by an equal reduction in the value attributed to the instruments initially
issued. In the case of debt instruments, the additional payment is regarded as a
reduction in the premium or an increase in the discount on the initial issue.
66
An entity, such as a mutual entity, that has not yet applied IFRS 3 and had one or
more business combinations that were accounted for using the purchase
method shall apply the transition provisions in paragraphs B68 and B69.
Income taxes
67
For business combinations in which the acquisition date was before this IFRS is
applied, the acquirer shall apply the requirements of paragraph 68 of IAS 12, as
amended by this IFRS, prospectively. That is to say, the acquirer shall not adjust
the accounting for prior business combinations for previously recognised
changes in recognised deferred tax assets. However, from the date when this
IFRS is applied, the acquirer shall recognise, as an adjustment to profit or loss
(or, if IAS 12 requires, outside profit or loss), changes in recognised deferred tax
assets.
Reference to IFRS 9
67A
If an entity applies this Standard but does not yet apply IFRS 9, any reference to
IFRS 9 should be read as a reference to IAS 39.
Withdrawal of IFRS 3 (2004)
68
This IFRS supersedes IFRS 3 Business Combinations (as issued in 2004).
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Appendix A
Defined terms
This appendix is an integral part of the IFRS.
acquiree
The business or businesses that the acquirer obtains control of in
a business combination.
acquirer
The entity that obtains control of the acquiree.
acquisition date
The date on which the acquirer obtains control of the acquiree.
business
An integrated set of activities and assets that is capable of being
conducted and managed for the purpose of providing a return in
the form of dividends, lower costs or other economic benefits
directly to investors or other owners, members or participants.
business combination
A transaction or other event in which an acquirer obtains
control of one or more businesses. Transactions sometimes
referred to as ‘true mergers’ or ‘mergers of equals’ are also
business combinations as that term is used in this IFRS.
contingent
consideration
Usually, an obligation of the acquirer to transfer additional
assets or equity interests to the former owners of an acquiree
as part of the exchange for control of the acquiree if specified
future events occur or conditions are met. However, contingent
consideration also may give the acquirer the right to the return of
previously transferred consideration if specified conditions are
met.
equity interests
For the purposes of this IFRS, equity interests is used broadly to
mean ownership interests of investor-owned entities and owner,
member or participant interests of mutual entities.
fair value
Fair value is the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between
market participants at the measurement date. (See IFRS 13.)
goodwill
An asset representing the future economic benefits arising from
other assets acquired in a business combination that are not
individually identified and separately recognised.
identifiable
An asset is identifiable if it either:
intangible asset
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(a)
is separable, ie capable of being separated or divided from
the entity and sold, transferred, licensed, rented or
exchanged, either individually or together with a related
contract, identifiable asset or liability, regardless of
whether the entity intends to do so; or
(b)
arises from contractual or other legal rights, regardless of
whether those rights are transferable or separable from
the entity or from other rights and obligations.
An identifiable non-monetary asset without physical substance.
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mutual entity
An entity, other than an investor-owned entity, that provides
dividends, lower costs or other economic benefits directly to its
owners, members or participants. For example, a mutual
insurance company, a credit union and a co-operative entity are
all mutual entities.
non-controlling
interest
The equity in a subsidiary not attributable, directly or indirectly,
to a parent.
owners
For the purposes of this IFRS, owners is used broadly to include
holders of equity interests of investor-owned entities and
owners or members of, or participants in, mutual entities.
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Appendix B
Application guidance
This appendix is an integral part of the IFRS.
Business combinations of entities under common control
(application of paragraph 2(c))
B1
This IFRS does not apply to a business combination of entities or businesses
under common control. A business combination involving entities or businesses
under common control is a business combination in which all of the combining
entities or businesses are ultimately controlled by the same party or parties both
before and after the business combination, and that control is not transitory.
B2
A group of individuals shall be regarded as controlling an entity when, as a
result of contractual arrangements, they collectively have the power to govern
its financial and operating policies so as to obtain benefits from its activities.
Therefore, a business combination is outside the scope of this IFRS when the
same group of individuals has, as a result of contractual arrangements, ultimate
collective power to govern the financial and operating policies of each of the
combining entities so as to obtain benefits from their activities, and that
ultimate collective power is not transitory.
B3
An entity may be controlled by an individual or by a group of individuals acting
together under a contractual arrangement, and that individual or group of
individuals may not be subject to the financial reporting requirements of IFRSs.
Therefore, it is not necessary for combining entities to be included as part of the
same consolidated financial statements for a business combination to be
regarded as one involving entities under common control.
B4
The extent of non-controlling interests in each of the combining entities before
and after the business combination is not relevant to determining whether the
combination involves entities under common control. Similarly, the fact that
one of the combining entities is a subsidiary that has been excluded from the
consolidated financial statements is not relevant to determining whether a
combination involves entities under common control.
Identifying a business combination (application of paragraph 3)
B5
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This IFRS defines a business combination as a transaction or other event in
which an acquirer obtains control of one or more businesses. An acquirer might
obtain control of an acquiree in a variety of ways, for example:
(a)
by transferring cash, cash equivalents or other assets (including net
assets that constitute a business);
(b)
by incurring liabilities;
(c)
by issuing equity interests;
(d)
by providing more than one type of consideration; or
(e)
without transferring consideration, including by contract alone (see
paragraph 43).
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B6
A business combination may be structured in a variety of ways for legal, taxation
or other reasons, which include but are not limited to:
(a)
one or more businesses become subsidiaries of an acquirer or the net
assets of one or more businesses are legally merged into the acquirer;
(b)
one combining entity transfers its net assets, or its owners transfer their
equity interests, to another combining entity or its owners;
(c)
all of the combining entities transfer their net assets, or the owners of
those entities transfer their equity interests, to a newly formed entity
(sometimes referred to as a roll-up or put-together transaction); or
(d)
a group of former owners of one of the combining entities obtains
control of the combined entity.
Definition of a business (application of paragraph 3)
B7
A business consists of inputs and processes applied to those inputs that have the
ability to create outputs. Although businesses usually have outputs, outputs are
not required for an integrated set to qualify as a business. The three elements of
a business are defined as follows:
(a)
Input: Any economic resource that creates, or has the ability to create,
outputs when one or more processes are applied to it. Examples include
non-current assets (including intangible assets or rights to use
non-current assets), intellectual property, the ability to obtain access to
necessary materials or rights and employees.
(b)
Process: Any system, standard, protocol, convention or rule that when
applied to an input or inputs, creates or has the ability to create outputs.
Examples include strategic management processes, operational
processes and resource management processes. These processes typically
are documented, but an organised workforce having the necessary skills
and experience following rules and conventions may provide the
necessary processes that are capable of being applied to inputs to create
outputs. (Accounting, billing, payroll and other administrative systems
typically are not processes used to create outputs.)
(c)
Output: The result of inputs and processes applied to those inputs that
provide or have the ability to provide a return in the form of dividends,
lower costs or other economic benefits directly to investors or other
owners, members or participants.
B8
To be capable of being conducted and managed for the purposes defined, an
integrated set of activities and assets requires two essential elements—inputs and
processes applied to those inputs, which together are or will be used to create
outputs. However, a business need not include all of the inputs or processes that
the seller used in operating that business if market participants are capable of
acquiring the business and continuing to produce outputs, for example, by
integrating the business with their own inputs and processes.
B9
The nature of the elements of a business varies by industry and by the structure
of an entity’s operations (activities), including the entity’s stage of development.
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Established businesses often have many different types of inputs, processes and
outputs, whereas new businesses often have few inputs and processes and
sometimes only a single output (product). Nearly all businesses also have
liabilities, but a business need not have liabilities.
B10
An integrated set of activities and assets in the development stage might not
have outputs. If not, the acquirer should consider other factors to determine
whether the set is a business. Those factors include, but are not limited to,
whether the set:
(a)
has begun planned principal activities;
(b)
has employees, intellectual property and other inputs and processes that
could be applied to those inputs;
(c)
is pursuing a plan to produce outputs; and
(d)
will be able to obtain access to customers that will purchase the outputs.
Not all of those factors need to be present for a particular integrated set of
activities and assets in the development stage to qualify as a business.
B11
Determining whether a particular set of assets and activities is a business should
be based on whether the integrated set is capable of being conducted and
managed as a business by a market participant. Thus, in evaluating whether a
particular set is a business, it is not relevant whether a seller operated the set as
a business or whether the acquirer intends to operate the set as a business.
B12
In the absence of evidence to the contrary, a particular set of assets and activities
in which goodwill is present shall be presumed to be a business. However, a
business need not have goodwill.
Identifying the acquirer (application of paragraphs 6 and 7)
B13
The guidance in IFRS 10 Consolidated Financial Statements shall be used to identify
the acquirer—the entity that obtains control of the acquiree. If a business
combination has occurred but applying the guidance in IFRS 10 does not clearly
indicate which of the combining entities is the acquirer, the factors in
paragraphs B14–B18 shall be considered in making that determination.
B14
In a business combination effected primarily by transferring cash or other assets
or by incurring liabilities, the acquirer is usually the entity that transfers the
cash or other assets or incurs the liabilities.
B15
In a business combination effected primarily by exchanging equity interests, the
acquirer is usually the entity that issues its equity interests. However, in some
business combinations, commonly called ‘reverse acquisitions’, the issuing
entity is the acquiree. Paragraphs B19–B27 provide guidance on accounting for
reverse acquisitions. Other pertinent facts and circumstances shall also be
considered in identifying the acquirer in a business combination effected by
exchanging equity interests, including:
(a)
the relative voting rights in the combined entity after the business
combination—The acquirer is usually the combining entity whose owners
as a group retain or receive the largest portion of the voting rights in the
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combined entity. In determining which group of owners retains or
receives the largest portion of the voting rights, an entity shall consider
the existence of any unusual or special voting arrangements and options,
warrants or convertible securities.
(b)
the existence of a large minority voting interest in the combined entity if no other
owner or organised group of owners has a significant voting interest—The
acquirer is usually the combining entity whose single owner or
organised group of owners holds the largest minority voting interest in
the combined entity.
(c)
the composition of the governing body of the combined entity—The acquirer is
usually the combining entity whose owners have the ability to elect or
appoint or to remove a majority of the members of the governing body of
the combined entity.
(d)
the composition of the senior management of the combined entity—The acquirer is
usually the combining entity whose (former) management dominates
the management of the combined entity.
(e)
the terms of the exchange of equity interests—The acquirer is usually the
combining entity that pays a premium over the pre-combination fair
value of the equity interests of the other combining entity or entities.
B16
The acquirer is usually the combining entity whose relative size (measured in,
for example, assets, revenues or profit) is significantly greater than that of the
other combining entity or entities.
B17
In a business combination involving more than two entities, determining the
acquirer shall include a consideration of, among other things, which of the
combining entities initiated the combination, as well as the relative size of the
combining entities.
B18
A new entity formed to effect a business combination is not necessarily the
acquirer. If a new entity is formed to issue equity interests to effect a business
combination, one of the combining entities that existed before the business
combination shall be identified as the acquirer by applying the guidance in
paragraphs B13–B17. In contrast, a new entity that transfers cash or other assets
or incurs liabilities as consideration may be the acquirer.
Reverse acquisitions
B19
A reverse acquisition occurs when the entity that issues securities (the legal
acquirer) is identified as the acquiree for accounting purposes on the basis of the
guidance in paragraphs B13–B18. The entity whose equity interests are acquired
(the legal acquiree) must be the acquirer for accounting purposes for the
transaction to be considered a reverse acquisition. For example, reverse
acquisitions sometimes occur when a private operating entity wants to become a
public entity but does not want to register its equity shares. To accomplish that,
the private entity will arrange for a public entity to acquire its equity interests in
exchange for the equity interests of the public entity. In this example, the
public entity is the legal acquirer because it issued its equity interests, and the
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private entity is the legal acquiree because its equity interests were acquired.
However, application of the guidance in paragraphs B13–B18 results in
identifying:
(a)
the public entity as the acquiree for accounting purposes (the
accounting acquiree); and
(b)
the private entity as the acquirer for accounting purposes (the
accounting acquirer).
The accounting acquiree must meet the definition of a business for the
transaction to be accounted for as a reverse acquisition, and all of the
recognition and measurement principles in this IFRS, including the requirement
to recognise goodwill, apply.
Measuring the consideration transferred
B20
In a reverse acquisition, the accounting acquirer usually issues no consideration
for the acquiree. Instead, the accounting acquiree usually issues its equity
shares to the owners of the accounting acquirer.
Accordingly, the
acquisition-date fair value of the consideration transferred by the accounting
acquirer for its interest in the accounting acquiree is based on the number of
equity interests the legal subsidiary would have had to issue to give the owners
of the legal parent the same percentage equity interest in the combined entity
that results from the reverse acquisition. The fair value of the number of equity
interests calculated in that way can be used as the fair value of consideration
transferred in exchange for the acquiree.
Preparation and presentation of consolidated financial
statements
B21
Consolidated financial statements prepared following a reverse acquisition are
issued under the name of the legal parent (accounting acquiree) but described in
the notes as a continuation of the financial statements of the legal subsidiary
(accounting acquirer), with one adjustment, which is to adjust retroactively the
accounting acquirer’s legal capital to reflect the legal capital of the accounting
acquiree. That adjustment is required to reflect the capital of the legal parent
(the accounting acquiree). Comparative information presented in those
consolidated financial statements also is retroactively adjusted to reflect the
legal capital of the legal parent (accounting acquiree).
B22
Because the consolidated financial statements represent the continuation of the
financial statements of the legal subsidiary except for its capital structure, the
consolidated financial statements reflect:
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(a)
the assets and liabilities of the legal subsidiary (the accounting acquirer)
recognised and measured at their pre-combination carrying amounts.
(b)
the assets and liabilities of the legal parent (the accounting acquiree)
recognised and measured in accordance with this IFRS.
(c)
the retained earnings and other equity balances of the legal subsidiary
(accounting acquirer) before the business combination.
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(d)
the amount recognised as issued equity interests in the consolidated
financial statements determined by adding the issued equity interest of
the legal subsidiary (the accounting acquirer) outstanding immediately
before the business combination to the fair value of the legal parent
(accounting acquiree). However, the equity structure (ie the number and
type of equity interests issued) reflects the equity structure of the legal
parent (the accounting acquiree), including the equity interests the legal
parent issued to effect the combination. Accordingly, the equity
structure of the legal subsidiary (the accounting acquirer) is restated
using the exchange ratio established in the acquisition agreement to
reflect the number of shares of the legal parent (the accounting acquiree)
issued in the reverse acquisition.
(e)
the non-controlling interest’s proportionate share of the legal
subsidiary’s (accounting acquirer’s) pre-combination carrying amounts
of retained earnings and other equity interests as discussed in
paragraphs B23 and B24.
Non-controlling interest
B23
In a reverse acquisition, some of the owners of the legal acquiree (the accounting
acquirer) might not exchange their equity interests for equity interests of the
legal parent (the accounting acquiree). Those owners are treated as a
non-controlling interest in the consolidated financial statements after the
reverse acquisition. That is because the owners of the legal acquiree that do not
exchange their equity interests for equity interests of the legal acquirer have an
interest in only the results and net assets of the legal acquiree—not in the results
and net assets of the combined entity. Conversely, even though the legal
acquirer is the acquiree for accounting purposes, the owners of the legal
acquirer have an interest in the results and net assets of the combined entity.
B24
The assets and liabilities of the legal acquiree are measured and recognised in
the consolidated financial statements at their pre-combination carrying
amounts (see paragraph B22(a)). Therefore, in a reverse acquisition the
non-controlling interest reflects the non-controlling shareholders’ proportionate
interest in the pre-combination carrying amounts of the legal acquiree’s net
assets even if the non-controlling interests in other acquisitions are measured at
their fair value at the acquisition date.
Earnings per share
B25
As noted in paragraph B22(d), the equity structure in the consolidated financial
statements following a reverse acquisition reflects the equity structure of the
legal acquirer (the accounting acquiree), including the equity interests issued by
the legal acquirer to effect the business combination.
B26
In calculating the weighted average number of ordinary shares outstanding (the
denominator of the earnings per share calculation) during the period in which
the reverse acquisition occurs:
(a)
the number of ordinary shares outstanding from the beginning of that
period to the acquisition date shall be computed on the basis of the
weighted average number of ordinary shares of the legal acquiree
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(accounting acquirer) outstanding during the period multiplied by the
exchange ratio established in the merger agreement; and
(b)
B27
the number of ordinary shares outstanding from the acquisition date to
the end of that period shall be the actual number of ordinary shares of
the legal acquirer (the accounting acquiree) outstanding during that
period.
The basic earnings per share for each comparative period before the acquisition
date presented in the consolidated financial statements following a reverse
acquisition shall be calculated by dividing:
(a)
the profit or loss of the legal acquiree attributable to ordinary
shareholders in each of those periods by
(b)
the legal acquiree’s historical weighted average number of ordinary
shares outstanding multiplied by the exchange ratio established in the
acquisition agreement.
Recognising particular assets acquired and liabilities assumed
(application of paragraphs 10–13)
B28–
B30
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Intangible assets
B31
The acquirer shall recognise, separately from goodwill, the identifiable
intangible assets acquired in a business combination. An intangible asset is
identifiable if it meets either the separability criterion or the contractual-legal
criterion.
B32
An intangible asset that meets the contractual-legal criterion is identifiable even
if the asset is not transferable or separable from the acquiree or from other
rights and obligations. For example:
B33
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(a)
[deleted]
(b)
an acquiree owns and operates a nuclear power plant. The licence to
operate that power plant is an intangible asset that meets the
contractual-legal criterion for recognition separately from goodwill, even
if the acquirer cannot sell or transfer it separately from the acquired
power plant. An acquirer may recognise the fair value of the operating
licence and the fair value of the power plant as a single asset for financial
reporting purposes if the useful lives of those assets are similar.
(c)
an acquiree owns a technology patent. It has licensed that patent to
others for their exclusive use outside the domestic market, receiving a
specified percentage of future foreign revenue in exchange. Both the
technology patent and the related licence agreement meet the
contractual-legal criterion for recognition separately from goodwill even
if selling or exchanging the patent and the related licence agreement
separately from one another would not be practical.
The separability criterion means that an acquired intangible asset is capable of
being separated or divided from the acquiree and sold, transferred, licensed,
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rented or exchanged, either individually or together with a related contract,
identifiable asset or liability. An intangible asset that the acquirer would be able
to sell, license or otherwise exchange for something else of value meets the
separability criterion even if the acquirer does not intend to sell, license or
otherwise exchange it. An acquired intangible asset meets the separability
criterion if there is evidence of exchange transactions for that type of asset or an
asset of a similar type, even if those transactions are infrequent and regardless of
whether the acquirer is involved in them. For example, customer and subscriber
lists are frequently licensed and thus meet the separability criterion. Even if an
acquiree believes its customer lists have characteristics different from other
customer lists, the fact that customer lists are frequently licensed generally
means that the acquired customer list meets the separability criterion.
However, a customer list acquired in a business combination would not meet
the separability criterion if the terms of confidentiality or other agreements
prohibit an entity from selling, leasing or otherwise exchanging information
about its customers.
B34
An intangible asset that is not individually separable from the acquiree or
combined entity meets the separability criterion if it is separable in combination
with a related contract, identifiable asset or liability. For example:
(a)
market participants exchange deposit liabilities and related depositor
relationship intangible assets in observable exchange transactions.
Therefore, the acquirer should recognise the depositor relationship
intangible asset separately from goodwill.
(b)
an acquiree owns a registered trademark and documented but
unpatented technical expertise used to manufacture the trademarked
product. To transfer ownership of a trademark, the owner is also
required to transfer everything else necessary for the new owner to
produce a product or service indistinguishable from that produced by
the former owner. Because the unpatented technical expertise must be
separated from the acquiree or combined entity and sold if the related
trademark is sold, it meets the separability criterion.
Reacquired rights
B35
As part of a business combination, an acquirer may reacquire a right that it had
previously granted to the acquiree to use one or more of the acquirer’s
recognised or unrecognised assets. Examples of such rights include a right to
use the acquirer’s trade name under a franchise agreement or a right to use the
acquirer’s technology under a technology licensing agreement. A reacquired
right is an identifiable intangible asset that the acquirer recognises separately
from goodwill. Paragraph 29 provides guidance on measuring a reacquired
right and paragraph 55 provides guidance on the subsequent accounting for a
reacquired right.
B36
If the terms of the contract giving rise to a reacquired right are favourable or
unfavourable relative to the terms of current market transactions for the same
or similar items, the acquirer shall recognise a settlement gain or loss.
Paragraph B52 provides guidance for measuring that settlement gain or loss.
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Assembled workforce and other items that are not identifiable
B37
The acquirer subsumes into goodwill the value of an acquired intangible asset
that is not identifiable as of the acquisition date. For example, an acquirer may
attribute value to the existence of an assembled workforce, which is an existing
collection of employees that permits the acquirer to continue to operate an
acquired business from the acquisition date. An assembled workforce does not
represent the intellectual capital of the skilled workforce—the (often specialised)
knowledge and experience that employees of an acquiree bring to their jobs.
Because the assembled workforce is not an identifiable asset to be recognised
separately from goodwill, any value attributed to it is subsumed into goodwill.
B38
The acquirer also subsumes into goodwill any value attributed to items that do
not qualify as assets at the acquisition date. For example, the acquirer might
attribute value to potential contracts the acquiree is negotiating with
prospective new customers at the acquisition date. Because those potential
contracts are not themselves assets at the acquisition date, the acquirer does not
recognise them separately from goodwill. The acquirer should not subsequently
reclassify the value of those contracts from goodwill for events that occur after
the acquisition date. However, the acquirer should assess the facts and
circumstances surrounding events occurring shortly after the acquisition to
determine whether a separately recognisable intangible asset existed at the
acquisition date.
B39
After initial recognition, an acquirer accounts for intangible assets acquired in a
business combination in accordance with the provisions of IAS 38 Intangible
Assets. However, as described in paragraph 3 of IAS 38, the accounting for some
acquired intangible assets after initial recognition is prescribed by other IFRSs.
B40
The identifiability criteria determine whether an intangible asset is recognised
separately from goodwill. However, the criteria neither provide guidance for
measuring the fair value of an intangible asset nor restrict the assumptions used
in measuring the fair value of an intangible asset. For example, the acquirer
would take into account the assumptions that market participants would use
when pricing the intangible asset, such as expectations of future contract
renewals, in measuring fair value. It is not necessary for the renewals
themselves to meet the identifiability criteria. (However, see paragraph 29,
which establishes an exception to the fair value measurement principle for
reacquired rights recognised in a business combination.) Paragraphs 36 and 37
of IAS 38 provide guidance for determining whether intangible assets should be
combined into a single unit of account with other intangible or tangible assets.
Measuring the fair value of particular identifiable assets and a
non-controlling interest in an acquiree (application of
paragraphs 18 and 19)
Assets with uncertain cash flows (valuation allowances)
B41
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The acquirer shall not recognise a separate valuation allowance as of the
acquisition date for assets acquired in a business combination that are measured
at their acquisition-date fair values because the effects of uncertainty about
future cash flows are included in the fair value measure. For example, because
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this IFRS requires the acquirer to measure acquired receivables, including loans,
at their acquisition-date fair values in accounting for a business combination,
the acquirer does not recognise a separate valuation allowance for the
contractual cash flows that are deemed to be uncollectible at that date or a loss
allowance for expected credit losses.
Assets subject to operating leases in which the acquiree
is the lessor
B42
In measuring the acquisition-date fair value of an asset such as a building or a
patent that is subject to an operating lease in which the acquiree is the lessor,
the acquirer shall take into account the terms of the lease. The acquirer does not
recognise a separate asset or liability if the terms of an operating lease are either
favourable or unfavourable when compared with market terms.
Assets that the acquirer intends not to use or to use in a
way that is different from the way other market
participants would use them
B43
To protect its competitive position, or for other reasons, the acquirer may intend
not to use an acquired non-financial asset actively, or it may not intend to use
the asset according to its highest and best use. For example, that might be the
case for an acquired research and development intangible asset that the acquirer
plans to use defensively by preventing others from using it. Nevertheless, the
acquirer shall measure the fair value of the non-financial asset assuming its
highest and best use by market participants in accordance with the appropriate
valuation premise, both initially and when measuring fair value less costs of
disposal for subsequent impairment testing.
Non-controlling interest in an acquiree
B44
This IFRS allows the acquirer to measure a non-controlling interest in the
acquiree at its fair value at the acquisition date. Sometimes an acquirer will be
able to measure the acquisition-date fair value of a non-controlling interest on
the basis of a quoted price in an active market for the equity shares (ie those not
held by the acquirer). In other situations, however, a quoted price in an active
market for the equity shares will not be available. In those situations, the
acquirer would measure the fair value of the non-controlling interest using
other valuation techniques.
B45
The fair values of the acquirer’s interest in the acquiree and the non-controlling
interest on a per-share basis might differ. The main difference is likely to be the
inclusion of a control premium in the per-share fair value of the acquirer’s
interest in the acquiree or, conversely, the inclusion of a discount for lack of
control (also referred to as a non-controlling interest discount) in the per-share
fair value of the non-controlling interest if market participants would take into
account such a premium or discount when pricing the non-controlling interest.
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Measuring goodwill or a gain from a bargain purchase
Measuring the acquisition-date fair value of the
acquirer’s interest in the acquiree using valuation
techniques (application of paragraph 33)
B46
In a business combination achieved without the transfer of consideration, the
acquirer must substitute the acquisition-date fair value of its interest in the
acquiree for the acquisition-date fair value of the consideration transferred to
measure goodwill or a gain on a bargain purchase (see paragraphs 32–34).
Special considerations in applying the acquisition
method to combinations of mutual entities (application
of paragraph 33)
B47
When two mutual entities combine, the fair value of the equity or member
interests in the acquiree (or the fair value of the acquiree) may be more reliably
measurable than the fair value of the member interests transferred by the
acquirer. In that situation, paragraph 33 requires the acquirer to determine the
amount of goodwill by using the acquisition-date fair value of the acquiree’s
equity interests instead of the acquisition-date fair value of the acquirer’s equity
interests transferred as consideration.
In addition, the acquirer in a
combination of mutual entities shall recognise the acquiree’s net assets as a
direct addition to capital or equity in its statement of financial position, not as
an addition to retained earnings, which is consistent with the way in which
other types of entities apply the acquisition method.
B48
Although they are similar in many ways to other businesses, mutual entities
have distinct characteristics that arise primarily because their members are both
customers and owners. Members of mutual entities generally expect to receive
benefits for their membership, often in the form of reduced fees charged for
goods and services or patronage dividends. The portion of patronage dividends
allocated to each member is often based on the amount of business the member
did with the mutual entity during the year.
B49
A fair value measurement of a mutual entity should include the assumptions
that market participants would make about future member benefits as well as
any other relevant assumptions market participants would make about the
mutual entity. For example, a present value technique may be used to measure
the fair value of a mutual entity. The cash flows used as inputs to the model
should be based on the expected cash flows of the mutual entity, which are
likely to reflect reductions for member benefits, such as reduced fees charged for
goods and services.
Determining what is part of the business combination
transaction (application of paragraphs 51 and 52)
B50
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The acquirer should consider the following factors, which are neither mutually
exclusive nor individually conclusive, to determine whether a transaction is part
of the exchange for the acquiree or whether the transaction is separate from the
business combination:
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(a)
the reasons for the transaction—Understanding the reasons why the
parties to the combination (the acquirer and the acquiree and their
owners, directors and managers—and their agents) entered into a
particular transaction or arrangement may provide insight into whether
it is part of the consideration transferred and the assets acquired or
liabilities assumed. For example, if a transaction is arranged primarily
for the benefit of the acquirer or the combined entity rather than
primarily for the benefit of the acquiree or its former owners before the
combination, that portion of the transaction price paid (and any related
assets or liabilities) is less likely to be part of the exchange for the
acquiree. Accordingly, the acquirer would account for that portion
separately from the business combination.
(b)
who initiated the transaction—Understanding who initiated the
transaction may also provide insight into whether it is part of the
exchange for the acquiree. For example, a transaction or other event
that is initiated by the acquirer may be entered into for the purpose of
providing future economic benefits to the acquirer or combined entity
with little or no benefit received by the acquiree or its former owners
before the combination.
On the other hand, a transaction or
arrangement initiated by the acquiree or its former owners is less likely
to be for the benefit of the acquirer or the combined entity and more
likely to be part of the business combination transaction.
(c)
the timing of the transaction—The timing of the transaction may also
provide insight into whether it is part of the exchange for the acquiree.
For example, a transaction between the acquirer and the acquiree that
takes place during the negotiations of the terms of a business
combination may have been entered into in contemplation of the
business combination to provide future economic benefits to the
acquirer or the combined entity. If so, the acquiree or its former owners
before the business combination are likely to receive little or no benefit
from the transaction except for benefits they receive as part of the
combined entity.
Effective settlement of a pre-existing relationship
between the acquirer and acquiree in a business
combination (application of paragraph 52(a))
B51
The acquirer and acquiree may have a relationship that existed before they
contemplated the business combination, referred to here as a ‘pre-existing
relationship’. A pre-existing relationship between the acquirer and acquiree
may be contractual (for example, vendor and customer or licensor and licensee)
or non-contractual (for example, plaintiff and defendant).
B52
If the business combination in effect settles a pre-existing relationship, the
acquirer recognises a gain or loss, measured as follows:
(a)
for a pre-existing non-contractual relationship (such as a lawsuit), fair
value.
(b)
for a pre-existing contractual relationship, the lesser of (i) and (ii):
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(i)
the amount by which the contract is favourable or unfavourable
from the perspective of the acquirer when compared with terms
for current market transactions for the same or similar items.
(An unfavourable contract is a contract that is unfavourable in
terms of current market terms. It is not necessarily an onerous
contract in which the unavoidable costs of meeting the
obligations under the contract exceed the economic benefits
expected to be received under it.)
(ii)
the amount of any stated settlement provisions in the contract
available to the counterparty to whom the contract is
unfavourable.
If (ii) is less than (i), the difference is included as part of the business
combination accounting.
The amount of gain or loss recognised may depend in part on whether the
acquirer had previously recognised a related asset or liability, and the reported
gain or loss therefore may differ from the amount calculated by applying the
above requirements.
B53
A pre-existing relationship may be a contract that the acquirer recognises as a
reacquired right. If the contract includes terms that are favourable or
unfavourable when compared with pricing for current market transactions for
the same or similar items, the acquirer recognises, separately from the business
combination, a gain or loss for the effective settlement of the contract, measured
in accordance with paragraph B52.
Arrangements for contingent payments to employees or
selling shareholders (application of paragraph 52(b))
B54
Whether arrangements for contingent payments to employees or selling
shareholders are contingent consideration in the business combination or are
separate transactions depends on the nature of the arrangements.
Understanding the reasons why the acquisition agreement includes a provision
for contingent payments, who initiated the arrangement and when the parties
entered into the arrangement may be helpful in assessing the nature of the
arrangement.
B55
If it is not clear whether an arrangement for payments to employees or selling
shareholders is part of the exchange for the acquiree or is a transaction separate
from the business combination, the acquirer should consider the following
indicators:
(a)
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Continuing employment—The terms of continuing employment by the
selling shareholders who become key employees may be an indicator of
the substance of a contingent consideration arrangement. The relevant
terms of continuing employment may be included in an employment
agreement, acquisition agreement or some other document.
A
contingent consideration arrangement in which the payments are
automatically forfeited if employment terminates is remuneration for
post-combination services. Arrangements in which the contingent
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payments are not affected by employment termination may indicate that
the contingent payments are additional consideration rather than
remuneration.
(b)
Duration of continuing employment—If the period of required employment
coincides with or is longer than the contingent payment period, that fact
may indicate that the contingent payments are, in substance,
remuneration.
(c)
Level of remuneration—Situations in which employee remuneration other
than the contingent payments is at a reasonable level in comparison
with that of other key employees in the combined entity may indicate
that the contingent payments are additional consideration rather than
remuneration.
(d)
Incremental payments to employees—If selling shareholders who do not
become employees receive lower contingent payments on a per-share
basis than the selling shareholders who become employees of the
combined entity, that fact may indicate that the incremental amount of
contingent payments to the selling shareholders who become employees
is remuneration.
(e)
Number of shares owned—The relative number of shares owned by the
selling shareholders who remain as key employees may be an indicator
of the substance of the contingent consideration arrangement. For
example, if the selling shareholders who owned substantially all of the
shares in the acquiree continue as key employees, that fact may indicate
that the arrangement is, in substance, a profit-sharing arrangement
intended to provide remuneration for post-combination services.
Alternatively, if selling shareholders who continue as key employees
owned only a small number of shares of the acquiree and all selling
shareholders receive the same amount of contingent consideration on a
per-share basis, that fact may indicate that the contingent payments are
additional consideration. The pre-acquisition ownership interests held
by parties related to selling shareholders who continue as key employees,
such as family members, should also be considered.
(f)
Linkage to the valuation—If the initial consideration transferred at the
acquisition date is based on the low end of a range established in the
valuation of the acquiree and the contingent formula relates to that
valuation approach, that fact may suggest that the contingent payments
are additional consideration. Alternatively, if the contingent payment
formula is consistent with prior profit-sharing arrangements, that fact
may suggest that the substance of the arrangement is to provide
remuneration.
(g)
Formula for determining consideration—The formula used to determine the
contingent payment may be helpful in assessing the substance of the
arrangement. For example, if a contingent payment is determined on
the basis of a multiple of earnings, that might suggest that the obligation
is contingent consideration in the business combination and that the
formula is intended to establish or verify the fair value of the acquiree.
In contrast, a contingent payment that is a specified percentage of
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earnings might suggest that the obligation to employees is a
profit-sharing arrangement to remunerate employees for services
rendered.
(h)
Other agreements and issues—The terms of other arrangements with selling
shareholders (such as agreements not to compete, executory contracts,
consulting contracts and property lease agreements) and the income tax
treatment of contingent payments may indicate that contingent
payments are attributable to something other than consideration for the
acquiree. For example, in connection with the acquisition, the acquirer
might enter into a property lease arrangement with a significant selling
shareholder. If the lease payments specified in the lease contract are
significantly below market, some or all of the contingent payments to
the lessor (the selling shareholder) required by a separate arrangement
for contingent payments might be, in substance, payments for the use of
the leased property that the acquirer should recognise separately in its
post-combination financial statements. In contrast, if the lease contract
specifies lease payments that are consistent with market terms for the
leased property, the arrangement for contingent payments to the selling
shareholder may be contingent consideration in the business
combination.
Acquirer share-based payment awards exchanged for
awards held by the acquiree’s employees (application of
paragraph 52(b))
An acquirer may exchange its share-based payment awards2 (replacement
awards) for awards held by employees of the acquiree. Exchanges of share
options or other share-based payment awards in conjunction with a business
combination are accounted for as modifications of share-based payment awards
in accordance with IFRS 2 Share-based Payment. If the acquirer replaces the
acquiree awards, either all or a portion of the market-based measure of the
acquirer’s replacement awards shall be included in measuring the consideration
transferred in the business combination. Paragraphs B57–B62 provide guidance
on how to allocate the market-based measure. However, in situations in which
acquiree awards would expire as a consequence of a business combination and if
the acquirer replaces those awards when it is not obliged to do so, all of the
market-based measure of the replacement awards shall be recognised as
remuneration cost in the post-combination financial statements in accordance
with IFRS 2. That is to say, none of the market-based measure of those awards
shall be included in measuring the consideration transferred in the business
combination. The acquirer is obliged to replace the acquiree awards if the
acquiree or its employees have the ability to enforce replacement. For example,
for the purposes of applying this guidance, the acquirer is obliged to replace the
acquiree’s awards if replacement is required by:
B56
2
(a)
the terms of the acquisition agreement;
(b)
the terms of the acquiree’s awards; or
In paragraphs B56–B62 the term ‘share-based payment awards’ refers to vested or unvested
share-based payment transactions.
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(c)
applicable laws or regulations.
B57
To determine the portion of a replacement award that is part of the
consideration transferred for the acquiree and the portion that is remuneration
for post-combination service, the acquirer shall measure both the replacement
awards granted by the acquirer and the acquiree awards as of the acquisition
date in accordance with IFRS 2. The portion of the market-based measure of the
replacement award that is part of the consideration transferred in exchange for
the acquiree equals the portion of the acquiree award that is attributable to
pre-combination service.
B58
The portion of the replacement award attributable to pre-combination service is
the market-based measure of the acquiree award multiplied by the ratio of the
portion of the vesting period completed to the greater of the total vesting period
or the original vesting period of the acquiree award. The vesting period is the
period during which all the specified vesting conditions are to be satisfied.
Vesting conditions are defined in IFRS 2.
B59
The portion of a non-vested replacement award attributable to post-combination
service, and therefore recognised as remuneration cost in the post-combination
financial statements, equals the total market-based measure of the replacement
award less the amount attributed to pre-combination service. Therefore, the
acquirer attributes any excess of the market-based measure of the replacement
award over the market-based measure of the acquiree award to post-combination
service and recognises that excess as remuneration cost in the post-combination
financial statements. The acquirer shall attribute a portion of a replacement
award to post-combination service if it requires post-combination service,
regardless of whether employees had rendered all of the service required for
their acquiree awards to vest before the acquisition date.
B60
The portion of a non-vested replacement award attributable to pre-combination
service, as well as the portion attributable to post-combination service, shall
reflect the best available estimate of the number of replacement awards
expected to vest. For example, if the market-based measure of the portion of a
replacement award attributed to pre-combination service is CU100 and the
acquirer expects that only 95 per cent of the award will vest, the amount
included in consideration transferred in the business combination is CU95.
Changes in the estimated number of replacement awards expected to vest are
reflected in remuneration cost for the periods in which the changes or
forfeitures occur not as adjustments to the consideration transferred in the
business combination.
Similarly, the effects of other events, such as
modifications or the ultimate outcome of awards with performance conditions,
that occur after the acquisition date are accounted for in accordance with IFRS 2
in determining remuneration cost for the period in which an event occurs.
B61
The same requirements for determining the portions of a replacement award
attributable to pre-combination and post-combination service apply regardless
of whether a replacement award is classified as a liability or as an equity
instrument in accordance with the provisions of IFRS 2. All changes in the
market-based measure of awards classified as liabilities after the acquisition date
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and the related income tax effects are recognised in the acquirer’s
post-combination financial statements in the period(s) in which the changes
occur.
B62
The income tax effects of replacement awards of share-based payments shall be
recognised in accordance with the provisions of IAS 12 Income Taxes.
Equity-settled share-based payment transactions of the
acquiree
B62A
The acquiree may have outstanding share-based payment transactions that the
acquirer does not exchange for its share-based payment transactions. If vested,
those acquiree share-based payment transactions are part of the non-controlling
interest in the acquiree and are measured at their market-based measure. If
unvested, they are measured at their market-based measure as if the acquisition
date were the grant date in accordance with paragraphs 19 and 30.
B62B
The market-based measure of unvested share-based payment transactions is
allocated to the non-controlling interest on the basis of the ratio of the portion
of the vesting period completed to the greater of the total vesting period and the
original vesting period of the share-based payment transaction. The balance is
allocated to post-combination service.
Other IFRSs that provide guidance on subsequent measurement
and accounting (application of paragraph 54)
B63
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Examples of other IFRSs that provide guidance on subsequently measuring and
accounting for assets acquired and liabilities assumed or incurred in a business
combination include:
(a)
IAS 38 prescribes the accounting for identifiable intangible assets
acquired in a business combination. The acquirer measures goodwill at
the amount recognised at the acquisition date less any accumulated
impairment losses. IAS 36 Impairment of Assets prescribes the accounting
for impairment losses.
(b)
IFRS 4 Insurance Contracts provides guidance on the subsequent
accounting for an insurance contract acquired in a business
combination.
(c)
IAS 12 prescribes the subsequent accounting for deferred tax assets
(including unrecognised deferred tax assets) and liabilities acquired in a
business combination.
(d)
IFRS 2 provides guidance on subsequent measurement and accounting
for the portion of replacement share-based payment awards issued by an
acquirer that is attributable to employees’ future services.
(e)
IFRS 10 provides guidance on accounting for changes in a parent’s
ownership interest in a subsidiary after control is obtained.
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Disclosures (application of paragraphs 59 and 61)
B64
To meet the objective in paragraph 59, the acquirer shall disclose the following
information for each business combination that occurs during the reporting
period:
(a)
the name and a description of the acquiree.
(b)
the acquisition date.
(c)
the percentage of voting equity interests acquired.
(d)
the primary reasons for the business combination and a description of
how the acquirer obtained control of the acquiree.
(e)
a qualitative description of the factors that make up the goodwill
recognised, such as expected synergies from combining operations of the
acquiree and the acquirer, intangible assets that do not qualify for
separate recognition or other factors.
(f)
the acquisition-date fair value of the total consideration transferred and
the acquisition-date fair value of each major class of consideration, such
as:
(g)
(h)
(i)
cash;
(ii)
other tangible or intangible assets, including a business or
subsidiary of the acquirer;
(iii)
liabilities incurred, for example, a liability for contingent
consideration; and
(iv)
equity interests of the acquirer, including the number of
instruments or interests issued or issuable and the method of
measuring the fair value of those instruments or interests.
for contingent consideration arrangements and indemnification assets:
(i)
the amount recognised as of the acquisition date;
(ii)
a description of the arrangement and the basis for determining
the amount of the payment; and
(iii)
an estimate of the range of outcomes (undiscounted) or, if a
range cannot be estimated, that fact and the reasons why a range
cannot be estimated. If the maximum amount of the payment is
unlimited, the acquirer shall disclose that fact.
for acquired receivables:
(i)
the fair value of the receivables;
(ii)
the gross contractual amounts receivable; and
(iii)
the best estimate at the acquisition date of the contractual cash
flows not expected to be collected.
The disclosures shall be provided by major class of receivable, such as
loans, direct finance leases and any other class of receivables.
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(i)
the amounts recognised as of the acquisition date for each major class of
assets acquired and liabilities assumed.
(j)
for each contingent liability recognised in accordance with
paragraph 23, the information required in paragraph 85 of IAS 37
Provisions, Contingent Liabilities and Contingent Assets. If a contingent liability
is not recognised because its fair value cannot be measured reliably, the
acquirer shall disclose:
the information required by paragraph 86 of IAS 37; and
(ii)
the reasons why the liability cannot be measured reliably.
(k)
the total amount of goodwill that is expected to be deductible for tax
purposes.
(l)
for transactions that are recognised separately from the acquisition of
assets and assumption of liabilities in the business combination in
accordance with paragraph 51:
(i)
a description of each transaction;
(ii)
how the acquirer accounted for each transaction;
(iii)
the amounts recognised for each transaction and the line item in
the financial statements in which each amount is recognised;
and
(iv)
if the transaction is the effective settlement of a pre-existing
relationship, the method used to determine the settlement
amount.
(m)
the disclosure of separately recognised transactions required by (l) shall
include the amount of acquisition-related costs and, separately, the
amount of those costs recognised as an expense and the line item or
items in the statement of comprehensive income in which those
expenses are recognised. The amount of any issue costs not recognised as
an expense and how they were recognised shall also be disclosed.
(n)
in a bargain purchase (see paragraphs 34–36):
(o)
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(i)
(i)
the amount of any gain recognised in accordance with
paragraph 34 and the line item in the statement of
comprehensive income in which the gain is recognised; and
(ii)
a description of the reasons why the transaction resulted in a
gain.
for each business combination in which the acquirer holds less than
100 per cent of the equity interests in the acquiree at the acquisition
date:
(i)
the amount of the non-controlling interest in the acquiree
recognised at the acquisition date and the measurement basis for
that amount; and
(ii)
for each non-controlling interest in an acquiree measured at fair
value, the valuation technique(s) and significant inputs used to
measure that value.
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(p)
(q)
in a business combination achieved in stages:
(i)
the acquisition-date fair value of the equity interest in the
acquiree held by the acquirer immediately before the acquisition
date; and
(ii)
the amount of any gain or loss recognised as a result of
remeasuring to fair value the equity interest in the acquiree held
by the acquirer before the business combination (see
paragraph 42) and the line item in the statement of
comprehensive income in which that gain or loss is recognised.
the following information:
(i)
the amounts of revenue and profit or loss of the acquiree since
the acquisition date included in the consolidated statement of
comprehensive income for the reporting period; and
(ii)
the revenue and profit or loss of the combined entity for the
current reporting period as though the acquisition date for all
business combinations that occurred during the year had been as
of the beginning of the annual reporting period.
If disclosure of any of the information required by this subparagraph is
impracticable, the acquirer shall disclose that fact and explain why the
disclosure is impracticable. This IFRS uses the term ‘impracticable’ with
the same meaning as in IAS 8 Accounting Policies, Changes in Accounting
Estimates and Errors.
B65
For individually immaterial business combinations occurring during the
reporting period that are material collectively, the acquirer shall disclose in
aggregate the information required by paragraph B64(e)–(q).
B66
If the acquisition date of a business combination is after the end of the reporting
period but before the financial statements are authorised for issue, the acquirer
shall disclose the information required by paragraph B64 unless the initial
accounting for the business combination is incomplete at the time the financial
statements are authorised for issue. In that situation, the acquirer shall describe
which disclosures could not be made and the reasons why they cannot be made.
B67
To meet the objective in paragraph 61, the acquirer shall disclose the following
information for each material business combination or in the aggregate for
individually immaterial business combinations that are material collectively:
(a)
if the initial accounting for a business combination is incomplete (see
paragraph 45) for particular assets, liabilities, non-controlling interests
or items of consideration and the amounts recognised in the financial
statements for the business combination thus have been determined
only provisionally:
(i)
the reasons why the initial accounting for the business
combination is incomplete;
(ii)
the assets, liabilities, equity interests or items of consideration
for which the initial accounting is incomplete; and
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(iii)
(b)
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the nature and amount of any measurement period adjustments
recognised during the reporting period in accordance with
paragraph 49.
for each reporting period after the acquisition date until the entity
collects, sells or otherwise loses the right to a contingent consideration
asset, or until the entity settles a contingent consideration liability or the
liability is cancelled or expires:
(i)
any changes in the recognised amounts, including any
differences arising upon settlement;
(ii)
any changes in the range of outcomes (undiscounted) and the
reasons for those changes; and
(iii)
the valuation techniques and key model inputs used to measure
contingent consideration.
(c)
for contingent liabilities recognised in a business combination, the
acquirer shall disclose the information required by paragraphs 84 and 85
of IAS 37 for each class of provision.
(d)
a reconciliation of the carrying amount of goodwill at the beginning and
end of the reporting period showing separately:
(i)
the gross amount and accumulated impairment losses at the
beginning of the reporting period.
(ii)
additional goodwill recognised during the reporting period,
except goodwill included in a disposal group that, on acquisition,
meets the criteria to be classified as held for sale in accordance
with IFRS 5 Non-current Assets Held for Sale and Discontinued
Operations.
(iii)
adjustments resulting from the subsequent recognition of
deferred tax assets during the reporting period in accordance
with paragraph 67.
(iv)
goodwill included in a disposal group classified as held for sale in
accordance with IFRS 5 and goodwill derecognised during the
reporting period without having previously been included in a
disposal group classified as held for sale.
(v)
impairment losses recognised during the reporting period in
accordance with IAS 36.
(IAS 36 requires disclosure of
information about the recoverable amount and impairment of
goodwill in addition to this requirement.)
(vi)
net exchange rate differences arising during the reporting period
in accordance with IAS 21 The Effects of Changes in Foreign Exchange
Rates.
(vii)
any other changes in the carrying amount during the reporting
period.
(viii)
the gross amount and accumulated impairment losses at the end
of the reporting period.
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(e)
the amount and an explanation of any gain or loss recognised in the
current reporting period that both:
(i)
relates to the identifiable assets acquired or liabilities assumed in
a business combination that was effected in the current or
previous reporting period; and
(ii)
is of such a size, nature or incidence that disclosure is relevant to
understanding the combined entity’s financial statements.
Transitional provisions for business combinations involving only
mutual entities or by contract alone (application of paragraph 66)
B68
Paragraph 64 provides that this IFRS applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after 1 July 2009. Earlier
application is permitted. However, an entity shall apply this IFRS only at the
beginning of an annual reporting period that begins on or after 30 June 2007. If
an entity applies this IFRS before its effective date, the entity shall disclose that
fact and shall apply IAS 27 (as amended in 2008) at the same time.
B69
The requirement to apply this IFRS prospectively has the following effect for a
business combination involving only mutual entities or by contract alone if the
acquisition date for that business combination is before the application of this
IFRS:
(a)
Classification—An entity shall continue to classify the prior business
combination in accordance with the entity’s previous accounting
policies for such combinations.
(b)
Previously recognised goodwill—At the beginning of the first annual period
in which this IFRS is applied, the carrying amount of goodwill arising
from the prior business combination shall be its carrying amount at that
date in accordance with the entity’s previous accounting policies. In
determining that amount, the entity shall eliminate the carrying
amount of any accumulated amortisation of that goodwill and the
corresponding decrease in goodwill. No other adjustments shall be made
to the carrying amount of goodwill.
(c)
Goodwill previously recognised as a deduction from equity—The entity’s previous
accounting policies may have resulted in goodwill arising from the prior
business combination being recognised as a deduction from equity. In
that situation the entity shall not recognise that goodwill as an asset at
the beginning of the first annual period in which this IFRS is applied.
Furthermore, the entity shall not recognise in profit or loss any part of
that goodwill when it disposes of all or part of the business to which that
goodwill relates or when a cash-generating unit to which the goodwill
relates becomes impaired.
(d)
Subsequent accounting for goodwill—From the beginning of the first annual
period in which this IFRS is applied, an entity shall discontinue
amortising goodwill arising from the prior business combination and
shall test goodwill for impairment in accordance with IAS 36.
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(e)
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Previously recognised negative goodwill—An entity that accounted for the
prior business combination by applying the purchase method may have
recognised a deferred credit for an excess of its interest in the net fair
value of the acquiree’s identifiable assets and liabilities over the cost of
that interest (sometimes called negative goodwill). If so, the entity shall
derecognise the carrying amount of that deferred credit at the beginning
of the first annual period in which this IFRS is applied with a
corresponding adjustment to the opening balance of retained earnings
at that date.
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Appendix C
Amendments to other IFRSs
The amendments in this appendix shall be applied for annual reporting periods beginning on or
after 1 July 2009. If an entity applies this IFRS for an earlier period, these amendments shall be
applied for that earlier period. Amended paragraphs are shown with new text underlined and
deleted text struck through.
*****
The amendments contained in this appendix when this revised IFRS was issued in 2008 have been
incorporated into the relevant IFRSs published in this volume.
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IFRS 4
IFRS 4
Insurance Contracts
In March 2004 the International Accounting Standards Board (the Board) issued IFRS 4
Insurance Contracts. In August 2005 the Board amended the scope of IFRS 4 to clarify that
most financial guarantee contracts would be accounted for by applying the financial
instruments requirements. In December 2005 the Board issued revised guidance on
implementing IFRS 4.
In September 2016 IFRS 4 was amended by Applying IFRS 9 Financial Instruments with IFRS 4
Insurance Contracts. These amendments address concerns arising from the different
effective dates of IFRS 9 and the forthcoming insurance contracts Standard. Accordingly,
these amendments introduce two optional approaches: a temporary exemption from
applying IFRS 9; and an overlay approach.
Other Standards have made minor consequential amendments to IFRS 4. They include
IFRS 13 Fair Value Measurement (issued May 2011), IFRS 9 Financial Instruments (Hedge
Accounting and amendments to IFRS 9, IFRS 7 and IAS 39) (issued November 2013), IFRS 15
Revenue from Contracts with Customers (issued May 2014), IFRS 9 Financial Instruments (issued
July 2014) and IFRS 16 Leases (issued January 2016).
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CONTENTS
from paragraph
INTERNATIONAL FINANCIAL REPORTING STANDARD 4
INSURANCE CONTRACTS
OBJECTIVE
1
SCOPE
2
Embedded derivatives
7
Unbundling of deposit components
10
RECOGNITION AND MEASUREMENT
13
Temporary exemption from some other IFRSs
13
Temporary exemption from IFRS 9
20A
Changes in accounting policies
21
Insurance contracts acquired in a business combination or portfolio transfer
31
Discretionary participation features
34
PRESENTATION
35B
The overlay approach
35B
DISCLOSURE
36
Explanation of recognised amounts
36
Nature and extent of risks arising from insurance contracts
38
Disclosures about the temporary exemption from IFRS 9
39B
Disclosures about the overlay approach
39K
EFFECTIVE DATE AND TRANSITION
40
Disclosure
42
Redesignation of financial assets
45
Applying IFRS 4 with IFRS 9
46
APPENDICES
A
Defined terms
B
Definition of an insurance contract
C
Amendments to other IFRSs
FOR THE ACCOMPANYING DOCUMENTS LISTED BELOW, SEE PART B OF THIS
EDITION
APPROVAL BY THE BOARD OF IFRS 4 ISSUED IN MARCH 2004
APPROVAL BY THE BOARD OF FINANCIAL GUARANTEE CONTRACTS
(AMENDMENTS TO IAS 39 AND IFRS 4) ISSUED IN AUGUST 2005
APPROVAL BY THE BOARD OF APPLYING IFRS 9 FINANCIAL INSTRUMENTS
WITH IFRS 4 INSURANCE CONTRACTS (AMENDMENTS TO IFRS 4) ISSUED
IN SEPTEMBER 2016
BASIS FOR CONCLUSIONS
DISSENTING OPINIONS
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IMPLEMENTATION GUIDANCE
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IFRS 4
International Financial Reporting Standard 4 Insurance Contracts (IFRS 4) is set out in
paragraphs 1–49 and Appendices A–C. All the paragraphs have equal authority.
Paragraphs in bold type state the main principles. Terms defined in Appendix A are in
italics the first time they appear in the Standard. Definitions of other terms are given in
the Glossary for International Financial Reporting Standards. IFRS 4 should be read in
the context of its objective and the Basis for Conclusions, the Preface to International
Financial Reporting Standards and the Conceptual Framework for Financial Reporting. IAS 8
Accounting Policies, Changes in Accounting Estimates and Errors provides a basis for selecting
and applying accounting policies in the absence of explicit guidance.
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International Financial Reporting Standard 4
Insurance Contracts
Objective
1
The objective of this IFRS is to specify the financial reporting for insurance
contracts by any entity that issues such contracts (described in this IFRS as an
insurer) until the Board completes the second phase of its project on insurance
contracts. In particular, this IFRS requires:
(a)
limited improvements to accounting by insurers for insurance contracts.
(b)
disclosure that identifies and explains the amounts in an insurer’s
financial statements arising from insurance contracts and helps users of
those financial statements understand the amount, timing and
uncertainty of future cash flows from insurance contracts.
Scope
2
3
4
An entity shall apply this IFRS to:
(a)
insurance contracts (including reinsurance contracts) that it issues and
reinsurance contracts that it holds.
(b)
financial instruments that it issues with a discretionary participation feature
(see paragraph 35). IFRS 7 Financial Instruments: Disclosures requires
disclosure about financial instruments, including financial instruments
that contain such features.
This IFRS does not address other aspects of accounting by insurers, such as
accounting for financial assets held by insurers and financial liabilities issued by
insurers (see IAS 32 Financial Instruments: Presentation, IFRS 7 and IFRS 9 Financial
Instruments), except:
(a)
paragraph 20A permits insurers that meet specified criteria to apply a
temporary exemption from IFRS 9;
(b)
paragraph 35B permits insurers to apply the overlay approach to
designated financial assets; and
(c)
paragraph 45 permits insurers to reclassify in specified circumstances
some or all of their financial assets so that the assets are measured at fair
value through profit or loss.
An entity shall not apply this IFRS to:
(a)
product warranties issued directly by a manufacturer, dealer or retailer
(see IFRS 15 Revenue from Contracts with Customers and IAS 37 Provisions,
Contingent Liabilities and Contingent Assets).
(b)
employers’ assets and liabilities under employee benefit plans (see IAS 19
Employee Benefits and IFRS 2 Share-based Payment) and retirement benefit
obligations reported by defined benefit retirement plans (see IAS 26
Accounting and Reporting by Retirement Benefit Plans).
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(c)
contractual rights or contractual obligations that are contingent on the
future use of, or right to use, a non-financial item (for example, some
licence fees, royalties, variable lease payments and similar items), as well
as a lessee’s residual value guarantee embedded in a lease (see IFRS 16
Leases, IFRS 15 Revenue from Contracts with Customers and IAS 38 Intangible
Assets).
(d)
financial guarantee contracts unless the issuer has previously asserted
explicitly that it regards such contracts as insurance contracts and has
used accounting applicable to insurance contracts, in which case the
issuer may elect to apply either IAS 32, IFRS 7 and IFRS 9 or this IFRS to
such financial guarantee contracts. The issuer may make that election
contract by contract, but the election for each contract is irrevocable.
(e)
contingent consideration payable or receivable
combination (see IFRS 3 Business Combinations).
(f)
direct insurance contracts that the entity holds (ie direct insurance contracts
in which the entity is the policyholder). However, a cedant shall apply this
IFRS to reinsurance contracts that it holds.
in
a
business
5
For ease of reference, this IFRS describes any entity that issues an insurance
contract as an insurer, whether or not the issuer is regarded as an insurer for
legal or supervisory purposes. All references in paragraphs 3(a)–3(b), 20A–20Q,
35B–35N, 39B–39M and 46–49 to an insurer shall be read as also referring to an
issuer of a financial instrument that contains a discretionary participation
feature.
6
A reinsurance contract is a type of insurance contract. Accordingly, all
references in this IFRS to insurance contracts also apply to reinsurance
contracts.
Embedded derivatives
7
IFRS 9 requires an entity to separate some embedded derivatives from their host
contract, measure them at fair value and include changes in their fair value in
profit or loss. IFRS 9 applies to derivatives embedded in an insurance contract
unless the embedded derivative is itself an insurance contract.
8
As an exception to the requirements in IFRS 9, an insurer need not separate, and
measure at fair value, a policyholder’s option to surrender an insurance contract
for a fixed amount (or for an amount based on a fixed amount and an interest
rate), even if the exercise price differs from the carrying amount of the host
insurance liability. However, the requirements in IFRS 9 do apply to a put option
or cash surrender option embedded in an insurance contract if the surrender
value varies in response to the change in a financial variable (such as an equity
or commodity price or index), or a non-financial variable that is not specific to a
party to the contract. Furthermore, those requirements also apply if the
holder’s ability to exercise a put option or cash surrender option is triggered by
a change in such a variable (for example, a put option that can be exercised if a
stock market index reaches a specified level).
9
Paragraph 8 applies equally to options to surrender a financial instrument
containing a discretionary participation feature.
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Unbundling of deposit components
10
Some insurance contracts contain both an insurance component and a deposit
component. In some cases, an insurer is required or permitted to unbundle those
components:
(a)
unbundling is required if both the following conditions are met:
(i)
the insurer can measure the deposit component (including
any embedded surrender options) separately (ie without
considering the insurance component).
(ii)
the insurer’s accounting policies do not otherwise require it to
recognise all obligations and rights arising from the deposit
component.
(b)
unbundling is permitted, but not required, if the insurer can measure
the deposit component separately as in (a)(i) but its accounting policies
require it to recognise all obligations and rights arising from the deposit
component, regardless of the basis used to measure those rights and
obligations.
(c)
unbundling is prohibited if an insurer cannot measure the deposit
component separately as in (a)(i).
11
The following is an example of a case when an insurer’s accounting policies do
not require it to recognise all obligations arising from a deposit component. A
cedant receives compensation for losses from a reinsurer, but the contract obliges
the cedant to repay the compensation in future years. That obligation arises
from a deposit component. If the cedant’s accounting policies would otherwise
permit it to recognise the compensation as income without recognising the
resulting obligation, unbundling is required.
12
To unbundle a contract, an insurer shall:
(a)
apply this IFRS to the insurance component.
(b)
apply IFRS 9 to the deposit component.
Recognition and measurement
Temporary exemption from some other IFRSs
13
Paragraphs 10–12 of IAS 8 Accounting Policies, Changes in Accounting Estimates and
Errors specify criteria for an entity to use in developing an accounting policy if
no IFRS applies specifically to an item. However, this IFRS exempts an insurer
from applying those criteria to its accounting policies for:
14
(a)
insurance contracts that it issues (including related acquisition costs and
related intangible assets, such as those described in paragraphs 31 and
32); and
(b)
reinsurance contracts that it holds.
Nevertheless, this IFRS does not exempt an insurer from some implications of
the criteria in paragraphs 10–12 of IAS 8. Specifically, an insurer:
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(a)
shall not recognise as a liability any provisions for possible future claims,
if those claims arise under insurance contracts that are not in existence
at the end of the reporting period (such as catastrophe provisions and
equalisation provisions).
(b)
shall carry out the liability adequacy test described in paragraphs 15–19.
(c)
shall remove an insurance liability (or a part of an insurance liability)
from its statement of financial position when, and only when, it is
extinguished—ie when the obligation specified in the contract is
discharged or cancelled or expires.
(d)
shall not offset:
(e)
(i)
reinsurance assets against the related insurance liabilities; or
(ii)
income or expense from reinsurance contracts against the
expense or income from the related insurance contracts.
shall consider whether its reinsurance assets are impaired (see
paragraph 20).
Liability adequacy test
15
An insurer shall assess at the end of each reporting period whether its
recognised insurance liabilities are adequate, using current estimates of
future cash flows under its insurance contracts. If that assessment shows
that the carrying amount of its insurance liabilities (less related deferred
acquisition costs and related intangible assets, such as those discussed in
paragraphs 31 and 32) is inadequate in the light of the estimated future
cash flows, the entire deficiency shall be recognised in profit or loss.
16
If an insurer applies a liability adequacy test that meets specified minimum
requirements, this IFRS imposes no further requirements. The minimum
requirements are the following:
17
(a)
The test considers current estimates of all contractual cash flows, and of
related cash flows such as claims handling costs, as well as cash flows
resulting from embedded options and guarantees.
(b)
If the test shows that the liability is inadequate, the entire deficiency is
recognised in profit or loss.
If an insurer’s accounting policies do not require a liability adequacy test that
meets the minimum requirements of paragraph 16, the insurer shall:
(a)
determine the carrying amount of the relevant insurance liabilities1 less
the carrying amount of:
(i)
1
any related deferred acquisition costs; and
The relevant insurance liabilities are those insurance liabilities (and related deferred acquisition
costs and related intangible assets) for which the insurer’s accounting policies do not require a
liability adequacy test that meets the minimum requirements of paragraph 16.
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(ii)
(b)
any related intangible assets, such as those acquired in a business
combination or portfolio transfer (see paragraphs 31 and 32).
However, related reinsurance assets are not considered because
an insurer accounts for them separately (see paragraph 20).
determine whether the amount described in (a) is less than the carrying
amount that would be required if the relevant insurance liabilities were
within the scope of IAS 37. If it is less, the insurer shall recognise the
entire difference in profit or loss and decrease the carrying amount of
the related deferred acquisition costs or related intangible assets or
increase the carrying amount of the relevant insurance liabilities.
18
If an insurer’s liability adequacy test meets the minimum requirements of
paragraph 16, the test is applied at the level of aggregation specified in that test.
If its liability adequacy test does not meet those minimum requirements, the
comparison described in paragraph 17 shall be made at the level of a portfolio of
contracts that are subject to broadly similar risks and managed together as a
single portfolio.
19
The amount described in paragraph 17(b) (ie the result of applying IAS 37) shall
reflect future investment margins (see paragraphs 27–29) if, and only if, the
amount described in paragraph 17(a) also reflects those margins.
Impairment of reinsurance assets
20
If a cedant’s reinsurance asset is impaired, the cedant shall reduce its carrying
amount accordingly and recognise that impairment loss in profit or loss.
A reinsurance asset is impaired if, and only if:
(a)
there is objective evidence, as a result of an event that occurred after
initial recognition of the reinsurance asset, that the cedant may not
receive all amounts due to it under the terms of the contract; and
(b)
that event has a reliably measurable impact on the amounts that the
cedant will receive from the reinsurer.
Temporary exemption from IFRS 9
20A
20B
IFRS 9 addresses the accounting for financial instruments and is effective
for annual periods beginning on or after 1 January 2018. However, for an
insurer that meets the criteria in paragraph 20B, this IFRS provides a
temporary exemption that permits, but does not require, the insurer to
apply IAS 39 Financial Instruments: Recognition and Measurement rather
than IFRS 9 for annual periods beginning before 1 January 2021. An
insurer that applies the temporary exemption from IFRS 9 shall:
(a)
use the requirements in IFRS 9 that are necessary to provide the
disclosures required in paragraphs 39B–39J of this IFRS; and
(b)
apply all other applicable IFRSs to its financial instruments, except
as described in paragraphs 20A–20Q, 39B–39J and 46–47 of this
IFRS.
An insurer may apply the temporary exemption from IFRS 9 if, and only
if:
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(a)
it has not previously applied any version of IFRS 92, other than only
the requirements for the presentation of gains and losses on
financial liabilities designated as at fair value through profit or
loss in paragraphs 5.7.1(c), 5.7.7–5.7.9, 7.2.14 and B5.7.5–B5.7.20 of
IFRS 9; and
(b)
its activities are predominantly connected with insurance, as
described in paragraph 20D, at its annual reporting date that
immediately precedes 1 April 2016, or at a subsequent annual
reporting date as specified in paragraph 20G.
20C
An insurer applying the temporary exemption from IFRS 9 is permitted to elect
to apply only the requirements for the presentation of gains and losses on
financial liabilities designated as at fair value through profit or loss in
paragraphs 5.7.1(c), 5.7.7–5.7.9, 7.2.14 and B5.7.5–B5.7.20 of IFRS 9. If an insurer
elects to apply those requirements, it shall apply the relevant transition
provisions in IFRS 9, disclose the fact that it has applied those requirements and
provide on an ongoing basis the related disclosures set out in paragraphs 10–11
of IFRS 7 (as amended by IFRS 9 (2010)).
20D
An insurer’s activities are predominantly connected with insurance if, and only
if:
20E
2
(a)
the carrying amount of its liabilities arising from contracts within the
scope of this IFRS, which includes any deposit components or embedded
derivatives unbundled from insurance contracts applying paragraphs
7–12 of this IFRS, is significant compared to the total carrying amount of
all its liabilities; and
(b)
the percentage of the total carrying amount of its liabilities connected
with insurance (see paragraph 20E) relative to the total carrying amount
of all its liabilities is:
(i)
greater than 90 per cent; or
(ii)
less than or equal to 90 per cent but greater than 80 per cent, and
the insurer does not engage in a significant activity unconnected
with insurance (see paragraph 20F).
For the purposes of applying paragraph 20D(b), liabilities connected with
insurance comprise:
(a)
liabilities arising from contracts within the scope of this IFRS, as
described in paragraph 20D(a);
(b)
non-derivative investment contract liabilities measured at fair value
through profit or loss applying IAS 39 (including those designated as at
fair value through profit or loss to which the insurer has applied the
requirements in IFRS 9 for the presentation of gains and losses (see
paragraphs 20B(a) and 20C)); and
The Board issued successive versions of IFRS 9 in 2009, 2010, 2013 and 2014.
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(c)
20F
20G
20H
liabilities that arise because the insurer issues, or fulfils obligations
arising from, the contracts in (a) and (b). Examples of such liabilities
include derivatives used to mitigate risks arising from those contracts
and from the assets backing those contracts, relevant tax liabilities such
as the deferred tax liabilities for taxable temporary differences on
liabilities arising from those contracts, and debt instruments issued that
are included in the insurer’s regulatory capital.
In assessing whether it engages in a significant activity unconnected with
insurance for the purposes of applying paragraph 20D(b)(ii), an insurer shall
consider:
(a)
only those activities from which it may earn income and incur expenses;
and
(b)
quantitative or qualitative factors (or both), including publicly available
information such as the industry classification that users of financial
statements apply to the insurer.
Paragraph 20B(b) requires an entity to assess whether it qualifies for the
temporary exemption from IFRS 9 at its annual reporting date that immediately
precedes 1 April 2016. After that date:
(a)
an entity that previously qualified for the temporary exemption from
IFRS 9 shall reassess whether its activities are predominantly connected
with insurance at a subsequent annual reporting date if, and only if,
there was a change in the entity’s activities, as described in paragraphs
20H–20I, during the annual period that ended on that date.
(b)
an entity that previously did not qualify for the temporary exemption
from IFRS 9 is permitted to reassess whether its activities are
predominantly connected with insurance at a subsequent annual
reporting date before 31 December 2018 if, and only if, there was a
change in the entity’s activities, as described in paragraphs 20H–20I,
during the annual period that ended on that date.
For the purposes of applying paragraph 20G, a change in an entity’s activities is
a change that:
(a)
is determined by the entity’s senior management as a result of external
or internal changes;
(b)
is significant to the entity’s operations; and
(c)
is demonstrable to external parties.
Accordingly, such a change occurs only when the entity begins or ceases to
perform an activity that is significant to its operations or significantly changes
the magnitude of one of its activities; for example, when the entity has acquired,
disposed of or terminated a business line.
20I
A change in an entity’s activities, as described in paragraph 20H, is expected to
be very infrequent. The following are not changes in an entity’s activities for the
purposes of applying paragraph 20G:
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(a)
a change in the entity’s funding structure that in itself does not affect
the activities from which the entity earns income and incurs expenses.
(b)
the entity’s plan to sell a business line, even if the assets and liabilities
are classified as held for sale applying IFRS 5 Non-current Assets Held for Sale
and Discontinued Operations. A plan to sell a business line could change the
entity’s activities and give rise to a reassessment in the future but has yet
to affect the liabilities recognised on its statement of financial position.
20J
If an entity no longer qualifies for the temporary exemption from IFRS 9 as a
result of a reassessment (see paragraph 20G(a)), then the entity is permitted to
continue to apply the temporary exemption from IFRS 9 only until the end of
the annual period that began immediately after that reassessment.
Nevertheless, the entity must apply IFRS 9 for annual periods beginning on or
after 1 January 2021. For example, if an entity determines that it no longer
qualifies for the temporary exemption from IFRS 9 applying paragraph 20G(a) on
31 December 2018 (the end of its annual period), then the entity is permitted to
continue to apply the temporary exemption from IFRS 9 only until 31 December
2019.
20K
An insurer that previously elected to apply the temporary exemption from
IFRS 9 may at the beginning of any subsequent annual period irrevocably elect
to apply IFRS 9.
First-time adopter
20L
A first-time adopter, as defined in IFRS 1 First-time Adoption of International Financial
Reporting Standards, may apply the temporary exemption from IFRS 9 described
in paragraph 20A if, and only if, it meets the criteria described in paragraph 20B.
In applying paragraph 20B(b), the first-time adopter shall use the carrying
amounts determined applying IFRSs at the date specified in that paragraph.
20M
IFRS 1 contains requirements and exemptions applicable to a first-time adopter.
Those requirements and exemptions (for example, paragraphs D16–D17 of
IFRS 1) do not override the requirements in paragraphs 20A–20Q and 39B–39J of
this IFRS. For example, the requirements and exemptions in IFRS 1 do not
override the requirement that a first-time adopter must meet the criteria
specified in paragraph 20L to apply the temporary exemption from IFRS 9.
20N
A first-time adopter that discloses the information required by paragraphs
39B–39J shall use the requirements and exemptions in IFRS 1 that are relevant to
making the assessments required for those disclosures.
Temporary exemption from specific requirements in IAS 28
20O
Paragraphs 35–36 of IAS 28 Investments in Associates and Joint Ventures require an
entity to apply uniform accounting policies when using the equity method.
Nevertheless, for annual periods beginning before 1 January 2021, an entity is
permitted, but not required, to retain the relevant accounting policies applied
by the associate or joint venture as follows:
(a)
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temporary exemption from IFRS 9; or
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(b)
20P
the entity applies the temporary exemption from IFRS 9 but the associate
or joint venture applies IFRS 9.
When an entity uses the equity method to account for its investment in an
associate or joint venture:
20Q
(a)
if IFRS 9 was previously applied in the financial statements used to apply
the equity method to that associate or joint venture (after reflecting any
adjustments made by the entity), then IFRS 9 shall continue to be
applied.
(b)
if the temporary exemption from IFRS 9 was previously applied in the
financial statements used to apply the equity method to that associate or
joint venture (after reflecting any adjustments made by the entity), then
IFRS 9 may be subsequently applied.
An entity may apply paragraphs 20O and 20P(b) separately for each associate or
joint venture.
Changes in accounting policies
21
Paragraphs 22–30 apply both to changes made by an insurer that already applies
IFRSs and to changes made by an insurer adopting IFRSs for the first time.
22
An insurer may change its accounting policies for insurance contracts if,
and only if, the change makes the financial statements more relevant to
the economic decision-making needs of users and no less reliable, or
more reliable and no less relevant to those needs. An insurer shall judge
relevance and reliability by the criteria in IAS 8.
23
To justify changing its accounting policies for insurance contracts, an insurer
shall show that the change brings its financial statements closer to meeting the
criteria in IAS 8, but the change need not achieve full compliance with those
criteria. The following specific issues are discussed below:
(a)
current interest rates (paragraph 24);
(b)
continuation of existing practices (paragraph 25);
(c)
prudence (paragraph 26);
(d)
future investment margins (paragraphs 27–29); and
(e)
shadow accounting (paragraph 30).
Current market interest rates
24
3
An insurer is permitted, but not required, to change its accounting policies so
that it remeasures designated insurance liabilities3 to reflect current market
interest rates and recognises changes in those liabilities in profit or loss. At that
time, it may also introduce accounting policies that require other current
estimates and assumptions for the designated liabilities. The election in this
paragraph permits an insurer to change its accounting policies for designated
liabilities, without applying those policies consistently to all similar liabilities as
In this paragraph, insurance liabilities include related deferred acquisition costs and related
intangible assets, such as those discussed in paragraphs 31 and 32.
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IAS 8 would otherwise require. If an insurer designates liabilities for this
election, it shall continue to apply current market interest rates (and, if
applicable, the other current estimates and assumptions) consistently in all
periods to all these liabilities until they are extinguished.
Continuation of existing practices
25
An insurer may continue the following practices, but the introduction of any of
them does not satisfy paragraph 22:
(a)
measuring insurance liabilities on an undiscounted basis.
(b)
measuring contractual rights to future investment management fees at
an amount that exceeds their fair value as implied by a comparison with
current fees charged by other market participants for similar services. It
is likely that the fair value at inception of those contractual rights equals
the origination costs paid, unless future investment management fees
and related costs are out of line with market comparables.
(c)
using non-uniform accounting policies for the insurance contracts (and
related deferred acquisition costs and related intangible assets, if any) of
subsidiaries, except as permitted by paragraph 24. If those accounting
policies are not uniform, an insurer may change them if the change does
not make the accounting policies more diverse and also satisfies the
other requirements in this IFRS.
Prudence
26
An insurer need not change its accounting policies for insurance contracts to
eliminate excessive prudence. However, if an insurer already measures its
insurance contracts with sufficient prudence, it shall not introduce additional
prudence.
Future investment margins
27
28
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An insurer need not change its accounting policies for insurance contracts to
eliminate future investment margins.
However, there is a rebuttable
presumption that an insurer’s financial statements will become less relevant
and reliable if it introduces an accounting policy that reflects future investment
margins in the measurement of insurance contracts, unless those margins affect
the contractual payments. Two examples of accounting policies that reflect
those margins are:
(a)
using a discount rate that reflects the estimated return on the insurer’s
assets; or
(b)
projecting the returns on those assets at an estimated rate of return,
discounting those projected returns at a different rate and including the
result in the measurement of the liability.
An insurer may overcome the rebuttable presumption described in paragraph 27
if, and only if, the other components of a change in accounting policies increase
the relevance and reliability of its financial statements sufficiently to outweigh
the decrease in relevance and reliability caused by the inclusion of future
investment margins. For example, suppose that an insurer’s existing accounting
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policies for insurance contracts involve excessively prudent assumptions set at
inception and a discount rate prescribed by a regulator without direct reference
to market conditions, and ignore some embedded options and guarantees.
The insurer might make its financial statements more relevant and no less
reliable by switching to a comprehensive investor-oriented basis of accounting
that is widely used and involves:
29
(a)
current estimates and assumptions;
(b)
a reasonable (but not excessively prudent) adjustment to reflect risk and
uncertainty;
(c)
measurements that reflect both the intrinsic value and time value of
embedded options and guarantees; and
(d)
a current market discount rate, even if that discount rate reflects the
estimated return on the insurer’s assets.
In some measurement approaches, the discount rate is used to determine the
present value of a future profit margin. That profit margin is then attributed to
different periods using a formula. In those approaches, the discount rate affects
the measurement of the liability only indirectly. In particular, the use of a less
appropriate discount rate has a limited or no effect on the measurement of the
liability at inception. However, in other approaches, the discount rate
determines the measurement of the liability directly. In the latter case, because
the introduction of an asset-based discount rate has a more significant effect, it
is highly unlikely that an insurer could overcome the rebuttable presumption
described in paragraph 27.
Shadow accounting
30
In some accounting models, realised gains or losses on an insurer’s assets have a
direct effect on the measurement of some or all of (a) its insurance liabilities,
(b) related deferred acquisition costs and (c) related intangible assets, such as
those described in paragraphs 31 and 32. An insurer is permitted, but not
required, to change its accounting policies so that a recognised but unrealised
gain or loss on an asset affects those measurements in the same way that a
realised gain or loss does. The related adjustment to the insurance liability (or
deferred acquisition costs or intangible assets) shall be recognised in other
comprehensive income if, and only if, the unrealised gains or losses are
recognised in other comprehensive income. This practice is sometimes
described as ‘shadow accounting’.
Insurance contracts acquired in a business combination
or portfolio transfer
31
To comply with IFRS 3, an insurer shall, at the acquisition date, measure at fair
value the insurance liabilities assumed and insurance assets acquired in a business
combination. However, an insurer is permitted, but not required, to use an
expanded presentation that splits the fair value of acquired insurance contracts
into two components:
(a)
a liability measured in accordance with the insurer’s accounting policies
for insurance contracts that it issues; and
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(b)
an intangible asset, representing the difference between (i) the fair value
of the contractual insurance rights acquired and insurance obligations
assumed and (ii) the amount described in (a).
The subsequent
measurement of this asset shall be consistent with the measurement of
the related insurance liability.
32
An insurer acquiring a portfolio of insurance contracts may use the expanded
presentation described in paragraph 31.
33
The intangible assets described in paragraphs 31 and 32 are excluded from the
scope of IAS 36 Impairment of Assets and IAS 38. However, IAS 36 and IAS 38 apply
to customer lists and customer relationships reflecting the expectation of future
contracts that are not part of the contractual insurance rights and contractual
insurance obligations that existed at the date of a business combination or
portfolio transfer.
Discretionary participation features
Discretionary participation features in insurance contracts
34
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Some insurance contracts contain a discretionary participation feature as well as
a guaranteed element. The issuer of such a contract:
(a)
may, but need not, recognise the guaranteed element separately from
the discretionary participation feature. If the issuer does not recognise
them separately, it shall classify the whole contract as a liability. If the
issuer classifies them separately, it shall classify the guaranteed element
as a liability.
(b)
shall, if it recognises the discretionary participation feature separately
from the guaranteed element, classify that feature as either a liability or
a separate component of equity. This IFRS does not specify how the
issuer determines whether that feature is a liability or equity. The issuer
may split that feature into liability and equity components and shall use
a consistent accounting policy for that split. The issuer shall not classify
that feature as an intermediate category that is neither liability nor
equity.
(c)
may recognise all premiums received as revenue without separating any
portion that relates to the equity component. The resulting changes in
the guaranteed element and in the portion of the discretionary
participation feature classified as a liability shall be recognised in profit
or loss. If part or all of the discretionary participation feature is
classified in equity, a portion of profit or loss may be attributable to that
feature (in the same way that a portion may be attributable to
non-controlling interests). The issuer shall recognise the portion of
profit or loss attributable to any equity component of a discretionary
participation feature as an allocation of profit or loss, not as expense or
income (see IAS 1 Presentation of Financial Statements).
(d)
shall, if the contract contains an embedded derivative within the scope
of IFRS 9, apply IFRS 9 to that embedded derivative.
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(e)
shall, in all respects not described in paragraphs 14–20 and 34(a)–(d),
continue its existing accounting policies for such contracts, unless it
changes those accounting policies in a way that complies with
paragraphs 21–30.
Discretionary participation features in financial instruments
35
35A
The requirements in paragraph 34 also apply to a financial instrument that
contains a discretionary participation feature. In addition:
(a)
if the issuer classifies the entire discretionary participation feature as a
liability, it shall apply the liability adequacy test in paragraphs 15–19 to
the whole contract (ie both the guaranteed element and the
discretionary participation feature). The issuer need not determine the
amount that would result from applying IFRS 9 to the guaranteed
element.
(b)
if the issuer classifies part or all of that feature as a separate component
of equity, the liability recognised for the whole contract shall not be less
than the amount that would result from applying IFRS 9 to the
guaranteed element. That amount shall include the intrinsic value of an
option to surrender the contract, but need not include its time value if
paragraph 9 exempts that option from measurement at fair value. The
issuer need not disclose the amount that would result from applying
IFRS 9 to the guaranteed element, nor need it present that amount
separately. Furthermore, the issuer need not determine that amount if
the total liability recognised is clearly higher.
(c)
although these contracts are financial instruments, the issuer may
continue to recognise the premiums for those contracts as revenue and
recognise as an expense the resulting increase in the carrying amount of
the liability.
(d)
although these contracts are financial instruments, an issuer applying
paragraph 20(b) of IFRS 7 to contracts with a discretionary participation
feature shall disclose the total interest expense recognised in profit or
loss, but need not calculate such interest expense using the effective
interest method.
The temporary exemptions in paragraphs 20A, 20L and 20O and the overlay
approach in paragraph 35B are also available to an issuer of a financial
instrument that contains a discretionary participation feature. Accordingly, all
references in paragraphs 3(a)–3(b), 20A–20Q, 35B–35N, 39B–39M and 46–49 to an
insurer shall be read as also referring to an issuer of a financial instrument that
contains a discretionary participation feature.
Presentation
The overlay approach
35B
An insurer is permitted, but not required, to apply the overlay approach
to designated financial assets. An insurer that applies the overlay
approach shall:
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(a)
(b)
35C
35D
35E
35F
(i)
the amount reported in profit or loss for the designated
financial assets applying IFRS 9; and
(ii)
the amount that would have been reported in profit or loss
for the designated financial assets if the insurer had
applied IAS 39.
apply all other applicable IFRSs to its financial instruments, except
as described in paragraphs 35B–35N, 39K–39M and 48–49 of this
IFRS.
An insurer may elect to apply the overlay approach described in
paragraph 35B only when it first applies IFRS 9, including when it first
applies IFRS 9 after previously applying:
(a)
the temporary exemption from IFRS 9 described in paragraph 20A;
or
(b)
only the requirements for the presentation of gains and losses on
financial liabilities designated as at fair value through profit or
loss in paragraphs 5.7.1(c), 5.7.7–5.7.9, 7.2.14 and B5.7.5–B5.7.20 of
IFRS 9.
An insurer shall present the amount reclassified between profit or loss and other
comprehensive income applying the overlay approach:
(a)
in profit or loss as a separate line item; and
(b)
in other comprehensive income as a separate component of other
comprehensive income.
A financial asset is eligible for designation for the overlay approach if, and only
if, the following criteria are met:
(a)
it is measured at fair value through profit or loss applying IFRS 9 but
would not have been measured at fair value through profit or loss in its
entirety applying IAS 39; and
(b)
it is not held in respect of an activity that is unconnected with contracts
within the scope of this IFRS. Examples of financial assets that would
not be eligible for the overlay approach are those assets held in respect of
banking activities or financial assets held in funds relating to investment
contracts that are outside the scope of this IFRS.
An insurer may designate an eligible financial asset for the overlay approach
when it elects to apply the overlay approach (see paragraph 35C). Subsequently,
it may designate an eligible financial asset for the overlay approach when, and
only when:
(a)
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reclassify between profit or loss and other comprehensive income
an amount that results in the profit or loss at the end of the
reporting period for the designated financial assets being the
same as if the insurer had applied IAS 39 to the designated
financial assets. Accordingly, the amount reclassified is equal to
the difference between:
that asset is initially recognised; or
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(b)
that asset newly meets the criterion in paragraph 35E(b) having
previously not met that criterion.
35G
An insurer is permitted to designate eligible financial assets for the overlay
approach applying paragraph 35F on an instrument-by-instrument basis.
35H
When relevant, for the purposes of applying the overlay approach to a newly
designated financial asset applying paragraph 35F(b):
35I
(a)
its fair value at the date of designation shall be its new amortised cost
carrying amount; and
(b)
the effective interest rate shall be determined based on its fair value at
the date of designation.
An entity shall continue to apply the overlay approach to a designated financial
asset until that financial asset is derecognised. However, an entity:
(a)
shall de-designate a financial asset when the financial asset no longer
meets the criterion in paragraph 35E(b). For example, a financial asset
will no longer meet that criterion when an entity transfers that asset so
that it is held in respect of its banking activities or when an entity ceases
to be an insurer.
(b)
may, at the beginning of any annual period, stop applying the overlay
approach to all designated financial assets. An entity that elects to stop
applying the overlay approach shall apply IAS 8 to account for the
change in accounting policy.
35J
When an entity de-designates a financial asset applying paragraph 35I(a), it shall
reclassify from accumulated other comprehensive income to profit or loss as a
reclassification adjustment (see IAS 1) any balance relating to that financial
asset.
35K
If an entity stops using the overlay approach applying the election in
paragraph 35I(b) or because it is no longer an insurer, it shall not subsequently
apply the overlay approach. An insurer that has elected to apply the overlay
approach (see paragraph 35C) but has no eligible financial assets (see
paragraph 35E) may subsequently apply the overlay approach when it has
eligible financial assets.
Interaction with other requirements
35L
Paragraph 30 of this IFRS permits a practice that is sometimes described as
’shadow accounting’. If an insurer applies the overlay approach, shadow
accounting may be applicable.
35M
Reclassifying an amount between profit or loss and other comprehensive income
applying paragraph 35B may have consequential effects for including other
amounts in other comprehensive income, such as income taxes. An insurer
shall apply the relevant IFRS, such as IAS 12 Income Taxes, to determine any such
consequential effects.
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First-time adopter
35N
If a first-time adopter elects to apply the overlay approach, it shall restate
comparative information to reflect the overlay approach if, and only if, it
restates comparative information to comply with IFRS 9 (see paragraphs E1–E2
of IFRS 1).
Disclosure
Explanation of recognised amounts
36
An insurer shall disclose information that identifies and explains the
amounts in its financial statements arising from insurance contracts.
37
To comply with paragraph 36, an insurer shall disclose:
(a)
its accounting policies for insurance contracts and related assets,
liabilities, income and expense.
(b)
the recognised assets, liabilities, income and expense (and, if it presents
its statement of cash flows using the direct method, cash flows) arising
from insurance contracts. Furthermore, if the insurer is a cedant, it shall
disclose:
(i)
gains and losses recognised in profit or loss on buying
reinsurance; and
(ii)
if the cedant defers and amortises gains and losses arising on
buying reinsurance, the amortisation for the period and the
amounts remaining unamortised at the beginning and end of the
period.
(c)
the process used to determine the assumptions that have the greatest
effect on the measurement of the recognised amounts described in (b).
When practicable, an insurer shall also give quantified disclosure of
those assumptions.
(d)
the effect of changes in assumptions used to measure insurance assets
and insurance liabilities, showing separately the effect of each change
that has a material effect on the financial statements.
(e)
reconciliations of changes in insurance liabilities, reinsurance assets
and, if any, related deferred acquisition costs.
Nature and extent of risks arising from insurance
contracts
38
An insurer shall disclose information that enables users of its financial
statements to evaluate the nature and extent of risks arising from
insurance contracts.
39
To comply with paragraph 38, an insurer shall disclose:
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(a)
its objectives, policies and processes for managing risks arising from
insurance contracts and the methods used to manage those risks.
(b)
[deleted]
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(c)
(d)
(e)
39A
information about insurance risk (both before and after risk mitigation by
reinsurance), including information about:
(i)
sensitivity to insurance risk (see paragraph 39A).
(ii)
concentrations of insurance risk, including a description of how
management determines concentrations and a description of the
shared characteristic that identifies each concentration (eg type
of insured event, geographical area, or currency).
(iii)
actual claims compared with previous estimates (ie claims
development). The disclosure about claims development shall go
back to the period when the earliest material claim arose for
which there is still uncertainty about the amount and timing of
the claims payments, but need not go back more than ten years.
An insurer need not disclose this information for claims for
which uncertainty about the amount and timing of claims
payments is typically resolved within one year.
information about credit risk, liquidity risk and market risk that
paragraphs 31–42 of IFRS 7 would require if the insurance contracts were
within the scope of IFRS 7. However:
(i)
an insurer need not provide the maturity analyses required by
paragraph 39(a) and (b) of IFRS 7 if it discloses information about
the estimated timing of the net cash outflows resulting from
recognised insurance liabilities instead. This may take the form
of an analysis, by estimated timing, of the amounts recognised in
the statement of financial position.
(ii)
if an insurer uses an alternative method to manage sensitivity to
market conditions, such as an embedded value analysis, it may
use that sensitivity analysis to meet the requirement in
paragraph 40(a) of IFRS 7. Such an insurer shall also provide the
disclosures required by paragraph 41 of IFRS 7.
information about exposures to market risk arising from embedded
derivatives contained in a host insurance contract if the insurer is not
required to, and does not, measure the embedded derivatives at fair
value.
To comply with paragraph 39(c)(i), an insurer shall disclose either (a) or (b) as
follows:
(a)
a sensitivity analysis that shows how profit or loss and equity would have
been affected if changes in the relevant risk variable that were
reasonably possible at the end of the reporting period had occurred; the
methods and assumptions used in preparing the sensitivity analysis; and
any changes from the previous period in the methods and assumptions
used. However, if an insurer uses an alternative method to manage
sensitivity to market conditions, such as an embedded value analysis, it
may meet this requirement by disclosing that alternative sensitivity
analysis and the disclosures required by paragraph 41 of IFRS 7.
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(b)
qualitative information about sensitivity, and information about those
terms and conditions of insurance contracts that have a material effect
on the amount, timing and uncertainty of the insurer’s future cash
flows.
Disclosures about the temporary exemption from IFRS 9
39B
39C
39D
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An insurer that elects to apply the temporary exemption from IFRS 9 shall
disclose information to enable users of financial statements:
(a)
to understand how the insurer qualified for the temporary
exemption; and
(b)
to compare insurers applying the temporary exemption with
entities applying IFRS 9.
To comply with paragraph 39B(a), an insurer shall disclose the fact that it is
applying the temporary exemption from IFRS 9 and how the insurer concluded
on the date specified in paragraph 20B(b) that it qualifies for the temporary
exemption from IFRS 9, including:
(a)
if the carrying amount of its liabilities arising from contracts within the
scope of this IFRS (ie those liabilities described in paragraph 20E(a)) was
less than or equal to 90 per cent of the total carrying amount of all its
liabilities, the nature and carrying amounts of the liabilities connected
with insurance that are not liabilities arising from contracts within the
scope of this IFRS (ie those liabilities described in paragraphs 20E(b) and
20E(c));
(b)
if the percentage of the total carrying amount of its liabilities connected
with insurance relative to the total carrying amount of all its liabilities
was less than or equal to 90 per cent but greater than 80 per cent, how
the insurer determined that it did not engage in a significant activity
unconnected with insurance, including what information it considered;
and
(c)
if the insurer qualified for the temporary exemption from IFRS 9 on the
basis of a reassessment applying paragraph 20G(b):
(i)
the reason for the reassessment;
(ii)
the date on which the relevant change in its activities occurred;
and
(iii)
a detailed explanation of the change in its activities and a
qualitative description of the effect of that change on the
insurer’s financial statements.
If, applying paragraph 20G(a), an entity concludes that its activities are no
longer predominantly connected with insurance, it shall disclose the following
information in each reporting period before it begins to apply IFRS 9:
(a)
the fact that it no longer qualifies for the temporary exemption from
IFRS 9;
(b)
the date on which the relevant change in its activities occurred; and
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(c)
39E
39F
39G
a detailed explanation of the change in its activities and a qualitative
description of the effect of that change on the entity’s financial
statements.
To comply with paragraph 39B(b), an insurer shall disclose the fair value at the
end of the reporting period and the amount of change in the fair value during
that period for the following two groups of financial assets separately:
(a)
financial assets with contractual terms that give rise on specified dates to
cash flows that are solely payments of principal and interest on the
principal amount outstanding (ie financial assets that meet the
condition in paragraphs 4.1.2(b) and 4.1.2A(b) of IFRS 9), excluding any
financial asset that meets the definition of held for trading in IFRS 9, or
that is managed and whose performance is evaluated on a fair value
basis (see paragraph B4.1.6 of IFRS 9).
(b)
all financial assets other than those specified in paragraph 39E(a); that is,
any financial asset:
(i)
with contractual terms that do not give rise on specified dates to
cash flows that are solely payments of principal and interest on
the principal amount outstanding;
(ii)
that meets the definition of held for trading in IFRS 9; or
(iii)
that is managed and whose performance is evaluated on a fair
value basis.
When disclosing the information in paragraph 39E, the insurer:
(a)
may deem the carrying amount of the financial asset measured applying
IAS 39 to be a reasonable approximation of its fair value if the insurer is
not required to disclose its fair value applying paragraph 29(a) of IFRS 7
(eg short-term trade receivables); and
(b)
shall consider the level of detail necessary to enable users of financial
statements to understand the characteristics of the financial assets.
To comply with paragraph 39B(b), an insurer shall disclose information about
the credit risk exposure, including significant credit risk concentrations,
inherent in the financial assets described in paragraph 39E(a). At a minimum,
an insurer shall disclose the following information for those financial assets at
the end of the reporting period:
(a)
by credit risk rating grades as defined in IFRS 7, the carrying amounts
applying IAS 39 (in the case of financial assets measured at amortised
cost, before adjusting for any impairment allowances).
(b)
for the financial assets described in paragraph 39E(a) that do not have
low credit risk at the end of the reporting period, the fair value and the
carrying amount applying IAS 39 (in the case of financial assets
measured at amortised cost, before adjusting for any impairment
allowances). For the purposes of this disclosure, paragraph B5.5.22 of
IFRS 9 provides the relevant requirements for assessing whether the
credit risk on a financial instrument is considered low.
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39H
To comply with paragraph 39B(b), an insurer shall disclose information about
where a user of financial statements can obtain any publicly available IFRS 9
information that relates to an entity within the group that is not provided in the
group’s consolidated financial statements for the relevant reporting period. For
example, such IFRS 9 information could be obtained from the publicly available
individual or separate financial statements of an entity within the group that
has applied IFRS 9.
39I
If an entity elected to apply the exemption in paragraph 20O from particular
requirements in IAS 28, it shall disclose that fact.
39J
If an entity applied the temporary exemption from IFRS 9 when accounting for
its investment in an associate or joint venture using the equity method (for
example, see paragraph 20O(a)), the entity shall disclose the following, in
addition to the information required by IFRS 12 Disclosure of Interests in Other
Entities:
(a)
the information described by paragraphs 39B–39H for each associate or
joint venture that is material to the entity. The amounts disclosed shall
be those included in the IFRS financial statements of the associate or
joint venture after reflecting any adjustments made by the entity when
using the equity method (see paragraph B14(a) of IFRS 12), rather than
the entity’s share of those amounts.
(b)
the quantitative information described by paragraphs 39B–39H in
aggregate for all individually immaterial associates or joint ventures.
The aggregate amounts:
(i)
disclosed shall be the entity’s share of those amounts; and
(ii)
for associates shall be disclosed separately from the aggregate
amounts disclosed for joint ventures.
Disclosures about the overlay approach
39K
39L
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An insurer that applies the overlay approach shall disclose information
to enable users of financial statements to understand:
(a)
how the total amount reclassified between profit or loss and other
comprehensive income in the reporting period is calculated; and
(b)
the effect of that reclassification on the financial statements.
To comply with paragraph 39K, an insurer shall disclose:
(a)
the fact that it is applying the overlay approach;
(b)
the carrying amount at the end of the reporting period of financial assets
to which the insurer applies the overlay approach by class of financial
asset;
(c)
the basis for designating financial assets for the overlay approach,
including an explanation of any designated financial assets that are held
outside the legal entity that issues contracts within the scope of this
IFRS;
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(d)
39M
an explanation of the total amount reclassified between profit or loss
and other comprehensive income in the reporting period in a way that
enables users of financial statements to understand how that amount is
derived, including:
(i)
the amount reported in profit or loss for the designated financial
assets applying IFRS 9; and
(ii)
the amount that would have been reported in profit or loss for
the designated financial assets if the insurer had applied IAS 39.
(e)
the effect of the reclassification described in paragraphs 35B and 35M on
each affected line item in profit or loss; and
(f)
if during the reporting period the insurer has changed the designation of
financial assets:
(i)
the amount reclassified between profit or loss and other
comprehensive income in the reporting period relating to newly
designated financial assets applying the overlay approach
(see paragraph 35F(b));
(ii)
the amount that would have been reclassified between profit or
loss and other comprehensive income in the reporting period if
the
financial
assets
had
not
been
de-designated
(see paragraph 35I(a)); and
(iii)
the amount reclassified in the reporting period to profit or loss
from accumulated other comprehensive income for financial
assets that have been de-designated (see paragraph 35J).
If an entity applied the overlay approach when accounting for its investment in
an associate or joint venture using the equity method, the entity shall disclose
the following, in addition to the information required by IFRS 12:
(a)
the information described by paragraphs 39K–39L for each associate or
joint venture that is material to the entity. The amounts disclosed shall
be those included in the IFRS financial statements of the associate or
joint venture after reflecting any adjustments made by the entity when
using the equity method (see paragraph B14(a) of IFRS 12), rather than
the entity’s share of those amounts.
(b)
the quantitative information described by paragraphs 39K–39L(d) and
39L(f), and the effect of the reclassification described in paragraph 35B
on profit or loss and other comprehensive income in aggregate for all
individually immaterial associates or joint ventures. The aggregate
amounts:
(i)
disclosed shall be the entity’s share of those amounts; and
(ii)
for associates shall be disclosed separately from the aggregate
amounts disclosed for joint ventures.
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Effective date and transition
40
The transitional provisions in paragraphs 41–45 apply both to an entity that is
already applying IFRSs when it first applies this IFRS and to an entity that
applies IFRSs for the first time (a first-time adopter).
41
An entity shall apply this IFRS for annual periods beginning on or after
1 January 2005. Earlier application is encouraged. If an entity applies this IFRS
for an earlier period, it shall disclose that fact.
41A
Financial Guarantee Contracts (Amendments to IAS 39 and IFRS 4), issued in August
2005, amended paragraphs 4(d), B18(g) and B19(f). An entity shall apply those
amendments for annual periods beginning on or after 1 January 2006. Earlier
application is encouraged. If an entity applies those amendments for an earlier
period, it shall disclose that fact and apply the related amendments to IAS 39
and IAS 324 at the same time.
41B
IAS 1 (as revised in 2007) amended the terminology used throughout IFRSs. In
addition it amended paragraph 30. An entity shall apply those amendments for
annual periods beginning on or after 1 January 2009. If an entity applies IAS 1
(revised 2007) for an earlier period, the amendments shall be applied for that
earlier period.
41C
[Deleted]
41D
[Deleted]
41E
IFRS 13 Fair Value Measurement, issued in May 2011, amended the definition of fair
value in Appendix A. An entity shall apply that amendment when it applies
IFRS 13.
41F
[Deleted]
41G
IFRS 15 Revenue from Contracts with Customers, issued in May 2014, amended
paragraphs 4(a) and (c), B7, B18(h) and B21. An entity shall apply those
amendments when it applies IFRS 15.
41H
IFRS 9, as issued in July 2014, amended paragraphs 3, 4, 7, 8, 12, 34, 35, 45,
Appendix A and paragraphs B18–B20 and deleted paragraphs 41C, 41D and 41F.
An entity shall apply those amendments when it applies IFRS 9.
41I
IFRS 16, issued in January 2016, amended paragraph 4. An entity shall apply
that amendment when it applies IFRS 16.
Disclosure
42
4
An entity need not apply the disclosure requirements in this IFRS to comparative
information that relates to annual periods beginning before 1 January 2005,
except for the disclosures required by paragraph 37(a) and (b) about accounting
policies, and recognised assets, liabilities, income and expense (and cash flows if
the direct method is used).
When an entity applies IFRS 7, the reference to IAS 32 is replaced by a reference to IFRS 7.
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43
If it is impracticable to apply a particular requirement of paragraphs 10–35 to
comparative information that relates to annual periods beginning before
1 January 2005, an entity shall disclose that fact. Applying the liability adequacy
test (paragraphs 15–19) to such comparative information might sometimes be
impracticable, but it is highly unlikely to be impracticable to apply other
requirements of paragraphs 10–35 to such comparative information.
IAS 8 explains the term ‘impracticable’.
44
In applying paragraph 39(c)(iii), an entity need not disclose information about
claims development that occurred earlier than five years before the end of the
first financial year in which it applies this IFRS. Furthermore, if it is
impracticable, when an entity first applies this IFRS, to prepare information
about claims development that occurred before the beginning of the earliest
period for which an entity presents full comparative information that complies
with this IFRS, the entity shall disclose that fact.
Redesignation of financial assets
45
Notwithstanding paragraph 4.4.1 of IFRS 9, when an insurer changes its
accounting policies for insurance liabilities, it is permitted, but not required, to
reclassify some or all of its financial assets so that they are measured at fair value
through profit or loss. This reclassification is permitted if an insurer changes
accounting policies when it first applies this IFRS and if it makes a subsequent
policy change permitted by paragraph 22. The reclassification is a change in
accounting policy and IAS 8 applies.
Applying IFRS 4 with IFRS 9
Temporary exemption from IFRS 9
46
Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts
(Amendments to IFRS 4), issued in September 2016, amended paragraphs 3 and
5, and added paragraphs 20A–20Q, 35A and 39B–39J and headings after
paragraphs 20, 20K, 20N and 39A. An entity shall apply those amendments,
which permit insurers that meet specified criteria to apply a temporary
exemption from IFRS 9, for annual periods beginning on or after 1 January 2018.
47
An entity that discloses the information required by paragraphs 39B–39J shall
use the transitional provisions in IFRS 9 that are relevant to making the
assessments required for those disclosures. The date of initial application for
that purpose shall be deemed to be the beginning of the first annual period
beginning on or after 1 January 2018.
The overlay approach
48
Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts
(Amendments to IFRS 4), issued in September 2016, amended paragraphs 3 and
5, and added paragraphs 35A–35N and 39K–39M and headings after paragraphs
35A, 35K, 35M and 39J. An entity shall apply those amendments, which permit
insurers to apply the overlay approach to designated financial assets, when it
first applies IFRS 9 (see paragraph 35C).
49
An entity that elects to apply the overlay approach shall:
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(a)
apply that approach retrospectively to designated financial assets on
transition to IFRS 9. Accordingly, for example, the entity shall recognise
as an adjustment to the opening balance of accumulated other
comprehensive income an amount equal to the difference between the
fair value of the designated financial assets determined applying IFRS 9
and their carrying amount determined applying IAS 39.
(b)
restate comparative information to reflect the overlay approach if, and
only if, the entity restates comparative information applying IFRS 9.
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Appendix A
Defined terms
This appendix is an integral part of the IFRS.
cedant
The policyholder under a reinsurance contract.
deposit component
A contractual component that is not accounted for as a derivative
under IFRS 9 and would be within the scope of IFRS 9 if it were a
separate instrument.
direct insurance
contract
An insurance contract that is not a reinsurance
contract.
discretionary
participation feature
A contractual right to receive, as a supplement to guaranteed
benefits, additional benefits:
(a)
that are likely to be a significant portion of the total
contractual benefits;
(b)
whose amount or timing is contractually at the discretion
of the issuer; and
(c)
that are contractually based on:
(i)
the performance of a specified pool of contracts or
a specified type of contract;
(ii)
realised and/or unrealised investment returns on
a specified pool of assets held by the issuer; or
(iii)
the profit or loss of the company, fund or other
entity that issues the contract.
fair value
Fair value is the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between
market participants at the measurement date. (See IFRS 13.)
financial guarantee
contract
A contract that requires the issuer to make specified payments to
reimburse the holder for a loss it incurs because a specified
debtor fails to make payment when due in accordance with the
original or modified terms of a debt instrument.
financial risk
The risk of a possible future change in one or more of a specified
interest rate, financial instrument price, commodity price,
foreign exchange rate, index of prices or rates, credit rating or
credit index or other variable, provided in the case of a
non-financial variable that the variable is not specific to a party
to the contract.
guaranteed benefits
Payments or other benefits to which a particular policyholder or
investor has an unconditional right that is not subject to the
contractual discretion of the issuer.
guaranteed element
An obligation to pay guaranteed benefits, included in a
contract that contains a discretionary participation feature.
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insurance asset
An insurer’s net contractual rights under an insurance
contract.
insurance contract
A contract under which one party (the insurer) accepts
significant insurance risk from another party (the
policyholder) by agreeing to compensate the policyholder if a
specified uncertain future event (the insured event) adversely
affects the policyholder. (See Appendix B for guidance on this
definition.)
insurance liability
An insurer’s net contractual obligations under an insurance
contract.
insurance risk
Risk, other than financial risk, transferred from the holder of a
contract to the issuer.
insured event
An uncertain future event that is covered by an insurance
contract and creates insurance risk.
insurer
The party that has an obligation under an insurance contract to
compensate a policyholder if an insured event occurs.
liability adequacy test
An assessment of whether the carrying amount of an insurance
liability needs to be increased (or the carrying amount of related
deferred acquisition costs or related intangible assets decreased),
based on a review of future cash flows.
policyholder
A party that has a right to compensation under an insurance
contract if an insured event occurs.
reinsurance assets
A cedant’s net contractual rights under a reinsurance contract.
reinsurance contract
An insurance contract issued by one insurer (the reinsurer) to
compensate another insurer (the cedant) for losses on one or
more contracts issued by the cedant.
reinsurer
The party that has an obligation under a reinsurance contract
to compensate a cedant if an insured event occurs.
unbundle
Account for the components of a contract as if they were separate
contracts.
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Appendix B
Definition of an insurance contract
This appendix is an integral part of the IFRS.
B1
This appendix gives guidance on the definition of an insurance contract in
Appendix A. It addresses the following issues:
(a)
the term ‘uncertain future event’ (paragraphs B2–B4);
(b)
payments in kind (paragraphs B5–B7);
(c)
insurance risk and other risks (paragraphs B8–B17);
(d)
examples of insurance contracts (paragraphs B18–B21);
(e)
significant insurance risk (paragraphs B22–B28); and
(f)
changes in the level of insurance risk (paragraphs B29 and B30).
Uncertain future event
B2
Uncertainty (or risk) is the essence of an insurance contract. Accordingly, at
least one of the following is uncertain at the inception of an insurance contract:
(a)
whether an insured event will occur;
(b)
when it will occur; or
(c)
how much the insurer will need to pay if it occurs.
B3
In some insurance contracts, the insured event is the discovery of a loss during
the term of the contract, even if the loss arises from an event that occurred
before the inception of the contract. In other insurance contracts, the insured
event is an event that occurs during the term of the contract, even if the
resulting loss is discovered after the end of the contract term.
B4
Some insurance contracts cover events that have already occurred, but whose
financial effect is still uncertain. An example is a reinsurance contract that
covers the direct insurer against adverse development of claims already reported
by policyholders. In such contracts, the insured event is the discovery of the
ultimate cost of those claims.
Payments in kind
B5
Some insurance contracts require or permit payments to be made in kind.
An example is when the insurer replaces a stolen article directly, instead of
reimbursing the policyholder. Another example is when an insurer uses its own
hospitals and medical staff to provide medical services covered by the contracts.
B6
Some fixed-fee service contracts in which the level of service depends on an
uncertain event meet the definition of an insurance contract in this IFRS but are
not regulated as insurance contracts in some countries. One example is a
maintenance contract in which the service provider agrees to repair specified
equipment after a malfunction. The fixed service fee is based on the expected
number of malfunctions, but it is uncertain whether a particular machine will
break down. The malfunction of the equipment adversely affects its owner and
the contract compensates the owner (in kind, rather than cash). Another
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example is a contract for car breakdown services in which the provider agrees,
for a fixed annual fee, to provide roadside assistance or tow the car to a nearby
garage. The latter contract could meet the definition of an insurance contract
even if the provider does not agree to carry out repairs or replace parts.
B7
Applying the IFRS to the contracts described in paragraph B6 is likely to be no
more burdensome than applying the IFRSs that would be applicable if such
contracts were outside the scope of this IFRS:
(a)
There are unlikely to be material liabilities for malfunctions and
breakdowns that have already occurred.
(b)
If IFRS 15 applied, the service provider would recognise revenue when
(or as) it transfers services to the customer (subject to other specified
criteria). That approach is also acceptable under this IFRS, which
permits the service provider (i) to continue its existing accounting
policies for these contracts unless they involve practices prohibited by
paragraph 14 and (ii) to improve its accounting policies if so permitted
by paragraphs 22–30.
(c)
The service provider considers whether the cost of meeting its
contractual obligation to provide services exceeds the revenue received
in advance. To do this, it applies the liability adequacy test described in
paragraphs 15–19 of this IFRS. If this IFRS did not apply to these
contracts, the service provider would apply IAS 37 to determine whether
the contracts are onerous.
(d)
For these contracts, the disclosure requirements in this IFRS are unlikely
to add significantly to disclosures required by other IFRSs.
Distinction between insurance risk and other risks
B8
The definition of an insurance contract refers to insurance risk, which this IFRS
defines as risk, other than financial risk, transferred from the holder of a contract
to the issuer. A contract that exposes the issuer to financial risk without
significant insurance risk is not an insurance contract.
B9
The definition of financial risk in Appendix A includes a list of financial and
non-financial variables. That list includes non-financial variables that are not
specific to a party to the contract, such as an index of earthquake losses in a
particular region or an index of temperatures in a particular city. It excludes
non-financial variables that are specific to a party to the contract, such as the
occurrence or non-occurrence of a fire that damages or destroys an asset of that
party. Furthermore, the risk of changes in the fair value of a non-financial asset
is not a financial risk if the fair value reflects not only changes in market prices
for such assets (a financial variable) but also the condition of a specific
non-financial asset held by a party to a contract (a non-financial variable). For
example, if a guarantee of the residual value of a specific car exposes the
guarantor to the risk of changes in the car’s physical condition, that risk is
insurance risk, not financial risk.
B10
Some contracts expose the issuer to financial risk, in addition to significant
insurance risk. For example, many life insurance contracts both guarantee a
minimum rate of return to policyholders (creating financial risk) and promise
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death benefits that at some times significantly exceed the policyholder’s account
balance (creating insurance risk in the form of mortality risk). Such contracts
are insurance contracts.
B11
Under some contracts, an insured event triggers the payment of an amount
linked to a price index. Such contracts are insurance contracts, provided the
payment that is contingent on the insured event can be significant. For
example, a life-contingent annuity linked to a cost-of-living index transfers
insurance risk because payment is triggered by an uncertain event—the survival
of the annuitant. The link to the price index is an embedded derivative, but it
also transfers insurance risk. If the resulting transfer of insurance risk is
significant, the embedded derivative meets the definition of an insurance
contract, in which case it need not be separated and measured at fair value (see
paragraph 7 of this IFRS).
B12
The definition of insurance risk refers to risk that the insurer accepts from the
policyholder. In other words, insurance risk is a pre-existing risk transferred
from the policyholder to the insurer. Thus, a new risk created by the contract is
not insurance risk.
B13
The definition of an insurance contract refers to an adverse effect on the
policyholder. The definition does not limit the payment by the insurer to an
amount equal to the financial impact of the adverse event. For example, the
definition does not exclude ‘new-for-old’ coverage that pays the policyholder
sufficient to permit replacement of a damaged old asset by a new asset.
Similarly, the definition does not limit payment under a term life insurance
contract to the financial loss suffered by the deceased’s dependants, nor does it
preclude the payment of predetermined amounts to quantify the loss caused by
death or an accident.
B14
Some contracts require a payment if a specified uncertain event occurs, but do
not require an adverse effect on the policyholder as a precondition for payment.
Such a contract is not an insurance contract even if the holder uses the contract
to mitigate an underlying risk exposure. For example, if the holder uses a
derivative to hedge an underlying non-financial variable that is correlated with
cash flows from an asset of the entity, the derivative is not an insurance contract
because payment is not conditional on whether the holder is adversely affected
by a reduction in the cash flows from the asset. Conversely, the definition of an
insurance contract refers to an uncertain event for which an adverse effect on
the policyholder is a contractual precondition for payment. This contractual
precondition does not require the insurer to investigate whether the event
actually caused an adverse effect, but permits the insurer to deny payment if it is
not satisfied that the event caused an adverse effect.
B15
Lapse or persistency risk (ie the risk that the counterparty will cancel the
contract earlier or later than the issuer had expected in pricing the contract) is
not insurance risk because the payment to the counterparty is not contingent on
an uncertain future event that adversely affects the counterparty. Similarly,
expense risk (ie the risk of unexpected increases in the administrative costs
associated with the servicing of a contract, rather than in costs associated with
insured events) is not insurance risk because an unexpected increase in expenses
does not adversely affect the counterparty.
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B16
Therefore, a contract that exposes the issuer to lapse risk, persistency risk or
expense risk is not an insurance contract unless it also exposes the issuer to
insurance risk. However, if the issuer of that contract mitigates that risk by
using a second contract to transfer part of that risk to another party, the second
contract exposes that other party to insurance risk.
B17
An insurer can accept significant insurance risk from the policyholder only if
the insurer is an entity separate from the policyholder. In the case of a mutual
insurer, the mutual accepts risk from each policyholder and pools that risk.
Although policyholders bear that pooled risk collectively in their capacity as
owners, the mutual has still accepted the risk that is the essence of an insurance
contract.
Examples of insurance contracts
B18
5
The following are examples of contracts that are insurance contracts, if the
transfer of insurance risk is significant:
(a)
insurance against theft or damage to property.
(b)
insurance against product liability, professional liability, civil liability or
legal expenses.
(c)
life insurance and prepaid funeral plans (although death is certain, it is
uncertain when death will occur or, for some types of life insurance,
whether death will occur within the period covered by the insurance).
(d)
life-contingent annuities and pensions (ie contracts that provide
compensation for the uncertain future event—the survival of the
annuitant or pensioner—to assist the annuitant or pensioner in
maintaining a given standard of living, which would otherwise be
adversely affected by his or her survival).
(e)
disability and medical cover.
(f)
surety bonds, fidelity bonds, performance bonds and bid bonds
(ie contracts that provide compensation if another party fails to perform
a contractual obligation, for example an obligation to construct a
building).
(g)
credit insurance that provides for specified payments to be made to
reimburse the holder for a loss it incurs because a specified debtor fails
to make payment when due under the original or modified terms of a
debt instrument. These contracts could have various legal forms, such as
that of a guarantee, some types of letter of credit, a credit derivative
default contract or an insurance contract. However, although these
contracts meet the definition of an insurance contract, they also meet
the definition of a financial guarantee contract in IFRS 9 and are within
the scope of IAS 325 and IFRS 9, not this IFRS (see paragraph 4(d)).
Nevertheless, if an issuer of financial guarantee contracts has previously
asserted explicitly that it regards such contracts as insurance contracts
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and has used accounting applicable to insurance contracts, the issuer
may elect to apply either IAS 326 and IFRS 9 or this IFRS to such financial
guarantee contracts.
B19
6
(h)
product warranties. Product warranties issued by another party for
goods sold by a manufacturer, dealer or retailer are within the scope of
this IFRS.
However, product warranties issued directly by a
manufacturer, dealer or retailer are outside its scope, because they are
within the scope of IFRS 15 and IAS 37.
(i)
title insurance (ie insurance against the discovery of defects in title to
land that were not apparent when the insurance contract was written).
In this case, the insured event is the discovery of a defect in the title, not
the defect itself.
(j)
travel assistance (ie compensation in cash or in kind to policyholders for
losses suffered while they are travelling). Paragraphs B6 and B7 discuss
some contracts of this kind.
(k)
catastrophe bonds that provide for reduced payments of principal,
interest or both if a specified event adversely affects the issuer of the
bond (unless the specified event does not create significant insurance
risk, for example if the event is a change in an interest rate or foreign
exchange rate).
(l)
insurance swaps and other contracts that require a payment based on
changes in climatic, geological or other physical variables that are
specific to a party to the contract.
(m)
reinsurance contracts.
The following are examples of items that are not insurance contracts:
(a)
investment contracts that have the legal form of an insurance contract
but do not expose the insurer to significant insurance risk, for example
life insurance contracts in which the insurer bears no significant
mortality risk (such contracts are non-insurance financial instruments or
service contracts, see paragraphs B20 and B21).
(b)
contracts that have the legal form of insurance, but pass all significant
insurance risk back to the policyholder through non-cancellable and
enforceable mechanisms that adjust future payments by the
policyholder as a direct result of insured losses, for example some
financial reinsurance contracts or some group contracts (such contracts
are normally non-insurance financial instruments or service contracts,
see paragraphs B20 and B21).
(c)
self-insurance, in other words retaining a risk that could have been
covered by insurance (there is no insurance contract because there is no
agreement with another party).
(d)
contracts (such as gambling contracts) that require a payment if a
specified uncertain future event occurs, but do not require, as a
contractual precondition for payment, that the event adversely affects
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the policyholder. However, this does not preclude the specification of a
predetermined payout to quantify the loss caused by a specified event
such as death or an accident (see also paragraph B13).
B20
B21
(e)
derivatives that expose one party to financial risk but not insurance risk,
because they require that party to make payment based solely on
changes in one or more of a specified interest rate, financial instrument
price, commodity price, foreign exchange rate, index of prices or rates,
credit rating or credit index or other variable, provided in the case of a
non-financial variable that the variable is not specific to a party to the
contract (see IFRS 9).
(f)
a credit-related guarantee (or letter of credit, credit derivative default
contract or credit insurance contract) that requires payments even if the
holder has not incurred a loss on the failure of the debtor to make
payments when due (see IFRS 9).
(g)
contracts that require a payment based on a climatic, geological or other
physical variable that is not specific to a party to the contract (commonly
described as weather derivatives).
(h)
catastrophe bonds that provide for reduced payments of principal,
interest or both, based on a climatic, geological or other physical variable
that is not specific to a party to the contract.
If the contracts described in paragraph B19 create financial assets or financial
liabilities, they are within the scope of IFRS 9. Among other things, this means
that the parties to the contract use what is sometimes called deposit accounting,
which involves the following:
(a)
one party recognises the consideration received as a financial liability,
rather than as revenue.
(b)
the other party recognises the consideration paid as a financial asset,
rather than as an expense.
If the contracts described in paragraph B19 do not create financial assets or
financial liabilities, IFRS 15 applies. Under IFRS 15, revenue is recognised when
(or as) an entity satisfies a performance obligation by transferring a promised
good or service to a customer in an amount that reflects the consideration to
which the entity expects to be entitled.
Significant insurance risk
B22
A contract is an insurance contract only if it transfers significant insurance risk.
Paragraphs B8–B21 discuss insurance risk. The following paragraphs discuss the
assessment of whether insurance risk is significant.
B23
Insurance risk is significant if, and only if, an insured event could cause an
insurer to pay significant additional benefits in any scenario, excluding
scenarios that lack commercial substance (ie have no discernible effect on the
economics of the transaction). If significant additional benefits would be
payable in scenarios that have commercial substance, the condition in the
previous sentence may be met even if the insured event is extremely unlikely or
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even if the expected (ie probability-weighted) present value of contingent cash
flows is a small proportion of the expected present value of all the remaining
contractual cash flows.
B24
B25
7
The additional benefits described in paragraph B23 refer to amounts that exceed
those that would be payable if no insured event occurred (excluding scenarios
that lack commercial substance). Those additional amounts include claims
handling and claims assessment costs, but exclude:
(a)
the loss of the ability to charge the policyholder for future services.
For example, in an investment-linked life insurance contract, the death
of the policyholder means that the insurer can no longer perform
investment management services and collect a fee for doing so.
However, this economic loss for the insurer does not reflect insurance
risk, just as a mutual fund manager does not take on insurance risk in
relation to the possible death of the client. Therefore, the potential loss
of future investment management fees is not relevant in assessing how
much insurance risk is transferred by a contract.
(b)
waiver on death of charges that would be made on cancellation or
surrender. Because the contract brought those charges into existence,
the waiver of these charges does not compensate the policyholder for a
pre-existing risk. Hence, they are not relevant in assessing how much
insurance risk is transferred by a contract.
(c)
a payment conditional on an event that does not cause a significant loss
to the holder of the contract. For example, consider a contract that
requires the issuer to pay one million currency units if an asset suffers
physical damage causing an insignificant economic loss of one currency
unit to the holder. In this contract, the holder transfers to the insurer
the insignificant risk of losing one currency unit. At the same time, the
contract creates non-insurance risk that the issuer will need to pay
999,999 currency units if the specified event occurs. Because the issuer
does not accept significant insurance risk from the holder, this contract
is not an insurance contract.
(d)
possible reinsurance recoveries.
separately.
The insurer accounts for these
An insurer shall assess the significance of insurance risk contract by contract,
rather than by reference to materiality to the financial statements.7 Thus,
insurance risk may be significant even if there is a minimal probability of
material losses for a whole book of contracts. This contract-by-contract
assessment makes it easier to classify a contract as an insurance contract.
However, if a relatively homogeneous book of small contracts is known to
consist of contracts that all transfer insurance risk, an insurer need not examine
each contract within that book to identify a few non-derivative contracts that
transfer insignificant insurance risk.
For this purpose, contracts entered into simultaneously with a single counterparty (or contracts
that are otherwise interdependent) form a single contract.
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B26
It follows from paragraphs B23–B25 that if a contract pays a death benefit
exceeding the amount payable on survival, the contract is an insurance contract
unless the additional death benefit is insignificant (judged by reference to the
contract rather than to an entire book of contracts).
As noted in
paragraph B24(b), the waiver on death of cancellation or surrender charges is
not included in this assessment if this waiver does not compensate the
policyholder for a pre-existing risk. Similarly, an annuity contract that pays out
regular sums for the rest of a policyholder’s life is an insurance contract, unless
the aggregate life-contingent payments are insignificant.
B27
Paragraph B23 refers to additional benefits. These additional benefits could
include a requirement to pay benefits earlier if the insured event occurs earlier
and the payment is not adjusted for the time value of money. An example is
whole life insurance for a fixed amount (in other words, insurance that provides
a fixed death benefit whenever the policyholder dies, with no expiry date for the
cover). It is certain that the policyholder will die, but the date of death is
uncertain. The insurer will suffer a loss on those individual contracts for which
policyholders die early, even if there is no overall loss on the whole book of
contracts.
B28
If an insurance contract is unbundled into a deposit component and an
insurance component, the significance of insurance risk transfer is assessed by
reference to the insurance component. The significance of insurance risk
transferred by an embedded derivative is assessed by reference to the embedded
derivative.
Changes in the level of insurance risk
B29
Some contracts do not transfer any insurance risk to the issuer at inception,
although they do transfer insurance risk at a later time. For example, consider a
contract that provides a specified investment return and includes an option for
the policyholder to use the proceeds of the investment on maturity to buy a
life-contingent annuity at the current annuity rates charged by the insurer to
other new annuitants when the policyholder exercises the option. The contract
transfers no insurance risk to the issuer until the option is exercised, because
the insurer remains free to price the annuity on a basis that reflects the
insurance risk transferred to the insurer at that time. However, if the contract
specifies the annuity rates (or a basis for setting the annuity rates), the contract
transfers insurance risk to the issuer at inception.
B30
A contract that qualifies as an insurance contract remains an insurance contract
until all rights and obligations are extinguished or expire.
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Appendix C
Amendments to other IFRSs
The amendments in this appendix shall be applied for annual periods beginning on or after
1 January 2005. If an entity adopts this IFRS for an earlier period, these amendments shall be
applied for that earlier period.
*****
The amendments contained in this appendix when this IFRS was issued in 2004 have been incorporated
into the relevant IFRSs published in this volume.
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IFRS 5
IFRS 5
Non-current Assets Held for Sale and
Discontinued Operations
In April 2001 the International Accounting Standards Board (the Board) adopted IAS 35
Discontinuing Operations, which had originally been issued by the International Accounting
Standards Committee in June 1998.
In March 2004 the Board issued IFRS 5 Non-current Assets Held for Sale and Discontinued
Operations to replace IAS 35.
Other Standards have made minor consequential amendments to IFRS 5. They include
Improvement to IFRSs (issued April 2009), IFRS 11 Joint Arrangements (issued May 2011), IFRS 13
Fair Value Measurement (issued May 2011), Presentation of Items of Other Comprehensive Income
(Amendments to IAS 1) (issued June 2011), IFRS 9 Financial Instruments (Hedge Accounting and
amendments to IFRS 9, IFRS 7 and IAS 39) (issued November 2013), IFRS 9 Financial
Instruments (issued July 2014), Annual Improvements to IFRSs 2012–2014 Cycle (issued September
2014) and IFRS 16 Leases (issued January 2016).
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CONTENTS
from paragraph
INTERNATIONAL FINANCIAL REPORTING STANDARD 5
NON-CURRENT ASSETS HELD FOR SALE AND
DISCONTINUED OPERATIONS
OBJECTIVE
1
SCOPE
2
CLASSIFICATION OF NON-CURRENT ASSETS (OR DISPOSAL GROUPS) AS
HELD FOR SALE OR AS HELD FOR DISTRIBUTION TO OWNERS
Non-current assets that are to be abandoned
6
13
MEASUREMENT OF NON-CURRENT ASSETS (OR DISPOSAL GROUPS)
CLASSIFIED AS HELD FOR SALE
15
Measurement of a non-current asset (or disposal group)
15
Recognition of impairment losses and reversals
20
Changes to a plan of sale or to a plan of distribution to owners
26
PRESENTATION AND DISCLOSURE
30
Presenting discontinued operations
31
Gains or losses relating to continuing operations
37
Presentation of a non-current asset or disposal group classified as held for
sale
38
Additional disclosures
41
TRANSITIONAL PROVISIONS
43
EFFECTIVE DATE
44
WITHDRAWAL OF IAS 35
45
APPENDICES
A Defined terms
B Application supplement
C Amendments to other IFRSs
FOR THE ACCOMPANYING DOCUMENTS LISTED BELOW, SEE PART B OF THIS
EDITION
APPROVAL BY THE BOARD OF IFRS 5 ISSUED IN MARCH 2004
BASIS FOR CONCLUSIONS
DISSENTING OPINIONS
IMPLEMENTATION GUIDANCE
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International Financial Reporting Standard 5 Non-current Assets Held for Sale and
Discontinued Operations (IFRS 5) is set out in paragraphs 1–45 and Appendices A–C. All the
paragraphs have equal authority. Paragraphs in bold type state the main principles.
Terms defined in Appendix A are in italics the first time they appear in the Standard.
Definitions of other terms are given in the Glossary for International Financial Reporting
Standards. IFRS 5 should be read in the context of its objective and the Basis for
Conclusions, the Preface to International Financial Reporting Standards and the Conceptual
Framework for Financial Reporting. IAS 8 Accounting Policies, Changes in Accounting Estimates and
Errors provides a basis for selecting and applying accounting policies in the absence of
explicit guidance.
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IFRS 5
International Financial Reporting Standard 5
Non-current Assets Held for Sale and Discontinued
Operations
Objective
1
The objective of this IFRS is to specify the accounting for assets held for sale, and
the presentation and disclosure of discontinued operations. In particular, the IFRS
requires:
(a)
assets that meet the criteria to be classified as held for sale to be
measured at the lower of carrying amount and fair value less costs to sell,
and depreciation on such assets to cease; and
(b)
assets that meet the criteria to be classified as held for sale to be
presented separately in the statement of financial position and the
results of discontinued operations to be presented separately in the
statement of comprehensive income.
Scope
2
The classification and presentation requirements of this IFRS apply to all
recognised non-current assets1 and to all disposal groups of an entity. The
measurement requirements of this IFRS apply to all recognised non-current
assets and disposal groups (as set out in paragraph 4), except for those assets
listed in paragraph 5 which shall continue to be measured in accordance with
the Standard noted.
3
Assets classified as non-current in accordance with IAS 1 Presentation of Financial
Statements shall not be reclassified as current assets until they meet the criteria to
be classified as held for sale in accordance with this IFRS. Assets of a class that
an entity would normally regard as non-current that are acquired exclusively
with a view to resale shall not be classified as current unless they meet the
criteria to be classified as held for sale in accordance with this IFRS.
4
Sometimes an entity disposes of a group of assets, possibly with some directly
associated liabilities, together in a single transaction. Such a disposal group
may be a group of cash-generating units, a single cash-generating unit, or part of a
cash-generating unit.2 The group may include any assets and any liabilities of
the entity, including current assets, current liabilities and assets excluded by
paragraph 5 from the measurement requirements of this IFRS. If a non-current
asset within the scope of the measurement requirements of this IFRS is part of a
disposal group, the measurement requirements of this IFRS apply to the group
1
For assets classified according to a liquidity presentation, non-current assets are assets that include
amounts expected to be recovered more than twelve months after the reporting period.
Paragraph 3 applies to the classification of such assets.
2
However, once the cash flows from an asset or group of assets are expected to arise principally from
sale rather than continuing use, they become less dependent on cash flows arising from other
assets, and a disposal group that was part of a cash-generating unit becomes a separate
cash-generating unit.
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as a whole, so that the group is measured at the lower of its carrying amount
and fair value less costs to sell. The requirements for measuring the individual
assets and liabilities within the disposal group are set out in paragraphs 18, 19
and 23.
5
The measurement provisions of this IFRS3 do not apply to the following assets,
which are covered by the IFRSs listed, either as individual assets or as part of a
disposal group:
(a)
deferred tax assets (IAS 12 Income Taxes).
(b)
assets arising from employee benefits (IAS 19 Employee Benefits).
(c)
financial assets within the scope of IFRS 9 Financial Instruments.
(d)
non-current assets that are accounted for in accordance with the fair
value model in IAS 40 Investment Property.
(e)
non-current assets that are measured at fair value less costs to sell in
accordance with IAS 41 Agriculture.
(f)
contractual rights under insurance contracts as defined in IFRS 4
Insurance Contracts.
5A
The classification, presentation and measurement requirements in this IFRS
applicable to a non-current asset (or disposal group) that is classified as held for
sale apply also to a non-current asset (or disposal group) that is classified as held
for distribution to owners acting in their capacity as owners (held for
distribution to owners).
5B
This IFRS specifies the disclosures required in respect of non-current assets (or
disposal groups) classified as held for sale or discontinued operations.
Disclosures in other IFRSs do not apply to such assets (or disposal groups) unless
those IFRSs require:
(a)
specific disclosures in respect of non-current assets (or disposal groups)
classified as held for sale or discontinued operations; or
(b)
disclosures about measurement of assets and liabilities within a disposal
group that are not within the scope of the measurement requirement of
IFRS 5 and such disclosures are not already provided in the other notes to
the financial statements.
Additional disclosures about non-current assets (or disposal groups) classified as
held for sale or discontinued operations may be necessary to comply with the
general requirements of IAS 1, in particular paragraphs 15 and 125 of that
Standard.
3
Other than paragraphs 18 and 19, which require the assets in question to be measured in
accordance with other applicable IFRSs.
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Classification of non-current assets (or disposal groups) as held
for sale or as held for distribution to owners
6
An entity shall classify a non-current asset (or disposal group) as held for
sale if its carrying amount will be recovered principally through a sale
transaction rather than through continuing use.
7
For this to be the case, the asset (or disposal group) must be available for
immediate sale in its present condition subject only to terms that are usual and
customary for sales of such assets (or disposal groups) and its sale must be highly
probable.
8
For the sale to be highly probable, the appropriate level of management must be
committed to a plan to sell the asset (or disposal group), and an active
programme to locate a buyer and complete the plan must have been initiated.
Further, the asset (or disposal group) must be actively marketed for sale at a
price that is reasonable in relation to its current fair value. In addition, the sale
should be expected to qualify for recognition as a completed sale within one
year from the date of classification, except as permitted by paragraph 9, and
actions required to complete the plan should indicate that it is unlikely that
significant changes to the plan will be made or that the plan will be withdrawn.
The probability of shareholders’ approval (if required in the jurisdiction) should
be considered as part of the assessment of whether the sale is highly probable.
8A
An entity that is committed to a sale plan involving loss of control of a
subsidiary shall classify all the assets and liabilities of that subsidiary as held for
sale when the criteria set out in paragraphs 6–8 are met, regardless of whether
the entity will retain a non-controlling interest in its former subsidiary after the
sale.
9
Events or circumstances may extend the period to complete the sale beyond one
year. An extension of the period required to complete a sale does not preclude
an asset (or disposal group) from being classified as held for sale if the delay is
caused by events or circumstances beyond the entity’s control and there is
sufficient evidence that the entity remains committed to its plan to sell the asset
(or disposal group). This will be the case when the criteria in Appendix B are
met.
10
Sale transactions include exchanges of non-current assets for other non-current
assets when the exchange has commercial substance in accordance with IAS 16
Property, Plant and Equipment.
11
When an entity acquires a non-current asset (or disposal group) exclusively with
a view to its subsequent disposal, it shall classify the non-current asset (or
disposal group) as held for sale at the acquisition date only if the one-year
requirement in paragraph 8 is met (except as permitted by paragraph 9) and it is
highly probable that any other criteria in paragraphs 7 and 8 that are not met at
that date will be met within a short period following the acquisition (usually
within three months).
12
If the criteria in paragraphs 7 and 8 are met after the reporting period, an entity
shall not classify a non-current asset (or disposal group) as held for sale in those
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financial statements when issued. However, when those criteria are met after
the reporting period but before the authorisation of the financial statements for
issue, the entity shall disclose the information specified in paragraph 41(a), (b)
and (d) in the notes.
12A
A non-current asset (or disposal group) is classified as held for distribution to
owners when the entity is committed to distribute the asset (or disposal group)
to the owners. For this to be the case, the assets must be available for immediate
distribution in their present condition and the distribution must be highly
probable. For the distribution to be highly probable, actions to complete the
distribution must have been initiated and should be expected to be completed
within one year from the date of classification. Actions required to complete the
distribution should indicate that it is unlikely that significant changes to the
distribution will be made or that the distribution will be withdrawn. The
probability of shareholders’ approval (if required in the jurisdiction) should be
considered as part of the assessment of whether the distribution is highly
probable.
Non-current assets that are to be abandoned
13
An entity shall not classify as held for sale a non-current asset (or disposal group)
that is to be abandoned. This is because its carrying amount will be recovered
principally through continuing use. However, if the disposal group to be
abandoned meets the criteria in paragraph 32(a)–(c), the entity shall present the
results and cash flows of the disposal group as discontinued operations in
accordance with paragraphs 33 and 34 at the date on which it ceases to be used.
Non-current assets (or disposal groups) to be abandoned include non-current
assets (or disposal groups) that are to be used to the end of their economic life
and non-current assets (or disposal groups) that are to be closed rather than sold.
14
An entity shall not account for a non-current asset that has been temporarily
taken out of use as if it had been abandoned.
Measurement of non-current assets (or disposal groups)
classified as held for sale
Measurement of a non-current asset (or disposal group)
15
An entity shall measure a non-current asset (or disposal group) classified
as held for sale at the lower of its carrying amount and fair value less
costs to sell.
15A
An entity shall measure a non-current asset (or disposal group) classified
as held for distribution to owners at the lower of its carrying amount and
fair value less costs to distribute.4
16
If a newly acquired asset (or disposal group) meets the criteria to be classified as
held for sale (see paragraph 11), applying paragraph 15 will result in the asset (or
disposal group) being measured on initial recognition at the lower of its carrying
amount had it not been so classified (for example, cost) and fair value less costs
4
Costs to distribute are the incremental costs directly attributable to the distribution, excluding
finance costs and income tax expense.
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to sell. Hence, if the asset (or disposal group) is acquired as part of a business
combination, it shall be measured at fair value less costs to sell.
17
When the sale is expected to occur beyond one year, the entity shall measure the
costs to sell at their present value. Any increase in the present value of the costs
to sell that arises from the passage of time shall be presented in profit or loss as
a financing cost.
18
Immediately before the initial classification of the asset (or disposal group) as
held for sale, the carrying amounts of the asset (or all the assets and liabilities in
the group) shall be measured in accordance with applicable IFRSs.
19
On subsequent remeasurement of a disposal group, the carrying amounts of any
assets and liabilities that are not within the scope of the measurement
requirements of this IFRS, but are included in a disposal group classified as held
for sale, shall be remeasured in accordance with applicable IFRSs before the fair
value less costs to sell of the disposal group is remeasured.
Recognition of impairment losses and reversals
20
An entity shall recognise an impairment loss for any initial or subsequent
write-down of the asset (or disposal group) to fair value less costs to sell, to the
extent that it has not been recognised in accordance with paragraph 19.
21
An entity shall recognise a gain for any subsequent increase in fair value less
costs to sell of an asset, but not in excess of the cumulative impairment loss that
has been recognised either in accordance with this IFRS or previously in
accordance with IAS 36 Impairment of Assets.
22
An entity shall recognise a gain for any subsequent increase in fair value less
costs to sell of a disposal group:
(a)
to the extent that it has not been recognised in accordance with
paragraph 19; but
(b)
not in excess of the cumulative impairment loss that has been
recognised, either in accordance with this IFRS or previously in
accordance with IAS 36, on the non-current assets that are within the
scope of the measurement requirements of this IFRS.
23
The impairment loss (or any subsequent gain) recognised for a disposal group
shall reduce (or increase) the carrying amount of the non-current assets in the
group that are within the scope of the measurement requirements of this IFRS,
in the order of allocation set out in paragraphs 104(a) and (b) and 122 of IAS 36
(as revised in 2004).
24
A gain or loss not previously recognised by the date of the sale of a non-current
asset (or disposal group) shall be recognised at the date of derecognition.
Requirements relating to derecognition are set out in:
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(a)
paragraphs 67–72 of IAS 16 (as revised in 2003) for property, plant and
equipment, and
(b)
paragraphs 112–117 of IAS 38 Intangible Assets (as revised in 2004) for
intangible assets.
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25
An entity shall not depreciate (or amortise) a non-current asset while it is
classified as held for sale or while it is part of a disposal group classified as held
for sale. Interest and other expenses attributable to the liabilities of a disposal
group classified as held for sale shall continue to be recognised.
Changes to a plan of sale or to a plan of distribution to
owners
26
If an entity has classified an asset (or disposal group) as held for sale or as held
for distribution to owners, but the criteria in paragraphs 7–9 (for held for sale)
or in paragraph 12A (for held for distribution to owners) are no longer met, the
entity shall cease to classify the asset (or disposal group) as held for sale or held
for distribution to owners (respectively). In such cases an entity shall follow the
guidance in paragraphs 27–29 to account for this change except when
paragraph 26A applies.
26A
If an entity reclassifies an asset (or disposal group) directly from being held for
sale to being held for distribution to owners, or directly from being held for
distribution to owners to being held for sale, then the change in classification is
considered a continuation of the original plan of disposal. The entity:
27
(a)
shall not follow the guidance in paragraphs 27–29 to account for this
change. The entity shall apply the classification, presentation and
measurement requirements in this IFRS that are applicable to the new
method of disposal.
(b)
shall measure the non-current asset (or disposal group) by following the
requirements in paragraph 15 (if reclassified as held for sale) or 15A (if
reclassified as held for distribution to owners) and recognise any
reduction or increase in the fair value less costs to sell/costs to distribute
of the non-current asset (or disposal group) by following the
requirements in paragraphs 20–25.
(c)
shall not change the date of classification in accordance with
paragraphs 8 and 12A. This does not preclude an extension of the period
required to complete a sale or a distribution to owners if the conditions
in paragraph 9 are met.
The entity shall measure a non-current asset (or disposal group) that ceases to be
classified as held for sale or as held for distribution to owners (or ceases to be
included in a disposal group classified as held for sale or as held for distribution
to owners) at the lower of:
(a)
its carrying amount before the asset (or disposal group) was classified as
held for sale or as held for distribution to owners, adjusted for any
depreciation, amortisation or revaluations that would have been
recognised had the asset (or disposal group) not been classified as held
for sale or as held for distribution to owners, and
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(b)
its recoverable amount at the date of the subsequent decision not to sell or
distribute.5
28
The entity shall include any required adjustment to the carrying amount of a
non-current asset that ceases to be classified as held for sale or as held for
distribution to owners in profit or loss6 from continuing operations in the
period in which the criteria in paragraphs 7–9 or 12A, respectively, are no longer
met. Financial statements for the periods since classification as held for sale or
as held for distribution to owners shall be amended accordingly if the disposal
group or non-current asset that ceases to be classified as held for sale or as held
for distribution to owners is a subsidiary, joint operation, joint venture,
associate, or a portion of an interest in a joint venture or an associate. The entity
shall present that adjustment in the same caption in the statement of
comprehensive income used to present a gain or loss, if any, recognised in
accordance with paragraph 37.
29
If an entity removes an individual asset or liability from a disposal group
classified as held for sale, the remaining assets and liabilities of the disposal
group to be sold shall continue to be measured as a group only if the group
meets the criteria in paragraphs 7–9. If an entity removes an individual asset or
liability from a disposal group classified as held for distribution to owners, the
remaining assets and liabilities of the disposal group to be distributed shall
continue to be measured as a group only if the group meets the criteria in
paragraph 12A. Otherwise, the remaining non-current assets of the group that
individually meet the criteria to be classified as held for sale (or as held for
distribution to owners) shall be measured individually at the lower of their
carrying amounts and fair values less costs to sell (or costs to distribute) at that
date. Any non-current assets that do not meet the criteria for held for sale shall
cease to be classified as held for sale in accordance with paragraph 26. Any
non-current assets that do not meet the criteria for held for distribution to
owners shall cease to be classified as held for distribution to owners in
accordance with paragraph 26.
Presentation and disclosure
30
An entity shall present and disclose information that enables users of the
financial statements to evaluate the financial effects of discontinued
operations and disposals of non-current assets (or disposal groups).
Presenting discontinued operations
A component of an entity comprises operations and cash flows that can be clearly
distinguished, operationally and for financial reporting purposes, from the rest
31
5
If the non-current asset is part of a cash-generating unit, its recoverable amount is the carrying
amount that would have been recognised after the allocation of any impairment loss arising on that
cash-generating unit in accordance with IAS 36.
6
Unless the asset is property, plant and equipment or an intangible asset that had been revalued in
accordance with IAS 16 or IAS 38 before classification as held for sale, in which case the adjustment
shall be treated as a revaluation increase or decrease.
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of the entity. In other words, a component of an entity will have been a
cash-generating unit or a group of cash-generating units while being held for
use.
32
33
A discontinued operation is a component of an entity that either has been
disposed of, or is classified as held for sale, and
(a)
represents a separate major line of business or geographical area of
operations,
(b)
is part of a single co-ordinated plan to dispose of a separate major line of
business or geographical area of operations or
(c)
is a subsidiary acquired exclusively with a view to resale.
An entity shall disclose:
(a)
(b)
a single amount in the statement of comprehensive income comprising
the total of:
(i)
the post-tax profit or loss of discontinued operations and
(ii)
the post-tax gain or loss recognised on the measurement to fair
value less costs to sell or on the disposal of the assets or disposal
group(s) constituting the discontinued operation.
an analysis of the single amount in (a) into:
(i)
the revenue, expenses and pre-tax profit or loss of discontinued
operations;
(ii)
the related income tax expense as required by paragraph 81(h) of
IAS 12.
(iii)
the gain or loss recognised on the measurement to fair value less
costs to sell or on the disposal of the assets or disposal group(s)
constituting the discontinued operation; and
(iv)
the related income tax expense as required by paragraph 81(h) of
IAS 12.
The analysis may be presented in the notes or in the statement of
comprehensive income.
If it is presented in the statement of
comprehensive income it shall be presented in a section identified as
relating to discontinued operations, ie separately from continuing
operations. The analysis is not required for disposal groups that are
newly acquired subsidiaries that meet the criteria to be classified as held
for sale on acquisition (see paragraph 11).
(c)
the net cash flows attributable to the operating, investing and financing
activities of discontinued operations.
These disclosures may be
presented either in the notes or in the financial statements. These
disclosures are not required for disposal groups that are newly acquired
subsidiaries that meet the criteria to be classified as held for sale on
acquisition (see paragraph 11).
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(d)
the amount of income from continuing operations and from
discontinued operations attributable to owners of the parent. These
disclosures may be presented either in the notes or in the statement of
comprehensive income.
33A
If an entity presents the items of profit or loss in a separate statement as
described in paragraph 10A of IAS 1 (as amended in 2011), a section identified as
relating to discontinued operations is presented in that statement.
34
An entity shall re-present the disclosures in paragraph 33 for prior periods
presented in the financial statements so that the disclosures relate to all
operations that have been discontinued by the end of the reporting period for
the latest period presented.
35
Adjustments in the current period to amounts previously presented in
discontinued operations that are directly related to the disposal of a
discontinued operation in a prior period shall be classified separately in
discontinued operations. The nature and amount of such adjustments shall be
disclosed. Examples of circumstances in which these adjustments may arise
include the following:
(a)
the resolution of uncertainties that arise from the terms of the disposal
transaction, such as the resolution of purchase price adjustments and
indemnification issues with the purchaser.
(b)
the resolution of uncertainties that arise from and are directly related to
the operations of the component before its disposal, such as
environmental and product warranty obligations retained by the seller.
(c)
the settlement of employee benefit plan obligations, provided that the
settlement is directly related to the disposal transaction.
36
If an entity ceases to classify a component of an entity as held for sale, the results
of operations of the component previously presented in discontinued operations
in accordance with paragraphs 33–35 shall be reclassified and included in
income from continuing operations for all periods presented. The amounts for
prior periods shall be described as having been re-presented.
36A
An entity that is committed to a sale plan involving loss of control of a
subsidiary shall disclose the information required in paragraphs 33–36 when
the subsidiary is a disposal group that meets the definition of a discontinued
operation in accordance with paragraph 32.
Gains or losses relating to continuing operations
37
Any gain or loss on the remeasurement of a non-current asset (or disposal group)
classified as held for sale that does not meet the definition of a discontinued
operation shall be included in profit or loss from continuing operations.
Presentation of a non-current asset or disposal group
classified as held for sale
38
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An entity shall present a non-current asset classified as held for sale and the
assets of a disposal group classified as held for sale separately from other assets
in the statement of financial position. The liabilities of a disposal group
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classified as held for sale shall be presented separately from other liabilities in
the statement of financial position. Those assets and liabilities shall not be
offset and presented as a single amount. The major classes of assets and
liabilities classified as held for sale shall be separately disclosed either in the
statement of financial position or in the notes, except as permitted by
paragraph 39. An entity shall present separately any cumulative income or
expense recognised in other comprehensive income relating to a non-current
asset (or disposal group) classified as held for sale.
39
If the disposal group is a newly acquired subsidiary that meets the criteria to be
classified as held for sale on acquisition (see paragraph 11), disclosure of the
major classes of assets and liabilities is not required.
40
An entity shall not reclassify or re-present amounts presented for non-current
assets or for the assets and liabilities of disposal groups classified as held for sale
in the statements of financial position for prior periods to reflect the
classification in the statement of financial position for the latest period
presented.
Additional disclosures
41
42
An entity shall disclose the following information in the notes in the period in
which a non-current asset (or disposal group) has been either classified as held
for sale or sold:
(a)
a description of the non-current asset (or disposal group);
(b)
a description of the facts and circumstances of the sale, or leading to the
expected disposal, and the expected manner and timing of that disposal;
(c)
the gain or loss recognised in accordance with paragraphs 20–22 and, if
not separately presented in the statement of comprehensive income, the
caption in the statement of comprehensive income that includes that
gain or loss;
(d)
if applicable, the reportable segment in which the non-current asset
(or disposal group) is presented in accordance with IFRS 8 Operating
Segments.
If either paragraph 26 or paragraph 29 applies, an entity shall disclose, in the
period of the decision to change the plan to sell the non-current asset (or
disposal group), a description of the facts and circumstances leading to the
decision and the effect of the decision on the results of operations for the period
and any prior periods presented.
Transitional provisions
43
The IFRS shall be applied prospectively to non-current assets (or disposal groups)
that meet the criteria to be classified as held for sale and operations that meet
the criteria to be classified as discontinued after the effective date of the IFRS.
An entity may apply the requirements of the IFRS to all non-current assets (or
disposal groups) that meet the criteria to be classified as held for sale and
operations that meet the criteria to be classified as discontinued after any date
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before the effective date of the IFRS, provided the valuations and other
information needed to apply the IFRS were obtained at the time those criteria
were originally met.
Effective date
44
An entity shall apply this IFRS for annual periods beginning on or after
1 January 2005. Earlier application is encouraged. If an entity applies the IFRS
for a period beginning before 1 January 2005, it shall disclose that fact.
44A
IAS 1 (as revised in 2007) amended the terminology used throughout IFRSs. In
addition it amended paragraphs 3 and 38, and added paragraph 33A. An entity
shall apply those amendments for annual periods beginning on or after
1 January 2009. If an entity applies IAS 1 (revised 2007) for an earlier period, the
amendments shall be applied for that earlier period.
44B
IAS 27 Consolidated and Separate Financial Statements (as amended in 2008) added
paragraph 33(d). An entity shall apply that amendment for annual periods
beginning on or after 1 July 2009. If an entity applies IAS 27 (amended 2008) for
an earlier period, the amendment shall be applied for that earlier period. The
amendment shall be applied retrospectively.
44C
Paragraphs 8A and 36A were added by Improvements to IFRSs issued in May 2008.
An entity shall apply those amendments for annual periods beginning on or
after 1 July 2009. Earlier application is permitted. However, an entity shall not
apply the amendments for annual periods beginning before 1 July 2009 unless it
also applies IAS 27 (as amended in January 2008). If an entity applies the
amendments before 1 July 2009 it shall disclose that fact. An entity shall apply
the amendments prospectively from the date at which it first applied IFRS 5,
subject to the transitional provisions in paragraph 45 of IAS 27 (amended
January 2008).
44D
Paragraphs 5A, 12A and 15A were added and paragraph 8 was amended by
IFRIC 17 Distributions of Non-cash Assets to Owners in November 2008. Those
amendments shall be applied prospectively to non-current assets (or disposal
groups) that are classified as held for distribution to owners in annual periods
beginning on or after 1 July 2009. Retrospective application is not permitted.
Earlier application is permitted. If an entity applies the amendments for a
period beginning before 1 July 2009 it shall disclose that fact and also apply
IFRS 3 Business Combinations (as revised in 2008), IAS 27 (as amended in January
2008) and IFRIC 17.
44E
Paragraph 5B was added by Improvements to IFRSs issued in April 2009. An entity
shall apply that amendment prospectively for annual periods beginning on or
after 1 January 2010. Earlier application is permitted. If an entity applies the
amendment for an earlier period it shall disclose that fact.
44F
[Deleted]
44G
IFRS 11 Joint Arrangements, issued in May 2011, amended paragraph 28. An entity
shall apply that amendment when it applies IFRS 11.
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44H
IFRS 13 Fair Value Measurement, issued in May 2011, amended the definition of fair
value in Appendix A. An entity shall apply that amendment when it applies
IFRS 13.
44I
Presentation of Items of Other Comprehensive Income (Amendments to IAS 1), issued in
June 2011, amended paragraph 33A. An entity shall apply that amendment
when it applies IAS 1 as amended in June 2011.
44J
[Deleted]
44K
IFRS 9, as issued in July 2014, amended paragraph 5 and deleted paragraphs 44F
and 44J. An entity shall apply those amendments when it applies IFRS 9.
44L
Annual Improvements to IFRSs 2012–2014 Cycle, issued in September 2014, amended
paragraphs 26–29 and added paragraph 26A. An entity shall apply those
amendments prospectively in accordance with IAS 8 Accounting Policies, Changes in
Accounting Estimates and Errors to changes in a method of disposal that occur in
annual periods beginning on or after 1 January 2016. Earlier application is
permitted. If an entity applies those amendments for an earlier period it shall
disclose that fact.
Withdrawal of IAS 35
45
This IFRS supersedes IAS 35 Discontinuing Operations.
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Appendix A
Defined terms
This appendix is an integral part of the IFRS.
cash-generating unit
The smallest identifiable group of assets that generates cash
inflows that are largely independent of the cash inflows from
other assets or groups of assets.
component of an
entity
Operations and cash flows that can be clearly distinguished,
operationally and for financial reporting purposes, from the rest
of the entity.
costs to sell
The incremental costs directly attributable to the disposal of an
asset (or disposal group), excluding finance costs and income
tax expense.
current asset
An entity shall classify an asset as current when:
discontinued
operation
(a)
it expects to realise the asset, or intends to sell or
consume it, in its normal operating cycle;
(b)
it holds the asset primarily for the purpose of trading;
(c)
it expects to realise the asset within twelve months after
the reporting period; or
(d)
the asset is cash or a cash equivalent (as defined in IAS 7)
unless the asset is restricted from being exchanged or
used to settle a liability for at least twelve months after
the reporting period.
A component of an entity that either has been disposed of or is
classified as held for sale and:
(a)
represents a separate major line of business or
geographical area of operations,
(b)
is part of a single co-ordinated plan to dispose of a
separate major line of business or geographical area of
operations or
(c)
is a subsidiary acquired exclusively with a view to resale.
disposal group
A group of assets to be disposed of, by sale or otherwise, together
as a group in a single transaction, and liabilities directly
associated with those assets that will be transferred in the
transaction. The group includes goodwill acquired in a business
combination if the group is a cash-generating unit to which
goodwill has been allocated in accordance with the requirements
of paragraphs 80–87 of IAS 36 Impairment of Assets (as revised in
2004) or if it is an operation within such a cash-generating unit.
fair value
Fair value is the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between
market participants at the measurement date. (See IFRS 13.)
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firm purchase
commitment
An agreement with an unrelated party, binding on both parties
and usually legally enforceable, that (a) specifies all significant
terms, including the price and timing of the transactions, and (b)
includes a disincentive for non-performance that is sufficiently
large to make performance highly probable.
highly probable
Significantly more likely than probable.
non-current asset
An asset that does not meet the definition of a current asset.
probable
More likely than not.
recoverable amount
The higher of an asset’s fair value less costs to sell and its value
in use.
value in use
The present value of estimated future cash flows expected to arise
from the continuing use of an asset and from its disposal at the
end of its useful life.
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Appendix B
Application supplement
This appendix is an integral part of the IFRS.
Extension of the period required to complete a sale
B1
As noted in paragraph 9, an extension of the period required to complete a sale
does not preclude an asset (or disposal group) from being classified as held for
sale if the delay is caused by events or circumstances beyond the entity’s control
and there is sufficient evidence that the entity remains committed to its plan to
sell the asset (or disposal group). An exception to the one-year requirement in
paragraph 8 shall therefore apply in the following situations in which such
events or circumstances arise:
(a)
(b)
(c)
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at the date an entity commits itself to a plan to sell a non-current asset
(or disposal group) it reasonably expects that others (not a buyer) will
impose conditions on the transfer of the asset (or disposal group) that
will extend the period required to complete the sale, and:
(i)
actions necessary to respond to those conditions cannot be
initiated until after a firm purchase commitment is obtained, and
(ii)
a firm purchase commitment is highly probable within one year.
an entity obtains a firm purchase commitment and, as a result, a buyer
or others unexpectedly impose conditions on the transfer of a
non-current asset (or disposal group) previously classified as held for sale
that will extend the period required to complete the sale, and:
(i)
timely actions necessary to respond to the conditions have been
taken, and
(ii)
a favourable resolution of the delaying factors is expected.
during the initial one-year period, circumstances arise that were
previously considered unlikely and, as a result, a non-current asset (or
disposal group) previously classified as held for sale is not sold by the end
of that period, and:
(i)
during the initial one-year period the entity took action necessary
to respond to the change in circumstances,
(ii)
the non-current asset (or disposal group) is being actively
marketed at a price that is reasonable, given the change in
circumstances, and
(iii)
the criteria in paragraphs 7 and 8 are met.
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Appendix C
Amendments to other IFRSs
The amendments in this appendix shall be applied for annual periods beginning on or after
1 January 2005. If an entity adopts this IFRS for an earlier period, these amendments shall be
applied for that earlier period.
*****
The amendments contained in this appendix when this IFRS was issued in 2004 have been incorporated
into the relevant IFRSs published in this volume.
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IFRS 6
IFRS 6
Exploration for and Evaluation of
Mineral Resources
In December 2004 the International Accounting Standards Board issued IFRS 6 Exploration
for and Evaluation of Mineral Resources.
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IFRS 6
CONTENTS
from paragraph
INTERNATIONAL FINANCIAL REPORTING STANDARD 6
EXPLORATION FOR AND EVALUATION OF
MINERAL RESOURCES
OBJECTIVE
1
SCOPE
3
RECOGNITION OF EXPLORATION AND EVALUATION ASSETS
6
Temporary exemption from IAS 8 paragraphs 11 and 12
6
MEASUREMENT OF EXPLORATION AND EVALUATION ASSETS
8
Measurement at recognition
8
Elements of cost of exploration and evaluation assets
9
Measurement after recognition
12
Changes in accounting policies
13
PRESENTATION
15
Classification of exploration and evaluation assets
15
Reclassification of exploration and evaluation assets
17
IMPAIRMENT
18
Recognition and measurement
18
Specifying the level at which exploration and evaluation assets are assessed
for impairment
21
DISCLOSURE
23
EFFECTIVE DATE
26
TRANSITIONAL PROVISIONS
27
APPENDICES
A Defined terms
B Amendments to other IFRSs
FOR THE ACCOMPANYING DOCUMENTS LISTED BELOW, SEE PART B OF THIS
EDITION
APPROVAL BY THE BOARD OF IFRS 6 ISSUED IN DECEMBER 2004
APPROVAL BY THE BOARD OF AMENDMENTS TO IFRS 1 AND IFRS 6
ISSUED IN JUNE 2005
BASIS FOR CONCLUSIONS
DISSENTING OPINIONS
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International Financial Reporting Standard 6 Exploration for and Evaluation of Mineral
Resources (IFRS 6) is set out in paragraphs 1–27 and Appendices A and B. All the
paragraphs have equal authority. Paragraphs in bold type state the main principles.
Terms defined in Appendix A are in italics the first time they appear in the Standard.
Definitions of other terms are given in the Glossary for International Financial Reporting
Standards. IFRS 6 should be read in the context of its objective and the Basis for
Conclusions, the Preface to International Financial Reporting Standards and the Conceptual
Framework for Financial Reporting. IAS 8 Accounting Policies, Changes in Accounting Estimates and
Errors provides a basis for selecting and applying accounting policies in the absence of
explicit guidance.
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IFRS 6
International Financial Reporting Standard 6
Exploration for and Evaluation of Mineral Resources
Objective
1
The objective of this IFRS is to specify the financial reporting for the exploration
for and evaluation of mineral resources.
2
In particular, the IFRS requires:
(a)
limited improvements to existing accounting practices for exploration and
evaluation expenditures.
(b)
entities that recognise exploration and evaluation assets to assess such assets
for impairment in accordance with this IFRS and measure any
impairment in accordance with IAS 36 Impairment of Assets.
(c)
disclosures that identify and explain the amounts in the entity’s
financial statements arising from the exploration for and evaluation of
mineral resources and help users of those financial statements
understand the amount, timing and certainty of future cash flows from
any exploration and evaluation assets recognised.
Scope
3
An entity shall apply the IFRS to exploration and evaluation expenditures that it
incurs.
4
The IFRS does not address other aspects of accounting by entities engaged in the
exploration for and evaluation of mineral resources.
5
An entity shall not apply the IFRS to expenditures incurred:
(a)
before the exploration for and evaluation of mineral resources, such as
expenditures incurred before the entity has obtained the legal rights to
explore a specific area.
(b)
after the technical feasibility and commercial viability of extracting a
mineral resource are demonstrable.
Recognition of exploration and evaluation assets
Temporary exemption from IAS 8 paragraphs 11 and 12
6
When developing its accounting policies, an entity recognising exploration and
evaluation assets shall apply paragraph 10 of IAS 8 Accounting Policies, Changes in
Accounting Estimates and Errors.
7
Paragraphs 11 and 12 of IAS 8 specify sources of authoritative requirements and
guidance that management is required to consider in developing an accounting
policy for an item if no IFRS applies specifically to that item. Subject to
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paragraphs 9 and 10 below, this IFRS exempts an entity from applying those
paragraphs to its accounting policies for the recognition and measurement of
exploration and evaluation assets.
Measurement of exploration and evaluation assets
Measurement at recognition
8
Exploration and evaluation assets shall be measured at cost.
Elements of cost of exploration and evaluation assets
9
An entity shall determine an accounting policy specifying which expenditures
are recognised as exploration and evaluation assets and apply the policy
consistently. In making this determination, an entity considers the degree to
which the expenditure can be associated with finding specific mineral resources.
The following are examples of expenditures that might be included in the initial
measurement of exploration and evaluation assets (the list is not exhaustive):
(a)
acquisition of rights to explore;
(b)
topographical, geological, geochemical and geophysical studies;
(c)
exploratory drilling;
(d)
trenching;
(e)
sampling; and
(f)
activities in relation to evaluating the technical feasibility and
commercial viability of extracting a mineral resource.
10
Expenditures related to the development of mineral resources shall not be
recognised as exploration and evaluation assets. The Framework1 and IAS 38
Intangible Assets provide guidance on the recognition of assets arising from
development.
11
In accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets an
entity recognises any obligations for removal and restoration that are incurred
during a particular period as a consequence of having undertaken the
exploration for and evaluation of mineral resources.
Measurement after recognition
12
1
After recognition, an entity shall apply either the cost model or the revaluation
model to the exploration and evaluation assets. If the revaluation model is
applied (either the model in IAS 16 Property, Plant and Equipment or the model in
IAS 38) it shall be consistent with the classification of the assets (see
paragraph 15).
The reference to the Framework is to IASC’s Framework for the Preparation and Presentation of Financial
Statements, adopted by the IASB in 2001. In September 2010 the IASB replaced the Framework with
the Conceptual Framework for Financial Reporting.
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Changes in accounting policies
13
An entity may change its accounting policies for exploration and
evaluation expenditures if the change makes the financial statements
more relevant to the economic decision-making needs of users and no
less reliable, or more reliable and no less relevant to those needs. An
entity shall judge relevance and reliability using the criteria in IAS 8.
14
To justify changing its accounting policies for exploration and evaluation
expenditures, an entity shall demonstrate that the change brings its financial
statements closer to meeting the criteria in IAS 8, but the change need not
achieve full compliance with those criteria.
Presentation
Classification of exploration and evaluation assets
15
An entity shall classify exploration and evaluation assets as tangible or
intangible according to the nature of the assets acquired and apply the
classification consistently.
16
Some exploration and evaluation assets are treated as intangible (eg drilling
rights), whereas others are tangible (eg vehicles and drilling rigs). To the extent
that a tangible asset is consumed in developing an intangible asset, the amount
reflecting that consumption is part of the cost of the intangible asset. However,
using a tangible asset to develop an intangible asset does not change a tangible
asset into an intangible asset.
Reclassification of exploration and evaluation assets
17
An exploration and evaluation asset shall no longer be classified as such when
the technical feasibility and commercial viability of extracting a mineral
resource are demonstrable. Exploration and evaluation assets shall be assessed
for impairment, and any impairment loss recognised, before reclassification.
Impairment
Recognition and measurement
18
Exploration and evaluation assets shall be assessed for impairment when
facts and circumstances suggest that the carrying amount of an
exploration and evaluation asset may exceed its recoverable amount.
When facts and circumstances suggest that the carrying amount exceeds
the recoverable amount, an entity shall measure, present and disclose any
resulting impairment loss in accordance with IAS 36, except as provided
by paragraph 21 below.
19
For the purposes of exploration and evaluation assets only, paragraph 20 of this
IFRS shall be applied rather than paragraphs 8–17 of IAS 36 when identifying an
exploration and evaluation asset that may be impaired. Paragraph 20 uses the
term ‘assets’ but applies equally to separate exploration and evaluation assets or
a cash-generating unit.
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20
One or more of the following facts and circumstances indicate that an entity
should test exploration and evaluation assets for impairment (the list is not
exhaustive):
(a)
the period for which the entity has the right to explore in the specific
area has expired during the period or will expire in the near future, and
is not expected to be renewed.
(b)
substantive expenditure on further exploration for and evaluation of
mineral resources in the specific area is neither budgeted nor planned.
(c)
exploration for and evaluation of mineral resources in the specific area
have not led to the discovery of commercially viable quantities of
mineral resources and the entity has decided to discontinue such
activities in the specific area.
(d)
sufficient data exist to indicate that, although a development in the
specific area is likely to proceed, the carrying amount of the exploration
and evaluation asset is unlikely to be recovered in full from successful
development or by sale.
In any such case, or similar cases, the entity shall perform an impairment test in
accordance with IAS 36. Any impairment loss is recognised as an expense in
accordance with IAS 36.
Specifying the level at which exploration and evaluation
assets are assessed for impairment
21
An entity shall determine an accounting policy for allocating exploration
and evaluation assets to cash-generating units or groups of
cash-generating units for the purpose of assessing such assets for
impairment. Each cash-generating unit or group of units to which an
exploration and evaluation asset is allocated shall not be larger than an
operating segment determined in accordance with IFRS 8 Operating
Segments.
22
The level identified by the entity for the purposes of testing exploration and
evaluation assets for impairment may comprise one or more cash-generating
units.
Disclosure
23
An entity shall disclose information that identifies and explains the
amounts recognised in its financial statements arising from the
exploration for and evaluation of mineral resources.
24
To comply with paragraph 23, an entity shall disclose:
(a)
its accounting policies for exploration and evaluation expenditures
including the recognition of exploration and evaluation assets.
(b)
the amounts of assets, liabilities, income and expense and operating and
investing cash flows arising from the exploration for and evaluation of
mineral resources.
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25
An entity shall treat exploration and evaluation assets as a separate class of
assets and make the disclosures required by either IAS 16 or IAS 38 consistent
with how the assets are classified.
Effective date
26
An entity shall apply this IFRS for annual periods beginning on or after
1 January 2006. Earlier application is encouraged. If an entity applies the IFRS
for a period beginning before 1 January 2006, it shall disclose that fact.
Transitional provisions
27
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If it is impracticable to apply a particular requirement of paragraph 18 to
comparative information that relates to annual periods beginning before
1 January 2006, an entity shall disclose that fact. IAS 8 explains the term
‘impracticable’.
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Appendix A
Defined terms
This appendix is an integral part of the IFRS.
exploration and
evaluation assets
Exploration and evaluation expenditures recognised as assets
in accordance with the entity’s accounting policy.
exploration and
evaluation
expenditures
Expenditures incurred by an entity in connection with the
exploration for and evaluation of mineral resources before
the technical feasibility and commercial viability of extracting a
mineral resource are demonstrable.
exploration for and
evaluation of mineral
resources
The search for mineral resources, including minerals, oil, natural
gas and similar non-regenerative resources after the entity has
obtained legal rights to explore in a specific area, as well as the
determination of the technical feasibility and commercial
viability of extracting the mineral resource.
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Appendix B
Amendments to other IFRSs
The amendments in this appendix shall be applied for annual periods beginning on or after
1 January 2006. If an entity applies this IFRS for an earlier period, these amendments shall be
applied for that earlier period.
*****
The amendments contained in this appendix when this IFRS was issued in 2004 have been incorporated
into the relevant IFRSs published in this volume.
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IFRS 7
Financial Instruments: Disclosures
In April 2001 the International Accounting Standards Board (the Board) adopted IAS 30
Disclosures in the Financial Statements of Banks and Similar Financial Institutions, which had
originally been issued by the International Accounting Standards Committee in August
1990.
In August 2005 the Board issued IFRS 7 Financial Instruments, which replaced IAS 30 and
carried forward the disclosure requirements in IAS 32 Financial Instruments: Disclosure and
Presentation. IAS 32 was subsequently renamed as IAS 32 Financial Instruments: Presentation.
IAS 1 Presentation of Financial Statements (as revised in 2007) amended the terminology used
throughout IFRS, including IFRS 7. In March 2009 the IASB enhanced the disclosures about
fair value and liquidity risks in IFRS 7.
The Board also amended IFRS 7 to reflect that a new financial instruments Standard was
issued—IFRS 9 Financial Instruments, which related to the classification of financial assets and
financial liabilities.
IFRS 7 was also amended in October 2010 to require entities to supplement disclosures for
all transferred financial assets that are not derecognised where there has been some
continuing involvement in a transferred asset. The Board amended IFRS 7 in December
2011 to improve disclosures in netting arrangements associated with financial assets and
financial liabilities.
Other Standards have made minor amendments to IFRS 7. They include Limited Exemption
from Comparative IFRS 7 Disclosures for First-time Adopters (Amendments to IFRS 1) (issued
January 2010), Improvements to IFRSs (issued May 2010), IFRS 10 Consolidated Financial Statements
(issued May 2011), IFRS 11 Joint Arrangements (issued May 2011), IFRS 13 Fair Value Measurement
(issued May 2011), Presentation of Items of Other Comprehensive Income (Amendments to IAS 1)
(issued June 2011), Mandatory Effective Date and Transition Disclosures (Amendments to IFRS 9
(2009), IFRS 9 (2010) and IFRS 7) (issued December 2011), Investment Entities (Amendments to
IFRS 10, IFRS 12 and IAS 27) (issued October 2012), IFRS 9 Financial Instruments (Hedge
Accounting and amendments to IFRS 9, IFRS 7 and IAS 39) (issued November 2013), Annual
Improvements to IFRSs 2012–2014 Cycle (issued September 2014), Disclosure Initiative
(Amendments to IAS 1) (issued December 2014), IFRS 16 Leases (issued January 2016) and
Annual Improvements to IFRS Standards 2014–2016 Cycle (issued December 2016).
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CONTENTS
from paragraph
INTERNATIONAL FINANCIAL REPORTING STANDARD 7
FINANCIAL INSTRUMENTS: DISCLOSURES
OBJECTIVE
1
SCOPE
3
CLASSES OF FINANCIAL INSTRUMENTS AND LEVEL OF DISCLOSURE
6
SIGNIFICANCE OF FINANCIAL INSTRUMENTS FOR FINANCIAL POSITION
AND PERFORMANCE
7
Statement of financial position
8
Statement of comprehensive income
20
Other disclosures
21
NATURE AND EXTENT OF RISKS ARISING FROM FINANCIAL INSTRUMENTS
31
Qualitative disclosures
33
Quantitative disclosures
34
TRANSFERS OF FINANCIAL ASSETS
42A
Transferred financial assets that are not derecognised in their entirety
42D
Transferred financial assets that are derecognised in their entirety
42E
Supplementary information
42H
INITIAL APPLICATION OF IFRS 9
42I
EFFECTIVE DATE AND TRANSITION
43
WITHDRAWAL OF IAS 30
45
APPENDICES
A Defined terms
B Application guidance
C Amendments to other IFRSs
FOR THE ACCOMPANYING DOCUMENTS LISTED BELOW, SEE PART B OF THIS
EDITION
APPROVAL BY THE BOARD OF IFRS 7 ISSUED IN AUGUST 2005
APPROVAL BY THE BOARD OF AMENDMENTS TO IFRS 7:
Improving Disclosures about Financial Instruments issued in March 2009
Disclosures—Transfers of Financial Assets issued in October 2010
Mandatory Effective Date of IFRS 9 and Transition Disclosures (Amendments
to IFRS 9 (2009), IFRS 9 (2010) and IFRS 7) issued in December 2011
Disclosures—Offsetting Financial Assets and Financial Liabilities
(Amendments to IFRS 7) issued in December 2011
IFRS 9 Financial Instruments (Hedge Accounting and amendments to IFRS 9,
IFRS 7 and IAS 39) issued in November 2013
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BASIS FOR CONCLUSIONS
APPENDIX
Amendments to Basis for Conclusions on other IFRSs
IMPLEMENTATION GUIDANCE
APPENDIX
Amendments to guidance on other IFRSs
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International Financial Reporting Standard 7 Financial Instruments: Disclosures (IFRS 7) is set
out in paragraphs 1–45 and Appendices A–C. All the paragraphs have equal authority.
Paragraphs in bold type state the main principles. Terms defined in Appendix A are in
italics the first time they appear in the Standard. Definitions of other terms are given in
the Glossary for International Financial Reporting Standards. IFRS 7 should be read in
the context of its objective and the Basis for Conclusions, the Preface to International
Financial Reporting Standards and the Conceptual Framework for Financial Reporting. IAS 8
Accounting Policies, Changes in Accounting Estimates and Errors provides a basis for selecting
and applying accounting policies in the absence of explicit guidance.
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International Financial Reporting Standard 7
Financial Instruments: Disclosures
Objective
1
2
The objective of this IFRS is to require entities to provide disclosures in their
financial statements that enable users to evaluate:
(a)
the significance of financial instruments for the entity’s financial
position and performance; and
(b)
the nature and extent of risks arising from financial instruments to
which the entity is exposed during the period and at the end of the
reporting period, and how the entity manages those risks.
The principles in this IFRS complement the principles for recognising,
measuring and presenting financial assets and financial liabilities in IAS 32
Financial Instruments: Presentation and IFRS 9 Financial Instruments.
Scope
3
This IFRS shall be applied by all entities to all types of financial instruments,
except:
(a)
those interests in subsidiaries, associates or joint ventures that are
accounted for in accordance with IFRS 10 Consolidated Financial Statements,
IAS 27 Separate Financial Statements or IAS 28 Investments in Associates and
Joint Ventures. However, in some cases, IFRS 10, IAS 27 or IAS 28 require or
permit an entity to account for an interest in a subsidiary, associate or
joint venture using IFRS 9; in those cases, entities shall apply the
requirements of this IFRS and, for those measured at fair value, the
requirements of IFRS 13 Fair Value Measurement. Entities shall also apply
this IFRS to all derivatives linked to interests in subsidiaries, associates or
joint ventures unless the derivative meets the definition of an equity
instrument in IAS 32.
(b)
employers’ rights and obligations arising from employee benefit plans,
to which IAS 19 Employee Benefits applies.
(c)
[deleted]
(d)
insurance contracts as defined in IFRS 4 Insurance Contracts. However, this
IFRS applies to derivatives that are embedded in insurance contracts if
IFRS 9 requires the entity to account for them separately. Moreover, an
issuer shall apply this IFRS to financial guarantee contracts if the issuer
applies IFRS 9 in recognising and measuring the contracts, but shall
apply IFRS 4 if the issuer elects, in accordance with paragraph 4(d) of
IFRS 4, to apply IFRS 4 in recognising and measuring them.
(e)
financial instruments, contracts and obligations under share-based
payment transactions to which IFRS 2 Share-based Payment applies, except
that this IFRS applies to contracts within the scope of IFRS 9.
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(f)
instruments that are required to be classified as equity instruments in
accordance with paragraphs 16A and 16B or paragraphs 16C and 16D of
IAS 32.
4
This IFRS applies to recognised and unrecognised financial instruments.
Recognised financial instruments include financial assets and financial
liabilities that are within the scope of IFRS 9. Unrecognised financial
instruments include some financial instruments that, although outside the
scope of IFRS 9, are within the scope of this IFRS.
5
This IFRS applies to contracts to buy or sell a non-financial item that are within
the scope of IFRS 9.
5A
The credit risk disclosure requirements in paragraphs 35A–35N apply to those
rights that IFRS 15 Revenue from Contracts with Customers specifies are accounted for
in accordance with IFRS 9 for the purposes of recognising impairment gains or
losses. Any reference to financial assets or financial instruments in these
paragraphs shall include those rights unless otherwise specified.
Classes of financial instruments and level of disclosure
6
When this IFRS requires disclosures by class of financial instrument, an entity
shall group financial instruments into classes that are appropriate to the nature
of the information disclosed and that take into account the characteristics of
those financial instruments. An entity shall provide sufficient information to
permit reconciliation to the line items presented in the statement of financial
position.
Significance of financial instruments for financial position and
performance
7
An entity shall disclose information that enables users of its financial
statements to evaluate the significance of financial instruments for its
financial position and performance.
Statement of financial position
Categories of financial assets and financial liabilities
8
The carrying amounts of each of the following categories, as specified in IFRS 9,
shall be disclosed either in the statement of financial position or in the notes:
(a)
financial assets measured at fair value through profit or loss, showing
separately (i) those designated as such upon initial recognition or
subsequently in accordance with paragraph 6.7.1 of IFRS 9 and (ii) those
mandatorily measured at fair value through profit or loss in accordance
with IFRS 9.
(b)–(d) [deleted]
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(e)
financial liabilities at fair value through profit or loss, showing
separately (i) those designated as such upon initial recognition or
subsequently in accordance with paragraph 6.7.1 of IFRS 9 and (ii) those
that meet the definition of held for trading in IFRS 9.
(f)
financial assets measured at amortised cost.
(g)
financial liabilities measured at amortised cost.
(h)
financial assets measured at fair value through other comprehensive
income, showing separately (i) financial assets that are measured at fair
value through other comprehensive income in accordance with
paragraph 4.1.2A of IFRS 9; and (ii) investments in equity instruments
designated as such upon initial recognition in accordance with
paragraph 5.7.5 of IFRS 9.
Financial assets or financial liabilities at fair value through profit
or loss
9
If the entity has designated as measured at fair value through profit or loss a
financial asset (or group of financial assets) that would otherwise be measured at
fair value through other comprehensive income or amortised cost, it shall
disclose:
(a)
the maximum exposure to credit risk (see paragraph 36(a)) of the financial
asset (or group of financial assets) at the end of the reporting period.
(b)
the amount by which any related credit derivatives or similar
instruments mitigate that maximum exposure to credit risk (see
paragraph 36(b)).
(c)
the amount of change, during the period and cumulatively, in the fair
value of the financial asset (or group of financial assets) that is
attributable to changes in the credit risk of the financial asset
determined either:
(i)
as the amount of change in its fair value that is not attributable
to changes in market conditions that give rise to market risk; or
(ii)
using an alternative method the entity believes more faithfully
represents the amount of change in its fair value that is
attributable to changes in the credit risk of the asset.
Changes in market conditions that give rise to market risk include
changes in an observed (benchmark) interest rate, commodity price,
foreign exchange rate or index of prices or rates.
(d)
10
the amount of the change in the fair value of any related credit
derivatives or similar instruments that has occurred during the period
and cumulatively since the financial asset was designated.
If the entity has designated a financial liability as at fair value through profit or
loss in accordance with paragraph 4.2.2 of IFRS 9 and is required to present the
effects of changes in that liability’s credit risk in other comprehensive income
(see paragraph 5.7.7 of IFRS 9), it shall disclose:
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10A
11
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(a)
the amount of change, cumulatively, in the fair value of the financial
liability that is attributable to changes in the credit risk of that liability
(see paragraphs B5.7.13–B5.7.20 of IFRS 9 for guidance on determining
the effects of changes in a liability’s credit risk).
(b)
the difference between the financial liability’s carrying amount and the
amount the entity would be contractually required to pay at maturity to
the holder of the obligation.
(c)
any transfers of the cumulative gain or loss within equity during the
period including the reason for such transfers.
(d)
if a liability is derecognised during the period, the amount (if any)
presented in other comprehensive income that was realised at
derecognition.
If an entity has designated a financial liability as at fair value through profit or
loss in accordance with paragraph 4.2.2 of IFRS 9 and is required to present all
changes in the fair value of that liability (including the effects of changes in the
credit risk of the liability) in profit or loss (see paragraphs 5.7.7 and 5.7.8 of
IFRS 9), it shall disclose:
(a)
the amount of change, during the period and cumulatively, in the fair
value of the financial liability that is attributable to changes in the credit
risk of that liability (see paragraphs B5.7.13–B5.7.20 of IFRS 9 for
guidance on determining the effects of changes in a liability’s credit
risk); and
(b)
the difference between the financial liability’s carrying amount and the
amount the entity would be contractually required to pay at maturity to
the holder of the obligation.
The entity shall also disclose:
(a)
a detailed description of the methods used to comply with the
requirements in paragraphs 9(c), 10(a) and 10A(a) and paragraph 5.7.7(a)
of IFRS 9, including an explanation of why the method is appropriate.
(b)
if the entity believes that the disclosure it has given, either in the
statement of financial position or in the notes, to comply with the
requirements in paragraph 9(c), 10(a) or 10A(a) or paragraph 5.7.7(a) of
IFRS 9 does not faithfully represent the change in the fair value of the
financial asset or financial liability attributable to changes in its credit
risk, the reasons for reaching this conclusion and the factors it believes
are relevant.
(c)
a detailed description of the methodology or methodologies used to
determine whether presenting the effects of changes in a liability’s credit
risk in other comprehensive income would create or enlarge an
accounting mismatch in profit or loss (see paragraphs 5.7.7 and 5.7.8 of
IFRS 9). If an entity is required to present the effects of changes in a
liability’s credit risk in profit or loss (see paragraph 5.7.8 of IFRS 9), the
disclosure must include a detailed description of the economic
relationship described in paragraph B5.7.6 of IFRS 9.
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Investments in equity instruments designated at fair value
through other comprehensive income
11A
11B
If an entity has designated investments in equity instruments to be measured at
fair value through other comprehensive income, as permitted by
paragraph 5.7.5 of IFRS 9, it shall disclose:
(a)
which investments in equity instruments have been designated to be
measured at fair value through other comprehensive income.
(b)
the reasons for using this presentation alternative.
(c)
the fair value of each such investment at the end of the reporting period.
(d)
dividends recognised during the period, showing separately those
related to investments derecognised during the reporting period and
those related to investments held at the end of the reporting period.
(e)
any transfers of the cumulative gain or loss within equity during the
period including the reason for such transfers.
If an entity derecognised investments in equity instruments measured at fair
value through other comprehensive income during the reporting period, it shall
disclose:
(a)
the reasons for disposing of the investments.
(b)
the fair value of the investments at the date of derecognition.
(c)
the cumulative gain or loss on disposal.
Reclassification
12–
12A
12B
12C
12D
[Deleted]
An entity shall disclose if, in the current or previous reporting periods, it has
reclassified any financial assets in accordance with paragraph 4.4.1 of IFRS 9.
For each such event, an entity shall disclose:
(a)
the date of reclassification.
(b)
a detailed explanation of the change in business model and a qualitative
description of its effect on the entity’s financial statements.
(c)
the amount reclassified into and out of each category.
For each reporting period following reclassification until derecognition, an
entity shall disclose for assets reclassified out of the fair value through profit or
loss category so that they are measured at amortised cost or fair value through
other comprehensive income in accordance with paragraph 4.4.1 of IFRS 9:
(a)
the effective interest rate determined on the date of reclassification; and
(b)
the interest revenue recognised.
If, since its last annual reporting date, an entity has reclassified financial assets
out of the fair value through other comprehensive income category so that they
are measured at amortised cost or out of the fair value through profit or loss
category so that they are measured at amortised cost or fair value through other
comprehensive income it shall disclose:
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13
(a)
the fair value of the financial assets at the end of the reporting period;
and
(b)
the fair value gain or loss that would have been recognised in profit or
loss or other comprehensive income during the reporting period if the
financial assets had not been reclassified.
[Deleted]
Offsetting financial assets and financial liabilities
13A
The disclosures in paragraphs 13B–13E supplement the other disclosure
requirements of this IFRS and are required for all recognised financial
instruments that are set off in accordance with paragraph 42 of IAS 32. These
disclosures also apply to recognised financial instruments that are subject to an
enforceable master netting arrangement or similar agreement, irrespective of
whether they are set off in accordance with paragraph 42 of IAS 32.
13B
An entity shall disclose information to enable users of its financial statements to
evaluate the effect or potential effect of netting arrangements on the entity’s
financial position. This includes the effect or potential effect of rights of set-off
associated with the entity’s recognised financial assets and recognised financial
liabilities that are within the scope of paragraph 13A.
13C
To meet the objective in paragraph 13B, an entity shall disclose, at the end of the
reporting period, the following quantitative information separately for
recognised financial assets and recognised financial liabilities that are within
the scope of paragraph 13A:
(a)
the gross amounts of those recognised financial assets and recognised
financial liabilities;
(b)
the amounts that are set off in accordance with the criteria in
paragraph 42 of IAS 32 when determining the net amounts presented in
the statement of financial position;
(c)
the net amounts presented in the statement of financial position;
(d)
the amounts subject to an enforceable master netting arrangement or
similar agreement that are not otherwise included in paragraph 13C(b),
including:
(e)
(i)
amounts related to recognised financial instruments that do not
meet some or all of the offsetting criteria in paragraph 42 of
IAS 32; and
(ii)
amounts related to financial collateral (including cash collateral);
and
the net amount after deducting the amounts in (d) from the amounts in
(c) above.
The information required by this paragraph shall be presented in a tabular
format, separately for financial assets and financial liabilities, unless another
format is more appropriate.
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13D
The total amount disclosed in accordance with paragraph 13C(d) for an
instrument shall be limited to the amount in paragraph 13C(c) for that
instrument.
13E
An entity shall include a description in the disclosures of the rights of set-off
associated with the entity’s recognised financial assets and recognised financial
liabilities subject to enforceable master netting arrangements and similar
agreements that are disclosed in accordance with paragraph 13C(d), including
the nature of those rights.
13F
If the information required by paragraphs 13B–13E is disclosed in more than
one note to the financial statements, an entity shall cross-refer between those
notes.
Collateral
14
15
An entity shall disclose:
(a)
the carrying amount of financial assets it has pledged as collateral for
liabilities or contingent liabilities, including amounts that have been
reclassified in accordance with paragraph 3.2.23(a) of IFRS 9; and
(b)
the terms and conditions relating to its pledge.
When an entity holds collateral (of financial or non-financial assets) and is
permitted to sell or repledge the collateral in the absence of default by the
owner of the collateral, it shall disclose:
(a)
the fair value of the collateral held;
(b)
the fair value of any such collateral sold or repledged, and whether the
entity has an obligation to return it; and
(c)
the terms and conditions associated with its use of the collateral.
Allowance account for credit losses
16
[Deleted]
16A
The carrying amount of financial assets measured at fair value through other
comprehensive income in accordance with paragraph 4.1.2A of IFRS 9 is not
reduced by a loss allowance and an entity shall not present the loss allowance
separately in the statement of financial position as a reduction of the carrying
amount of the financial asset. However, an entity shall disclose the loss
allowance in the notes to the financial statements.
Compound financial instruments with multiple embedded
derivatives
17
If an entity has issued an instrument that contains both a liability and an equity
component (see paragraph 28 of IAS 32) and the instrument has multiple
embedded derivatives whose values are interdependent (such as a callable
convertible debt instrument), it shall disclose the existence of those features.
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Defaults and breaches
18
19
For loans payable recognised at the end of the reporting period, an entity shall
disclose:
(a)
details of any defaults during the period of principal, interest, sinking
fund, or redemption terms of those loans payable;
(b)
the carrying amount of the loans payable in default at the end of the
reporting period; and
(c)
whether the default was remedied, or the terms of the loans payable
were renegotiated, before the financial statements were authorised for
issue.
If, during the period, there were breaches of loan agreement terms other than
those described in paragraph 18, an entity shall disclose the same information
as required by paragraph 18 if those breaches permitted the lender to demand
accelerated repayment (unless the breaches were remedied, or the terms of the
loan were renegotiated, on or before the end of the reporting period).
Statement of comprehensive income
Items of income, expense, gains or losses
20
An entity shall disclose the following items of income, expense, gains or losses
either in the statement of comprehensive income or in the notes:
(a)
net gains or net losses on:
(i)
financial assets or financial liabilities measured at fair value
through profit or loss, showing separately those on financial
assets or financial liabilities designated as such upon initial
recognition or subsequently in accordance with paragraph 6.7.1
of IFRS 9, and those on financial assets or financial liabilities that
are mandatorily measured at fair value through profit or loss in
accordance with IFRS 9 (eg financial liabilities that meet the
definition of held for trading in IFRS 9). For financial liabilities
designated as at fair value through profit or loss, an entity shall
show separately the amount of gain or loss recognised in other
comprehensive income and the amount recognised in profit or
loss.
(ii)–(iv) [deleted]
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(v)
financial liabilities measured at amortised cost.
(vi)
financial assets measured at amortised cost.
(vii)
investments in equity instruments designated at fair value
through other comprehensive income in accordance with
paragraph 5.7.5 of IFRS 9.
(viii)
financial assets measured at fair value through other
comprehensive income in accordance with paragraph 4.1.2A of
IFRS 9, showing separately the amount of gain or loss recognised
in other comprehensive income during the period and the
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amount reclassified upon derecognition from accumulated other
comprehensive income to profit or loss for the period.
20A
(b)
total interest revenue and total interest expense (calculated using the
effective interest method) for financial assets that are measured at
amortised cost or that are measured at fair value through other
comprehensive income in accordance with paragraph 4.1.2A of IFRS 9
(showing these amounts separately); or financial liabilities that are not
measured at fair value through profit or loss.
(c)
fee income and expense (other than amounts included in determining
the effective interest rate) arising from:
(i)
financial assets and financial liabilities that are not at fair value
through profit or loss; and
(ii)
trust and other fiduciary activities that result in the holding or
investing of assets on behalf of individuals, trusts, retirement
benefit plans, and other institutions.
(d)
[deleted]
(e)
[deleted]
An entity shall disclose an analysis of the gain or loss recognised in the
statement of comprehensive income arising from the derecognition of financial
assets measured at amortised cost, showing separately gains and losses arising
from derecognition of those financial assets. This disclosure shall include the
reasons for derecognising those financial assets.
Other disclosures
Accounting policies
21
In accordance with paragraph 117 of IAS 1 Presentation of Financial Statements (as
revised in 2007), an entity discloses its significant accounting policies
comprising the measurement basis (or bases) used in preparing the financial
statements and the other accounting policies used that are relevant to an
understanding of the financial statements.
Hedge accounting
21A
An entity shall apply the disclosure requirements in paragraphs 21B–24F for
those risk exposures that an entity hedges and for which it elects to apply hedge
accounting. Hedge accounting disclosures shall provide information about:
(a)
an entity’s risk management strategy and how it is applied to manage
risk;
(b)
how the entity’s hedging activities may affect the amount, timing and
uncertainty of its future cash flows; and
(c)
the effect that hedge accounting has had on the entity’s statement of
financial position, statement of comprehensive income and statement of
changes in equity.
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21B
An entity shall present the required disclosures in a single note or separate
section in its financial statements. However, an entity need not duplicate
information that is already presented elsewhere, provided that the information
is incorporated by cross-reference from the financial statements to some other
statement, such as a management commentary or risk report, that is available to
users of the financial statements on the same terms as the financial statements
and at the same time. Without the information incorporated by cross-reference,
the financial statements are incomplete.
21C
When paragraphs 22A–24F require the entity to separate by risk category the
information disclosed, the entity shall determine each risk category on the basis
of the risk exposures an entity decides to hedge and for which hedge accounting
is applied. An entity shall determine risk categories consistently for all hedge
accounting disclosures.
21D
To meet the objectives in paragraph 21A, an entity shall (except as otherwise
specified below) determine how much detail to disclose, how much emphasis to
place on different aspects of the disclosure requirements, the appropriate level
of aggregation or disaggregation, and whether users of financial statements
need additional explanations to evaluate the quantitative information disclosed.
However, an entity shall use the same level of aggregation or disaggregation it
uses for disclosure requirements of related information in this IFRS and IFRS 13
Fair Value Measurement.
The risk management strategy
22
[Deleted]
22A
An entity shall explain its risk management strategy for each risk category of
risk exposures that it decides to hedge and for which hedge accounting is
applied. This explanation should enable users of financial statements to
evaluate (for example):
22B
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(a)
how each risk arises.
(b)
how the entity manages each risk; this includes whether the entity
hedges an item in its entirety for all risks or hedges a risk component (or
components) of an item and why.
(c)
the extent of risk exposures that the entity manages.
To meet the requirements in paragraph 22A, the information should include
(but is not limited to) a description of:
(a)
the hedging instruments that are used (and how they are used) to hedge
risk exposures;
(b)
how the entity determines the economic relationship between the
hedged item and the hedging instrument for the purpose of assessing
hedge effectiveness; and
(c)
how the entity establishes the hedge ratio and what the sources of hedge
ineffectiveness are.
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22C
When an entity designates a specific risk component as a hedged item (see
paragraph 6.3.7 of IFRS 9) it shall provide, in addition to the disclosures required
by paragraphs 22A and 22B, qualitative or quantitative information about:
(a)
how the entity determined the risk component that is designated as the
hedged item (including a description of the nature of the relationship
between the risk component and the item as a whole); and
(b)
how the risk component relates to the item in its entirety (for example,
the designated risk component historically covered on average
80 per cent of the changes in fair value of the item as a whole).
The amount, timing and uncertainty of future cash flows
23
[Deleted]
23A
Unless exempted by paragraph 23C, an entity shall disclose by risk category
quantitative information to allow users of its financial statements to evaluate
the terms and conditions of hedging instruments and how they affect the
amount, timing and uncertainty of future cash flows of the entity.
23B
To meet the requirement in paragraph 23A, an entity shall provide a breakdown
that discloses:
23C
23D
(a)
a profile of the timing of the nominal amount of the hedging
instrument; and
(b)
if applicable, the average price or rate (for example strike or forward
prices etc) of the hedging instrument.
In situations in which an entity frequently resets (ie discontinues and restarts)
hedging relationships because both the hedging instrument and the hedged
item frequently change (ie the entity uses a dynamic process in which both the
exposure and the hedging instruments used to manage that exposure do not
remain the same for long—such as in the example in paragraph B6.5.24(b) of
IFRS 9) the entity:
(a)
is exempt from providing the disclosures required by paragraphs 23A
and 23B.
(b)
shall disclose:
(i)
information about what the ultimate risk management strategy
is in relation to those hedging relationships;
(ii)
a description of how it reflects its risk management strategy by
using hedge accounting and designating those particular
hedging relationships; and
(iii)
an indication of how frequently the hedging relationships are
discontinued and restarted as part of the entity’s process in
relation to those hedging relationships.
An entity shall disclose by risk category a description of the sources of hedge
ineffectiveness that are expected to affect the hedging relationship during its
term.
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23E
If other sources of hedge ineffectiveness emerge in a hedging relationship, an
entity shall disclose those sources by risk category and explain the resulting
hedge ineffectiveness.
23F
For cash flow hedges, an entity shall disclose a description of any forecast
transaction for which hedge accounting had been used in the previous period,
but which is no longer expected to occur.
The effects of hedge accounting on financial position and performance
24
[Deleted]
24A
An entity shall disclose, in a tabular format, the following amounts related to
items designated as hedging instruments separately by risk category for each
type of hedge (fair value hedge, cash flow hedge or hedge of a net investment in
a foreign operation):
24B
(a)
the carrying amount of the hedging instruments (financial assets
separately from financial liabilities);
(b)
the line item in the statement of financial position that includes the
hedging instrument;
(c)
the change in fair value of the hedging instrument used as the basis for
recognising hedge ineffectiveness for the period; and
(d)
the nominal amounts (including quantities such as tonnes or cubic
metres) of the hedging instruments.
An entity shall disclose, in a tabular format, the following amounts related to
hedged items separately by risk category for the types of hedges as follows:
(a)
(b)
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for fair value hedges:
(i)
the carrying amount of the hedged item recognised in the
statement of financial position (presenting assets separately from
liabilities);
(ii)
the accumulated amount of fair value hedge adjustments on the
hedged item included in the carrying amount of the hedged item
recognised in the statement of financial position (presenting
assets separately from liabilities);
(iii)
the line item in the statement of financial position that includes
the hedged item;
(iv)
the change in value of the hedged item used as the basis for
recognising hedge ineffectiveness for the period; and
(v)
the accumulated amount of fair value hedge adjustments
remaining in the statement of financial position for any hedged
items that have ceased to be adjusted for hedging gains and
losses in accordance with paragraph 6.5.10 of IFRS 9.
for cash flow hedges and hedges of a net investment in a foreign
operation:
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24C
(i)
the change in value of the hedged item used as the basis for
recognising hedge ineffectiveness for the period (ie for cash flow
hedges the change in value used to determine the recognised
hedge ineffectiveness in accordance with paragraph 6.5.11(c) of
IFRS 9);
(ii)
the balances in the cash flow hedge reserve and the foreign
currency translation reserve for continuing hedges that are
accounted for in accordance with paragraphs 6.5.11 and 6.5.13(a)
of IFRS 9; and
(iii)
the balances remaining in the cash flow hedge reserve and the
foreign currency translation reserve from any hedging
relationships for which hedge accounting is no longer applied.
An entity shall disclose, in a tabular format, the following amounts separately by
risk category for the types of hedges as follows:
(a)
(b)
for fair value hedges:
(i)
hedge ineffectiveness—ie the difference between the hedging
gains or losses of the hedging instrument and the hedged
item—recognised in profit or loss (or other comprehensive
income for hedges of an equity instrument for which an entity
has elected to present changes in fair value in other
comprehensive income in accordance with paragraph 5.7.5 of
IFRS 9); and
(ii)
the line item in the statement of comprehensive income that
includes the recognised hedge ineffectiveness.
for cash flow hedges and hedges of a net investment in a foreign
operation:
(i)
hedging gains or losses of the reporting period that were
recognised in other comprehensive income;
(ii)
hedge ineffectiveness recognised in profit or loss;
(iii)
the line item in the statement of comprehensive income that
includes the recognised hedge ineffectiveness;
(iv)
the amount reclassified from the cash flow hedge reserve or the
foreign currency translation reserve into profit or loss as a
reclassification adjustment (see IAS 1) (differentiating between
amounts for which hedge accounting had previously been used,
but for which the hedged future cash flows are no longer
expected to occur, and amounts that have been transferred
because the hedged item has affected profit or loss);
(v)
the line item in the statement of comprehensive income that
includes the reclassification adjustment (see IAS 1); and
(vi)
for hedges of net positions, the hedging gains or losses
recognised in a separate line item in the statement of
comprehensive income (see paragraph 6.6.4 of IFRS 9).
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24D
When the volume of hedging relationships to which the exemption in
paragraph 23C applies is unrepresentative of normal volumes during the period
(ie the volume at the reporting date does not reflect the volumes during the
period) an entity shall disclose that fact and the reason it believes the volumes
are unrepresentative.
24E
An entity shall provide a reconciliation of each component of equity and an
analysis of other comprehensive income in accordance with IAS 1 that, taken
together:
24F
(a)
differentiates, at a minimum, between the amounts that relate to the
disclosures in paragraph 24C(b)(i) and (b)(iv) as well as the amounts
accounted for in accordance with paragraph 6.5.11(d)(i) and (d)(iii) of
IFRS 9;
(b)
differentiates between the amounts associated with the time value of
options that hedge transaction related hedged items and the amounts
associated with the time value of options that hedge time-period related
hedged items when an entity accounts for the time value of an option in
accordance with paragraph 6.5.15 of IFRS 9; and
(c)
differentiates between the amounts associated with forward elements of
forward contracts and the foreign currency basis spreads of financial
instruments that hedge transaction related hedged items, and the
amounts associated with forward elements of forward contracts and the
foreign currency basis spreads of financial instruments that hedge
time-period related hedged items when an entity accounts for those
amounts in accordance with paragraph 6.5.16 of IFRS 9.
An entity shall disclose the information required in paragraph 24E separately by
risk category. This disaggregation by risk may be provided in the notes to the
financial statements.
Option to designate a credit exposure as measured at fair value
through profit or loss
24G
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If an entity designated a financial instrument, or a proportion of it, as measured
at fair value through profit or loss because it uses a credit derivative to manage
the credit risk of that financial instrument it shall disclose:
(a)
for credit derivatives that have been used to manage the credit risk of
financial instruments designated as measured at fair value through
profit or loss in accordance with paragraph 6.7.1 of IFRS 9, a
reconciliation of each of the nominal amount and the fair value at the
beginning and at the end of the period;
(b)
the gain or loss recognised in profit or loss on designation of a financial
instrument, or a proportion of it, as measured at fair value through
profit or loss in accordance with paragraph 6.7.1 of IFRS 9; and
(c)
on discontinuation of measuring a financial instrument, or a proportion
of it, at fair value through profit or loss, that financial instrument’s fair
value that has become the new carrying amount in accordance with
paragraph 6.7.4 of IFRS 9 and the related nominal or principal amount
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(except for providing comparative information in accordance with IAS 1,
an entity does not need to continue this disclosure in subsequent
periods).
Fair value
25
Except as set out in paragraph 29, for each class of financial assets and financial
liabilities (see paragraph 6), an entity shall disclose the fair value of that class of
assets and liabilities in a way that permits it to be compared with its carrying
amount.
26
In disclosing fair values, an entity shall group financial assets and financial
liabilities into classes, but shall offset them only to the extent that their carrying
amounts are offset in the statement of financial position.
27–
27B
28
[Deleted]
29
30
In some cases, an entity does not recognise a gain or loss on initial recognition of
a financial asset or financial liability because the fair value is neither evidenced
by a quoted price in an active market for an identical asset or liability (ie a
Level 1 input) nor based on a valuation technique that uses only data from
observable markets (see paragraph B5.1.2A of IFRS 9). In such cases, the entity
shall disclose by class of financial asset or financial liability:
(a)
its accounting policy for recognising in profit or loss the difference
between the fair value at initial recognition and the transaction price to
reflect a change in factors (including time) that market participants
would take into account when pricing the asset or liability (see
paragraph B5.1.2A(b) of IFRS 9).
(b)
the aggregate difference yet to be recognised in profit or loss at the
beginning and end of the period and a reconciliation of changes in the
balance of this difference.
(c)
why the entity concluded that the transaction price was not the best
evidence of fair value, including a description of the evidence that
supports the fair value.
Disclosures of fair value are not required:
(a)
when the carrying amount is a reasonable approximation of fair value,
for example, for financial instruments such as short-term trade
receivables and payables;
(b)
[deleted]
(c)
for a contract containing a discretionary participation feature (as
described in IFRS 4) if the fair value of that feature cannot be measured
reliably; or
(d)
for lease liabilities.
In the case described in paragraph 29(c), an entity shall disclose information to
help users of the financial statements make their own judgements about the
extent of possible differences between the carrying amount of those contracts
and their fair value, including:
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(a)
the fact that fair value information has not been disclosed for these
instruments because their fair value cannot be measured reliably;
(b)
a description of the financial instruments, their carrying amount, and an
explanation of why fair value cannot be measured reliably;
(c)
information about the market for the instruments;
(d)
information about whether and how the entity intends to dispose of the
financial instruments; and
(e)
if financial instruments whose fair value previously could not be reliably
measured are derecognised, that fact, their carrying amount at the time
of derecognition, and the amount of gain or loss recognised.
Nature and extent of risks arising from financial instruments
31
An entity shall disclose information that enables users of its financial
statements to evaluate the nature and extent of risks arising from
financial instruments to which the entity is exposed at the end of the
reporting period.
32
The disclosures required by paragraphs 33–42 focus on the risks that arise from
financial instruments and how they have been managed. These risks typically
include, but are not limited to, credit risk, liquidity risk and market risk.
32A
Providing qualitative disclosures in the context of quantitative disclosures
enables users to link related disclosures and hence form an overall picture of the
nature and extent of risks arising from financial instruments. The interaction
between qualitative and quantitative disclosures contributes to disclosure of
information in a way that better enables users to evaluate an entity’s exposure to
risks.
Qualitative disclosures
33
For each type of risk arising from financial instruments, an entity shall disclose:
(a)
the exposures to risk and how they arise;
(b)
its objectives, policies and processes for managing the risk and the
methods used to measure the risk; and
(c)
any changes in (a) or (b) from the previous period.
Quantitative disclosures
34
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For each type of risk arising from financial instruments, an entity shall disclose:
(a)
summary quantitative data about its exposure to that risk at the end of
the reporting period. This disclosure shall be based on the information
provided internally to key management personnel of the entity (as
defined in IAS 24 Related Party Disclosures), for example the entity’s board
of directors or chief executive officer.
(b)
the disclosures required by paragraphs 35A–42, to the extent not
provided in accordance with (a).
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(c)
35
concentrations of risk if not apparent from the disclosures made in
accordance with (a) and (b).
If the quantitative data disclosed as at the end of the reporting period are
unrepresentative of an entity’s exposure to risk during the period, an entity
shall provide further information that is representative.
Credit risk
Scope and objectives
35A
35B
An entity shall apply the disclosure requirements in paragraphs 35F–35N to
financial instruments to which the impairment requirements in IFRS 9 are
applied. However:
(a)
for trade receivables, contract assets and lease receivables,
paragraph 35J(a) applies to those trade receivables, contract assets or
lease receivables on which lifetime expected credit losses are recognised
in accordance with paragraph 5.5.15 of IFRS 9, if those financial assets
are modified while more than 30 days past due; and
(b)
paragraph 35K(b) does not apply to lease receivables.
The credit risk disclosures made in accordance with paragraphs 35F–35N shall
enable users of financial statements to understand the effect of credit risk on the
amount, timing and uncertainty of future cash flows. To achieve this objective,
credit risk disclosures shall provide:
(a)
information about an entity’s credit risk management practices and how
they relate to the recognition and measurement of expected credit losses,
including the methods, assumptions and information used to measure
expected credit losses;
(b)
quantitative and qualitative information that allows users of financial
statements to evaluate the amounts in the financial statements arising
from expected credit losses, including changes in the amount of
expected credit losses and the reasons for those changes; and
(c)
information about an entity’s credit risk exposure (ie the credit risk
inherent in an entity’s financial assets and commitments to extend
credit) including significant credit risk concentrations.
35C
An entity need not duplicate information that is already presented elsewhere,
provided that the information is incorporated by cross-reference from the
financial statements to other statements, such as a management commentary or
risk report that is available to users of the financial statements on the same
terms as the financial statements and at the same time. Without the
information incorporated by cross-reference, the financial statements are
incomplete.
35D
To meet the objectives in paragraph 35B, an entity shall (except as otherwise
specified) consider how much detail to disclose, how much emphasis to place on
different aspects of the disclosure requirements, the appropriate level of
aggregation or disaggregation, and whether users of financial statements need
additional explanations to evaluate the quantitative information disclosed.
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35E
If the disclosures provided in accordance with paragraphs 35F–35N are
insufficient to meet the objectives in paragraph 35B, an entity shall disclose
additional information that is necessary to meet those objectives.
The credit risk management practices
35F
An entity shall explain its credit risk management practices and how they relate
to the recognition and measurement of expected credit losses. To meet this
objective an entity shall disclose information that enables users of financial
statements to understand and evaluate:
(a)
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how an entity determined whether the credit risk of financial
instruments has increased significantly since initial recognition,
including, if and how:
(i)
financial instruments are considered to have low credit risk in
accordance with paragraph 5.5.10 of IFRS 9, including the classes
of financial instruments to which it applies; and
(ii)
the presumption in paragraph 5.5.11 of IFRS 9, that there have
been significant increases in credit risk since initial recognition
when financial assets are more than 30 days past due, has been
rebutted;
(b)
an entity’s definitions of default, including the reasons for selecting
those definitions;
(c)
how the instruments were grouped if expected credit losses were
measured on a collective basis;
(d)
how an entity determined that financial assets are credit-impaired
financial assets;
(e)
an entity’s write-off policy, including the indicators that there is no
reasonable expectation of recovery and information about the policy for
financial assets that are written-off but are still subject to enforcement
activity; and
(f)
how the requirements in paragraph 5.5.12 of IFRS 9 for the modification
of contractual cash flows of financial assets have been applied, including
how an entity:
(i)
determines whether the credit risk on a financial asset that has
been modified while the loss allowance was measured at an
amount equal to lifetime expected credit losses, has improved to
the extent that the loss allowance reverts to being measured at an
amount equal to 12-month expected credit losses in accordance
with paragraph 5.5.5 of IFRS 9; and
(ii)
monitors the extent to which the loss allowance on financial
assets meeting the criteria in (i) is subsequently remeasured at an
amount equal to lifetime expected credit losses in accordance
with paragraph 5.5.3 of IFRS 9.
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35G
An entity shall explain the inputs, assumptions and estimation techniques used
to apply the requirements in Section 5.5 of IFRS 9. For this purpose an entity
shall disclose:
(a)
the basis of inputs and assumptions and the estimation techniques used
to:
(i)
measure the 12-month and lifetime expected credit losses;
(ii)
determine whether the credit risk of financial instruments has
increased significantly since initial recognition; and
(iii)
determine whether a financial asset is a credit-impaired financial
asset.
(b)
how forward-looking information has been incorporated into the
determination of expected credit losses, including the use of
macroeconomic information; and
(c)
changes in the estimation techniques or significant assumptions made
during the reporting period and the reasons for those changes.
Quantitative and qualitative information about amounts arising from
expected credit losses
35H
To explain the changes in the loss allowance and the reasons for those changes,
an entity shall provide, by class of financial instrument, a reconciliation from
the opening balance to the closing balance of the loss allowance, in a table,
showing separately the changes during the period for:
(a)
the loss allowance measured at an amount equal to 12-month expected
credit losses;
(b)
the loss allowance measured at an amount equal to lifetime expected
credit losses for:
(c)
35I
(i)
financial instruments for which credit risk has increased
significantly since initial recognition but that are not
credit-impaired financial assets;
(ii)
financial assets that are credit-impaired at the reporting date (but
that are not purchased or originated credit-impaired); and
(iii)
trade receivables, contract assets or lease receivables for which
the loss allowances are measured in accordance with
paragraph 5.5.15 of IFRS 9.
financial assets that are purchased or originated credit-impaired. In
addition to the reconciliation, an entity shall disclose the total amount
of undiscounted expected credit losses at initial recognition on financial
assets initially recognised during the reporting period.
To enable users of financial statements to understand the changes in the loss
allowance disclosed in accordance with paragraph 35H, an entity shall provide
an explanation of how significant changes in the gross carrying amount of
financial instruments during the period contributed to changes in the loss
allowance.
The information shall be provided separately for financial
instruments that represent the loss allowance as listed in paragraph 35H(a)–(c)
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and shall include relevant qualitative and quantitative information. Examples
of changes in the gross carrying amount of financial instruments that
contributed to the changes in the loss allowance may include:
35J
35K
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(a)
changes because of financial instruments originated or acquired during
the reporting period;
(b)
the modification of contractual cash flows on financial assets that do not
result in a derecognition of those financial assets in accordance with
IFRS 9;
(c)
changes because of financial instruments that were derecognised
(including those that were written-off) during the reporting period; and
(d)
changes arising from whether the loss allowance is measured at an
amount equal to 12-month or lifetime expected credit losses.
To enable users of financial statements to understand the nature and effect of
modifications of contractual cash flows on financial assets that have not
resulted in derecognition and the effect of such modifications on the
measurement of expected credit losses, an entity shall disclose:
(a)
the amortised cost before the modification and the net modification gain
or loss recognised for financial assets for which the contractual cash
flows have been modified during the reporting period while they had a
loss allowance measured at an amount equal to lifetime expected credit
losses; and
(b)
the gross carrying amount at the end of the reporting period of financial
assets that have been modified since initial recognition at a time when
the loss allowance was measured at an amount equal to lifetime
expected credit losses and for which the loss allowance has changed
during the reporting period to an amount equal to 12-month expected
credit losses.
To enable users of financial statements to understand the effect of collateral and
other credit enhancements on the amounts arising from expected credit losses,
an entity shall disclose by class of financial instrument:
(a)
the amount that best represents its maximum exposure to credit risk at
the end of the reporting period without taking account of any collateral
held or other credit enhancements (eg netting agreements that do not
qualify for offset in accordance with IAS 32).
(b)
a narrative description of collateral held as security and other credit
enhancements, including:
(i)
a description of the nature and quality of the collateral held;
(ii)
an explanation of any significant changes in the quality of that
collateral or credit enhancements as a result of deterioration or
changes in the collateral policies of the entity during the
reporting period; and
(iii)
information about financial instruments for which an entity has
not recognised a loss allowance because of the collateral.
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(c)
35L
quantitative information about the collateral held as security and other
credit enhancements (for example, quantification of the extent to which
collateral and other credit enhancements mitigate credit risk) for
financial assets that are credit-impaired at the reporting date.
An entity shall disclose the contractual amount outstanding on financial assets
that were written off during the reporting period and are still subject to
enforcement activity.
Credit risk exposure
35M
To enable users of financial statements to assess an entity’s credit risk exposure
and understand its significant credit risk concentrations, an entity shall
disclose, by credit risk rating grades, the gross carrying amount of financial assets
and the exposure to credit risk on loan commitments and financial guarantee
contracts.
This information shall be provided separately for financial
instruments:
(a)
for which the loss allowance is measured at an amount equal to
12-month expected credit losses;
(b)
for which the loss allowance is measured at an amount equal to lifetime
expected credit losses and that are:
(c)
(i)
financial instruments for which credit risk has increased
significantly since initial recognition but that are not
credit-impaired financial assets;
(ii)
financial assets that are credit-impaired at the reporting date (but
that are not purchased or originated credit-impaired); and
(iii)
trade receivables, contract assets or lease receivables for which
the loss allowances are measured in accordance with
paragraph 5.5.15 of IFRS 9.
that are purchased or originated credit-impaired financial assets.
35N
For trade receivables, contract assets and lease receivables to which an entity
applies paragraph 5.5.15 of IFRS 9, the information provided in accordance with
paragraph 35M may be based on a provision matrix (see paragraph B5.5.35 of
IFRS 9).
36
For all financial instruments within the scope of this IFRS, but to which the
impairment requirements in IFRS 9 are not applied, an entity shall disclose by
class of financial instrument:
(a)
the amount that best represents its maximum exposure to credit risk at
the end of the reporting period without taking account of any collateral
held or other credit enhancements (eg netting agreements that do not
quality for offset in accordance with IAS 32); this disclosure is not
required for financial instruments whose carrying amount best
represents the maximum exposure to credit risk.
(b)
a description of collateral held as security and other credit
enhancements, and their financial effect (eg quantification of the extent
to which collateral and other credit enhancements mitigate credit risk)
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in respect of the amount that best represents the maximum exposure to
credit risk (whether disclosed in accordance with (a) or represented by
the carrying amount of a financial instrument).
37
(c)
[deleted]
(d)
[deleted]
[Deleted]
Collateral and other credit enhancements obtained
38
When an entity obtains financial or non-financial assets during the period by
taking possession of collateral it holds as security or calling on other credit
enhancements (eg guarantees), and such assets meet the recognition criteria in
other IFRSs, an entity shall disclose for such assets held at the reporting date:
(a)
the nature and carrying amount of the assets; and
(b)
when the assets are not readily convertible into cash, its policies for
disposing of such assets or for using them in its operations.
Liquidity risk
39
An entity shall disclose:
(a)
a maturity analysis for non-derivative financial liabilities (including
issued financial guarantee contracts) that shows the remaining
contractual maturities.
(b)
a maturity analysis for derivative financial liabilities. The maturity
analysis shall include the remaining contractual maturities for those
derivative financial liabilities for which contractual maturities are
essential for an understanding of the timing of the cash flows (see
paragraph B11B).
(c)
a description of how it manages the liquidity risk inherent in (a) and (b).
Market risk
Sensitivity analysis
40
41
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Unless an entity complies with paragraph 41, it shall disclose:
(a)
a sensitivity analysis for each type of market risk to which the entity is
exposed at the end of the reporting period, showing how profit or loss
and equity would have been affected by changes in the relevant risk
variable that were reasonably possible at that date;
(b)
the methods and assumptions used in preparing the sensitivity analysis;
and
(c)
changes from the previous period in the methods and assumptions used,
and the reasons for such changes.
If an entity prepares a sensitivity analysis, such as value-at-risk, that reflects
interdependencies between risk variables (eg interest rates and exchange rates)
and uses it to manage financial risks, it may use that sensitivity analysis in place
of the analysis specified in paragraph 40. The entity shall also disclose:
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(a)
an explanation of the method used in preparing such a sensitivity
analysis, and of the main parameters and assumptions underlying the
data provided; and
(b)
an explanation of the objective of the method used and of limitations
that may result in the information not fully reflecting the fair value of
the assets and liabilities involved.
Other market risk disclosures
42
When the sensitivity analyses disclosed in accordance with paragraph 40 or 41
are unrepresentative of a risk inherent in a financial instrument (for example
because the year-end exposure does not reflect the exposure during the year), the
entity shall disclose that fact and the reason it believes the sensitivity analyses
are unrepresentative.
Transfers of financial assets
42A
42B
42C
The disclosure requirements in paragraphs 42B–42H relating to transfers of
financial assets supplement the other disclosure requirements of this IFRS. An
entity shall present the disclosures required by paragraphs 42B–42H in a single
note in its financial statements. An entity shall provide the required disclosures
for all transferred financial assets that are not derecognised and for any
continuing involvement in a transferred asset, existing at the reporting date,
irrespective of when the related transfer transaction occurred. For the purposes
of applying the disclosure requirements in those paragraphs, an entity transfers
all or a part of a financial asset (the transferred financial asset) if, and only if, it
either:
(a)
transfers the contractual rights to receive the cash flows of that financial
asset; or
(b)
retains the contractual rights to receive the cash flows of that financial
asset, but assumes a contractual obligation to pay the cash flows to one
or more recipients in an arrangement.
An entity shall disclose information that enables users of its financial
statements:
(a)
to understand the relationship between transferred financial assets that
are not derecognised in their entirety and the associated liabilities; and
(b)
to evaluate the nature of, and risks associated with, the entity’s
continuing involvement in derecognised financial assets.
For the purposes of applying the disclosure requirements in paragraphs
42E–42H, an entity has continuing involvement in a transferred financial asset
if, as part of the transfer, the entity retains any of the contractual rights or
obligations inherent in the transferred financial asset or obtains any new
contractual rights or obligations relating to the transferred financial asset. For
the purposes of applying the disclosure requirements in paragraphs 42E–42H,
the following do not constitute continuing involvement:
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(a)
normal representations and warranties relating to fraudulent transfer
and concepts of reasonableness, good faith and fair dealings that could
invalidate a transfer as a result of legal action;
(b)
forward, option and other contracts to reacquire the transferred
financial asset for which the contract price (or exercise price) is the fair
value of the transferred financial asset; or
(c)
an arrangement whereby an entity retains the contractual rights to
receive the cash flows of a financial asset but assumes a contractual
obligation to pay the cash flows to one or more entities and the
conditions in paragraph 3.2.5(a)–(c) of IFRS 9 are met.
Transferred financial assets that are not derecognised in
their entirety
42D
An entity may have transferred financial assets in such a way that part or all of
the transferred financial assets do not qualify for derecognition. To meet the
objectives set out in paragraph 42B(a), the entity shall disclose at each reporting
date for each class of transferred financial assets that are not derecognised in
their entirety:
(a)
the nature of the transferred assets.
(b)
the nature of the risks and rewards of ownership to which the entity is
exposed.
(c)
a description of the nature of the relationship between the transferred
assets and the associated liabilities, including restrictions arising from
the transfer on the reporting entity’s use of the transferred assets.
(d)
when the counterparty (counterparties) to the associated liabilities has
(have) recourse only to the transferred assets, a schedule that sets out the
fair value of the transferred assets, the fair value of the associated
liabilities and the net position (the difference between the fair value of
the transferred assets and the associated liabilities).
(e)
when the entity continues to recognise all of the transferred assets, the
carrying amounts of the transferred assets and the associated liabilities.
(f)
when the entity continues to recognise the assets to the extent of its
continuing involvement (see paragraphs 3.2.6(c)(ii) and 3.2.16 of IFRS 9),
the total carrying amount of the original assets before the transfer, the
carrying amount of the assets that the entity continues to recognise, and
the carrying amount of the associated liabilities.
Transferred financial assets that are derecognised in
their entirety
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To meet the objectives set out in paragraph 42B(b), when an entity derecognises
transferred financial assets in their entirety (see paragraph 3.2.6(a) and (c)(i) of
IFRS 9) but has continuing involvement in them, the entity shall disclose, as a
minimum, for each type of continuing involvement at each reporting date:
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(a)
the carrying amount of the assets and liabilities that are recognised in
the entity’s statement of financial position and represent the entity’s
continuing involvement in the derecognised financial assets, and the
line items in which the carrying amount of those assets and liabilities
are recognised.
(b)
the fair value of the assets and liabilities that represent the entity’s
continuing involvement in the derecognised financial assets.
(c)
the amount that best represents the entity’s maximum exposure to loss
from its continuing involvement in the derecognised financial assets,
and information showing how the maximum exposure to loss is
determined.
(d)
the undiscounted cash outflows that would or may be required to
repurchase derecognised financial assets (eg the strike price in an option
agreement) or other amounts payable to the transferee in respect of the
transferred assets. If the cash outflow is variable then the amount
disclosed should be based on the conditions that exist at each reporting
date.
(e)
a maturity analysis of the undiscounted cash outflows that would or may
be required to repurchase the derecognised financial assets or other
amounts payable to the transferee in respect of the transferred assets,
showing the remaining contractual maturities of the entity’s continuing
involvement.
(f)
qualitative information that explains and supports the quantitative
disclosures required in (a)–(e).
42F
An entity may aggregate the information required by paragraph 42E in respect
of a particular asset if the entity has more than one type of continuing
involvement in that derecognised financial asset, and report it under one type of
continuing involvement.
42G
In addition, an entity shall disclose for each type of continuing involvement:
(a)
the gain or loss recognised at the date of transfer of the assets.
(b)
income and expenses recognised, both in the reporting period and
cumulatively, from the entity’s continuing involvement in the
derecognised financial assets (eg fair value changes in derivative
instruments).
(c)
if the total amount of proceeds from transfer activity (that qualifies for
derecognition) in a reporting period is not evenly distributed throughout
the reporting period (eg if a substantial proportion of the total amount
of transfer activity takes place in the closing days of a reporting period):
(i)
when the greatest transfer activity took place within that
reporting period (eg the last five days before the end of the
reporting period),
(ii)
the amount (eg related gains or losses) recognised from transfer
activity in that part of the reporting period, and
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(iii)
the total amount of proceeds from transfer activity in that part of
the reporting period.
An entity shall provide this information for each period for which a statement of
comprehensive income is presented.
Supplementary information
42H
An entity shall disclose any additional information that it considers necessary to
meet the disclosure objectives in paragraph 42B.
Initial application of IFRS 9
42I
In the reporting period that includes the date of initial application of IFRS 9, the
entity shall disclose the following information for each class of financial assets
and financial liabilities as at the date of initial application:
(a)
the original measurement category and carrying amount determined in
accordance with IAS 39 or in accordance with a previous version of
IFRS 9 (if the entity’s chosen approach to applying IFRS 9 involves more
than one date of initial application for different requirements);
(b)
the new measurement category and carrying amount determined in
accordance with IFRS 9;
(c)
the amount of any financial assets and financial liabilities in the
statement of financial position that were previously designated as
measured at fair value through profit or loss but are no longer so
designated, distinguishing between those that IFRS 9 requires an entity
to reclassify and those that an entity elects to reclassify at the date of
initial application.
In accordance with paragraph 7.2.2 of IFRS 9, depending on the entity’s chosen
approach to applying IFRS 9, the transition can involve more than one date of
initial application. Therefore this paragraph may result in disclosure on more
than one date of initial application. An entity shall present these quantitative
disclosures in a table unless another format is more appropriate.
42J
In the reporting period that includes the date of initial application of IFRS 9, an
entity shall disclose qualitative information to enable users to understand:
(a)
how it applied the classification requirements in IFRS 9 to those
financial assets whose classification has changed as a result of applying
IFRS 9.
(b)
the reasons for any designation or de-designation of financial assets or
financial liabilities as measured at fair value through profit or loss at the
date of initial application.
In accordance with paragraph 7.2.2 of IFRS 9, depending on the entity’s chosen
approach to applying IFRS 9, the transition can involve more than one date of
initial application. Therefore this paragraph may result in disclosure on more
than one date of initial application.
42K
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In the reporting period that an entity first applies the classification and
measurement requirements for financial assets in IFRS 9 (ie when the entity
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transitions from IAS 39 to IFRS 9 for financial assets), it shall present the
disclosures set out in paragraphs 42L–42O of this IFRS as required by
paragraph 7.2.15 of IFRS 9.
42L
When required by paragraph 42K, an entity shall disclose the changes in the
classifications of financial assets and financial liabilities as at the date of initial
application of IFRS 9, showing separately:
(a)
the changes in the carrying amounts on the basis of their measurement
categories in accordance with IAS 39 (ie not resulting from a change in
measurement attribute on transition to IFRS 9); and
(b)
the changes in the carrying amounts arising from a change in
measurement attribute on transition to IFRS 9.
The disclosures in this paragraph need not be made after the annual reporting
period in which the entity initially applies the classification and measurement
requirements for financial assets in IFRS 9.
42M
When required by paragraph 42K, an entity shall disclose the following for
financial assets and financial liabilities that have been reclassified so that they
are measured at amortised cost and, in the case of financial assets, that have
been reclassified out of fair value through profit or loss so that they are
measured at fair value through other comprehensive income, as a result of the
transition to IFRS 9:
(a)
the fair value of the financial assets or financial liabilities at the end of
the reporting period; and
(b)
the fair value gain or loss that would have been recognised in profit or
loss or other comprehensive income during the reporting period if the
financial assets or financial liabilities had not been reclassified.
The disclosures in this paragraph need not be made after the annual reporting
period in which the entity initially applies the classification and measurement
requirements for financial assets in IFRS 9.
42N
When required by paragraph 42K, an entity shall disclose the following for
financial assets and financial liabilities that have been reclassified out of the fair
value through profit or loss category as a result of the transition to IFRS 9:
(a)
the effective interest rate determined on the date of initial application;
and
(b)
the interest revenue or expense recognised.
If an entity treats the fair value of a financial asset or a financial liability as the
new gross carrying amount at the date of initial application (see
paragraph 7.2.11 of IFRS 9), the disclosures in this paragraph shall be made for
each reporting period until derecognition. Otherwise, the disclosures in this
paragraph need not be made after the annual reporting period in which the
entity initially applies the classification and measurement requirements for
financial assets in IFRS 9.
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42O
When an entity presents the disclosures set out in paragraphs 42K–42N, those
disclosures, and the disclosures in paragraph 25 of this IFRS, must permit
reconciliation between:
(a)
the measurement categories presented in accordance with IAS 39 and
IFRS 9; and
(b)
the class of financial instrument
as at the date of initial application.
42P
On the date of initial application of Section 5.5 of IFRS 9, an entity is required to
disclose information that would permit the reconciliation of the ending
impairment allowances in accordance with IAS 39 and the provisions in
accordance with IAS 37 to the opening loss allowances determined in
accordance with IFRS 9. For financial assets, this disclosure shall be provided by
the related financial assets’ measurement categories in accordance with IAS 39
and IFRS 9, and shall show separately the effect of the changes in the
measurement category on the loss allowance at that date.
42Q
In the reporting period that includes the date of initial application of IFRS 9, an
entity is not required to disclose the line item amounts that would have been
reported in accordance with the classification and measurement requirements
(which includes the requirements related to amortised cost measurement of
financial assets and impairment in Sections 5.4 and 5.5 of IFRS 9) of:
(a)
IFRS 9 for prior periods; and
(b)
IAS 39 for the current period.
42R
In accordance with paragraph 7.2.4 of IFRS 9, if it is impracticable (as defined in
IAS 8) at the date of initial application of IFRS 9 for an entity to assess a modified
time value of money element in accordance with paragraphs B4.1.9B–B4.1.9D of
IFRS 9 based on the facts and circumstances that existed at the initial
recognition of the financial asset, an entity shall assess the contractual cash flow
characteristics of that financial asset based on the facts and circumstances that
existed at the initial recognition of the financial asset without taking into
account the requirements related to the modification of the time value of money
element in paragraphs B4.1.9B–B4.1.9D of IFRS 9. An entity shall disclose the
carrying amount at the reporting date of the financial assets whose contractual
cash flow characteristics have been assessed based on the facts and
circumstances that existed at the initial recognition of the financial asset
without taking into account the requirements related to the modification of the
time value of money element in paragraphs B4.1.9B–B4.1.9D of IFRS 9 until those
financial assets are derecognised.
42S
In accordance with paragraph 7.2.5 of IFRS 9, if it is impracticable (as defined in
IAS 8) at the date of initial application for an entity to assess whether the fair
value of a prepayment feature was insignificant in accordance with
paragraphs B4.1.12(c) of IFRS 9 based on the facts and circumstances that existed
at the initial recognition of the financial asset, an entity shall assess the
contractual cash flow characteristics of that financial asset based on the facts
and circumstances that existed at the initial recognition of the financial asset
without taking into account the exception for prepayment features in
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paragraph B4.1.12 of IFRS 9. An entity shall disclose the carrying amount at the
reporting date of the financial assets whose contractual cash flow characteristics
have been assessed based on the facts and circumstances that existed at the
initial recognition of the financial asset without taking into account the
exception for prepayment features in paragraph B4.1.12 of IFRS 9 until those
financial assets are derecognised.
Effective date and transition
43
An entity shall apply this IFRS for annual periods beginning on or after
1 January 2007. Earlier application is encouraged. If an entity applies this IFRS
for an earlier period, it shall disclose that fact.
44
If an entity applies this IFRS for annual periods beginning before 1 January 2006,
it need not present comparative information for the disclosures required by
paragraphs 31–42 about the nature and extent of risks arising from financial
instruments.
44A
IAS 1 (as revised in 2007) amended the terminology used throughout IFRSs. In
addition it amended paragraphs 20, 21, 23(c) and (d), 27(c) and B5 of Appendix B.
An entity shall apply those amendments for annual periods beginning on or
after 1 January 2009. If an entity applies IAS 1 (revised 2007) for an earlier
period, the amendments shall be applied for that earlier period.
44B
IFRS 3 (as revised in 2008) deleted paragraph 3(c). An entity shall apply that
amendment for annual periods beginning on or after 1 July 2009. If an entity
applies IFRS 3 (revised 2008) for an earlier period, the amendment shall also be
applied for that earlier period. However, the amendment does not apply to
contingent consideration that arose from a business combination for which the
acquisition date preceded the application of IFRS 3 (revised 2008). Instead, an
entity shall account for such consideration in accordance with paragraphs
65A–65E of IFRS 3 (as amended in 2010).
44C
An entity shall apply the amendment in paragraph 3 for annual periods
beginning on or after 1 January 2009. If an entity applies Puttable Financial
Instruments and Obligations Arising on Liquidation (Amendments to IAS 32 and IAS 1),
issued in February 2008, for an earlier period, the amendment in paragraph 3
shall be applied for that earlier period.
44D
Paragraph 3(a) was amended by Improvements to IFRSs issued in May 2008. An
entity shall apply that amendment for annual periods beginning on or after
1 January 2009. Earlier application is permitted. If an entity applies the
amendment for an earlier period it shall disclose that fact and apply for that
earlier period the amendments to paragraph 1 of IAS 28, paragraph 1 of IAS 31
and paragraph 4 of IAS 32 issued in May 2008. An entity is permitted to apply
the amendment prospectively.
44E
[Deleted]
44F
[Deleted]
44G
Improving Disclosures about Financial Instruments (Amendments to IFRS 7), issued in
March 2009, amended paragraphs 27, 39 and B11 and added paragraphs 27A,
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27B, B10A and B11A–B11F. An entity shall apply those amendments for annual
periods beginning on or after 1 January 2009. An entity need not provide the
disclosures required by the amendments for:
(a)
any annual or interim period, including any statement of financial
position, presented within an annual comparative period ending before
31 December 2009, or
(b)
any statement of financial position as at the beginning of the earliest
comparative period as at a date before 31 December 2009.
Earlier application is permitted. If an entity applies the amendments for an
earlier period, it shall disclose that fact.1
44H–
44J
44K
[Deleted]
Paragraph 44B was amended by Improvements to IFRSs issued in May 2010. An
entity shall apply that amendment for annual periods beginning on or after
1 July 2010. Earlier application is permitted.
44L
Improvements to IFRSs issued in May 2010 added paragraph 32A and amended
paragraphs 34 and 36–38. An entity shall apply those amendments for annual
periods beginning on or after 1 January 2011. Earlier application is permitted.
If an entity applies the amendments for an earlier period it shall disclose that
fact.
44M
Disclosures—Transfers of Financial Assets (Amendments to IFRS 7), issued in October
2010, deleted paragraph 13 and added paragraphs 42A–42H and B29–B39. An
entity shall apply those amendments for annual periods beginning on or after
1 July 2011. Earlier application is permitted. If an entity applies the
amendments from an earlier date, it shall disclose that fact. An entity need not
provide the disclosures required by those amendments for any period presented
that begins before the date of initial application of the amendments.
44N
[Deleted]
44O
IFRS 10 and IFRS 11 Joint Arrangements, issued in May 2011, amended
paragraph 3. An entity shall apply that amendment when it applies IFRS 10 and
IFRS 11.
44P
IFRS 13, issued in May 2011, amended paragraphs 3, 28 and 29 and Appendix A
and deleted paragraphs 27–27B. An entity shall apply those amendments when
it applies IFRS 13.
44Q
Presentation of Items of Other Comprehensive Income (Amendments to IAS 1), issued in
June 2011, amended paragraph 27B. An entity shall apply that amendment
when it applies IAS 1 as amended in June 2011.
44R
Disclosures—Offsetting Financial Assets and Financial Liabilities (Amendments to IFRS 7),
issued in December 2011, added paragraphs 13A–13F and B40–B53. An entity
1
Paragraph 44G was amended as a consequence of Limited Exemption from Comparative IFRS 7 Disclosures
for First-time Adopters (Amendment to IFRS 1) issued in January 2010. The Board amended
paragraph 44G to clarify its conclusions and intended transition for Improving Disclosures about
Financial Instruments (Amendments to IFRS 7).
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shall apply those amendments for annual periods beginning on or after
1 January 2013. An entity shall provide the disclosures required by those
amendments retrospectively.
44S–
44W
44X
[Deleted]
Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27), issued in October
2012, amended paragraph 3. An entity shall apply that amendment for annual
periods beginning on or after 1 January 2014. Earlier application of Investment
Entities is permitted. If an entity applies that amendment earlier it shall also
apply all amendments included in Investment Entities at the same time.
44Y
[Deleted]
44Z
IFRS 9, as issued in July 2014, amended paragraphs 2–5, 8–11, 14, 20, 28–30, 36,
42C–42E, Appendix A and paragraphs B1, B5, B9, B10, B22 and B27, deleted
paragraphs 12, 12A, 16, 22–24, 37, 44E, 44F, 44H–44J, 44N, 44S–44W, 44Y, B4
and Appendix D and added paragraphs 5A, 10A, 11A, 11B, 12B–12D, 16A, 20A,
21A–21D, 22A–22C, 23A–23F, 24A–24G, 35A–35N, 42I–42S, 44ZA and B8A–B8J.
An entity shall apply those amendments when it applies IFRS 9. Those
amendments need not be applied to comparative information provided for
periods before the date of initial application of IFRS 9.
44ZA
In accordance with paragraph 7.1.2 of IFRS 9, for annual reporting periods prior
to 1 January 2018, an entity may elect to early apply only the requirements for
the presentation of gains and losses on financial liabilities designated as at fair
value through profit or loss in paragraphs 5.7.1(c), 5.7.7–5.7.9, 7.2.14 and
B5.7.5–B5.7.20 of IFRS 9 without applying the other requirements in IFRS 9. If an
entity elects to apply only those paragraphs of IFRS 9, it shall disclose that fact
and provide on an ongoing basis the related disclosures set out in paragraphs
10–11 of this IFRS (as amended by IFRS 9 (2010)).
44AA
Annual Improvements to IFRSs 2012–2014 Cycle, issued in September 2014, amended
paragraphs 44R and B30 and added paragraph B30A. An entity shall apply those
amendments retrospectively in accordance with IAS 8 Accounting Policies, Changes
in Accounting Estimates and Errors for annual periods beginning on or after
1 January 2016, except that an entity need not apply the amendments to
paragraphs B30 and B30A for any period presented that begins before the annual
period for which the entity first applies those amendments. Earlier application
of the amendments to paragraphs 44R, B30 and B30A is permitted. If an entity
applies those amendments for an earlier period it shall disclose that fact.
44BB
Disclosure Initiative (Amendments to IAS 1), issued in December 2014, amended
paragraphs 21 and B5. An entity shall apply those amendments for annual
periods beginning on or after 1 January 2016. Earlier application of those
amendments is permitted.
44CC
IFRS 16 Leases, issued in January 2016, amended paragraphs 29 and B11D. An
entity shall apply those amendments when it applies IFRS 16.
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Withdrawal of IAS 30
45
This IFRS supersedes IAS 30 Disclosures in the Financial Statements of Banks and Similar
Financial Institutions.
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Appendix A
Defined terms
This appendix is an integral part of the IFRS.
credit risk
The risk that one party to a financial instrument will cause a
financial loss for the other party by failing to discharge an
obligation.
credit risk rating
grades
Rating of credit risk based on the risk of a default occurring on
the financial instrument.
currency risk
The risk that the fair value or future cash flows of a financial
instrument will fluctuate because of changes in foreign exchange
rates.
interest rate risk
The risk that the fair value or future cash flows of a financial
instrument will fluctuate because of changes in market interest
rates.
liquidity risk
The risk that an entity will encounter difficulty in meeting
obligations associated with financial liabilities that are settled by
delivering cash or another financial asset.
loans payable
Loans payable are financial liabilities, other than short-term
trade payables on normal credit terms.
market risk
The risk that the fair value or future cash flows of a financial
instrument will fluctuate because of changes in market prices.
Market risk comprises three types of risk: currency risk,
interest rate risk and other price risk.
other price risk
The risk that the fair value or future cash flows of a financial
instrument will fluctuate because of changes in market prices
(other than those arising from interest rate risk or currency
risk), whether those changes are caused by factors specific to the
individual financial instrument or its issuer or by factors
affecting all similar financial instruments traded in the market.
The following terms are defined in paragraph 11 of IAS 32, paragraph 9 of IAS 39,
Appendix A of IFRS 9 or Appendix A of IFRS 13 and are used in this IFRS with the meaning
specified in IAS 32, IAS 39, IFRS 9 and IFRS 13.
●
amortised cost of a financial asset or financial liability
●
contract asset
●
credit-impaired financial assets
●
derecognition
●
derivative
●
dividends
●
effective interest method
●
equity instrument
●
expected credit losses
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●
fair value
●
financial asset
●
financial guarantee contract
●
financial instrument
●
financial liability
●
financial liability at fair value through profit or loss
●
forecast transaction
●
gross carrying amount of a financial asset
●
hedging instrument
●
held for trading
●
impairment gains or losses
●
loss allowance
●
past due
●
purchased or originated credit-impaired financial assets
●
reclassification date
●
regular way purchase or sale.
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Appendix B
Application guidance
This appendix is an integral part of the IFRS.
Classes of financial instruments and level of disclosure
(paragraph 6)
B1
Paragraph 6 requires an entity to group financial instruments into classes that
are appropriate to the nature of the information disclosed and that take into
account the characteristics of those financial instruments. The classes described
in paragraph 6 are determined by the entity and are, thus, distinct from the
categories of financial instruments specified in IFRS 9 (which determine how
financial instruments are measured and where changes in fair value are
recognised).
B2
In determining classes of financial instrument, an entity shall, at a minimum:
(a)
distinguish instruments measured at amortised cost from those
measured at fair value.
(b)
treat as a separate class or classes those financial instruments outside the
scope of this IFRS.
B3
An entity decides, in the light of its circumstances, how much detail it provides
to satisfy the requirements of this IFRS, how much emphasis it places on
different aspects of the requirements and how it aggregates information to
display the overall picture without combining information with different
characteristics. It is necessary to strike a balance between overburdening
financial statements with excessive detail that may not assist users of financial
statements and obscuring important information as a result of too much
aggregation. For example, an entity shall not obscure important information by
including it among a large amount of insignificant detail. Similarly, an entity
shall not disclose information that is so aggregated that it obscures important
differences between individual transactions or associated risks.
B4
[Deleted]
Other disclosure – accounting policies (paragraph 21)
B5
Paragraph 21 requires disclosure of the measurement basis (or bases) used in
preparing the financial statements and the other accounting policies used that
are relevant to an understanding of the financial statements. For financial
instruments, such disclosure may include:
(a)
for financial liabilities designated as at fair value through profit or loss:
(i)
the nature of the financial liabilities the entity has designated as
at fair value through profit or loss;
(ii)
the criteria for so designating such financial liabilities on initial
recognition; and
(iii)
how the entity has satisfied the conditions in paragraph 4.2.2 of
IFRS 9 for such designation.
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(aa)
for financial assets designated as measured at fair value through profit
or loss:
(i)
the nature of the financial assets the entity has designated as
measured at fair value through profit or loss; and
(ii)
how the entity has satisfied the criteria in paragraph 4.1.5 of
IFRS 9 for such designation.
(b)
[deleted]
(c)
whether regular way purchases and sales of financial assets are
accounted for at trade date or at settlement date (see paragraph 3.1.2 of
IFRS 9).
(d)
[deleted]
(e)
how net gains or net losses on each category of financial instrument are
determined (see paragraph 20(a)), for example, whether the net gains or
net losses on items at fair value through profit or loss include interest or
dividend income.
(f)
[deleted]
(g)
[deleted]
Paragraph 122 of IAS 1 (as revised in 2007) also requires entities to disclose,
along with its significant accounting policies or other notes, the judgements,
apart from those involving estimations, that management has made in the
process of applying the entity’s accounting policies and that have the most
significant effect on the amounts recognised in the financial statements.
Nature and extent of risks arising from financial instruments
(paragraphs 31–42)
B6
The disclosures required by paragraphs 31–42 shall be either given in the
financial statements or incorporated by cross-reference from the financial
statements to some other statement, such as a management commentary or risk
report, that is available to users of the financial statements on the same terms as
the financial statements and at the same time. Without the information
incorporated by cross-reference, the financial statements are incomplete.
Quantitative disclosures (paragraph 34)
B7
Paragraph 34(a) requires disclosures of summary quantitative data about an
entity’s exposure to risks based on the information provided internally to key
management personnel of the entity. When an entity uses several methods to
manage a risk exposure, the entity shall disclose information using the method
or methods that provide the most relevant and reliable information. IAS 8
Accounting Policies, Changes in Accounting Estimates and Errors discusses relevance and
reliability.
B8
Paragraph 34(c) requires disclosures about concentrations of risk.
Concentrations of risk arise from financial instruments that have similar
characteristics and are affected similarly by changes in economic or other
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conditions. The identification of concentrations of risk requires judgement
taking into account the circumstances of the entity.
Disclosure of
concentrations of risk shall include:
(a)
a description of how management determines concentrations;
(b)
a description of the shared characteristic that identifies each
concentration (eg counterparty, geographical area, currency or market);
and
(c)
the amount of the risk exposure associated with all financial
instruments sharing that characteristic.
Credit risk management practices (paragraphs 35F–35G)
B8A
Paragraph 35F(b) requires the disclosure of information about how an entity has
defined default for different financial instruments and the reasons for selecting
those definitions.
In accordance with paragraph 5.5.9 of IFRS 9, the
determination of whether lifetime expected credit losses should be recognised is
based on the increase in the risk of a default occurring since initial recognition.
Information about an entity’s definitions of default that will assist users of
financial statements in understanding how an entity has applied the expected
credit loss requirements in IFRS 9 may include:
(a)
the qualitative and quantitative factors considered in defining default;
(b)
whether different definitions have been applied to different types of
financial instruments; and
(c)
assumptions about the cure rate (ie the number of financial assets that
return to a performing status) after a default occurred on the financial
asset.
B8B
To assist users of financial statements in evaluating an entity’s restructuring and
modification policies, paragraph 35F(f)(ii) requires the disclosure of information
about how an entity monitors the extent to which the loss allowance on
financial assets previously disclosed in accordance with paragraph 35F(f)(i) are
subsequently measured at an amount equal to lifetime expected credit losses in
accordance with paragraph 5.5.3 of IFRS 9. Quantitative information that will
assist users in understanding the subsequent increase in credit risk of modified
financial assets may include information about modified financial assets
meeting the criteria in paragraph 35F(f)(i) for which the loss allowance has
reverted to being measured at an amount equal to lifetime expected credit losses
(ie a deterioration rate).
B8C
Paragraph 35G(a) requires the disclosure of information about the basis of
inputs and assumptions and the estimation techniques used to apply the
impairment requirements in IFRS 9. An entity’s assumptions and inputs used to
measure expected credit losses or determine the extent of increases in credit risk
since initial recognition may include information obtained from internal
historical information or rating reports and assumptions about the expected life
of financial instruments and the timing of the sale of collateral.
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Changes in the loss allowance (paragraph 35H)
B8D
B8E
In accordance with paragraph 35H, an entity is required to explain the reasons
for the changes in the loss allowance during the period. In addition to the
reconciliation from the opening balance to the closing balance of the loss
allowance, it may be necessary to provide a narrative explanation of the changes.
This narrative explanation may include an analysis of the reasons for changes in
the loss allowance during the period, including:
(a)
the portfolio composition;
(b)
the volume of financial instruments purchased or originated; and
(c)
the severity of the expected credit losses.
For loan commitments and financial guarantee contracts the loss allowance is
recognised as a provision. An entity should disclose information about the
changes in the loss allowance for financial assets separately from those for loan
commitments and financial guarantee contracts. However, if a financial
instrument includes both a loan (ie financial asset) and an undrawn
commitment (ie loan commitment) component and the entity cannot separately
identify the expected credit losses on the loan commitment component from
those on the financial asset component, the expected credit losses on the loan
commitment should be recognised together with the loss allowance for the
financial asset. To the extent that the combined expected credit losses exceed
the gross carrying amount of the financial asset, the expected credit losses
should be recognised as a provision.
Collateral (paragraph 35K)
B8F
Paragraph 35K requires the disclosure of information that will enable users of
financial statements to understand the effect of collateral and other credit
enhancements on the amount of expected credit losses. An entity is neither
required to disclose information about the fair value of collateral and other
credit enhancements nor is it required to quantify the exact value of the
collateral that was included in the calculation of expected credit losses (ie the
loss given default).
B8G
A narrative description of collateral and its effect on amounts of expected credit
losses might include information about:
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(a)
the main types of collateral held as security and other credit
enhancements (examples of the latter being guarantees, credit
derivatives and netting agreements that do not qualify for offset in
accordance with IAS 32);
(b)
the volume of collateral held and other credit enhancements and its
significance in terms of the loss allowance;
(c)
the policies and processes for valuing and managing collateral and other
credit enhancements;
(d)
the main types of counterparties to collateral and other credit
enhancements and their creditworthiness; and
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(e)
information about risk concentrations within the collateral and other
credit enhancements.
Credit risk exposure (paragraphs 35M–35N)
B8H
Paragraph 35M requires the disclosure of information about an entity’s credit
risk exposure and significant concentrations of credit risk at the reporting date.
A concentration of credit risk exists when a number of counterparties are
located in a geographical region or are engaged in similar activities and have
similar economic characteristics that would cause their ability to meet
contractual obligations to be similarly affected by changes in economic or other
conditions. An entity should provide information that enables users of financial
statements to understand whether there are groups or portfolios of financial
instruments with particular features that could affect a large portion of that
group of financial instruments such as concentration to particular risks. This
could include, for example, loan-to-value groupings, geographical, industry or
issuer-type concentrations.
B8I
The number of credit risk rating grades used to disclose the information in
accordance with paragraph 35M shall be consistent with the number that the
entity reports to key management personnel for credit risk management
purposes. If past due information is the only borrower-specific information
available and an entity uses past due information to assess whether credit risk
has increased significantly since initial recognition in accordance with
paragraph 5.5.11 of IFRS 9, an entity shall provide an analysis by past due status
for those financial assets.
B8J
When an entity has measured expected credit losses on a collective basis, the
entity may not be able to allocate the gross carrying amount of individual
financial assets or the exposure to credit risk on loan commitments and
financial guarantee contracts to the credit risk rating grades for which lifetime
expected credit losses are recognised. In that case, an entity should apply the
requirement in paragraph 35M to those financial instruments that can be
directly allocated to a credit risk rating grade and disclose separately the gross
carrying amount of financial instruments for which lifetime expected credit
losses have been measured on a collective basis.
Maximum credit risk exposure (paragraph 36(a))
B9
B10
Paragraphs 35K(a) and 36(a) require disclosure of the amount that best
represents the entity’s maximum exposure to credit risk. For a financial asset,
this is typically the gross carrying amount, net of:
(a)
any amounts offset in accordance with IAS 32; and
(b)
any loss allowance recognised in accordance with IFRS 9.
Activities that give rise to credit risk and the associated maximum exposure to
credit risk include, but are not limited to:
(a)
granting loans to customers and placing deposits with other entities. In
these cases, the maximum exposure to credit risk is the carrying amount
of the related financial assets.
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(b)
entering into derivative contracts, eg foreign exchange contracts,
interest rate swaps and credit derivatives. When the resulting asset is
measured at fair value, the maximum exposure to credit risk at the end
of the reporting period will equal the carrying amount.
(c)
granting financial guarantees. In this case, the maximum exposure to
credit risk is the maximum amount the entity could have to pay if the
guarantee is called on, which may be significantly greater than the
amount recognised as a liability.
(d)
making a loan commitment that is irrevocable over the life of the facility
or is revocable only in response to a material adverse change. If the
issuer cannot settle the loan commitment net in cash or another
financial instrument, the maximum credit exposure is the full amount
of the commitment. This is because it is uncertain whether the amount
of any undrawn portion may be drawn upon in the future. This may be
significantly greater than the amount recognised as a liability.
Quantitative liquidity risk disclosures (paragraphs 34(a)
and 39(a) and (b))
B10A
In accordance with paragraph 34(a) an entity discloses summary quantitative
data about its exposure to liquidity risk on the basis of the information provided
internally to key management personnel. An entity shall explain how those
data are determined. If the outflows of cash (or another financial asset) included
in those data could either:
(a)
occur significantly earlier than indicated in the data, or
(b)
be for significantly different amounts from those indicated in the data
(eg for a derivative that is included in the data on a net settlement basis
but for which the counterparty has the option to require gross
settlement),
the entity shall state that fact and provide quantitative information that enables
users of its financial statements to evaluate the extent of this risk unless that
information is included in the contractual maturity analyses required by
paragraph 39(a) or (b).
B11
B11A
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In preparing the maturity analyses required by paragraph 39(a) and (b), an entity
uses its judgement to determine an appropriate number of time bands. For
example, an entity might determine that the following time bands are
appropriate:
(a)
not later than one month;
(b)
later than one month and not later than three months;
(c)
later than three months and not later than one year; and
(d)
later than one year and not later than five years.
In complying with paragraph 39(a) and (b), an entity shall not separate an
embedded derivative from a hybrid (combined) financial instrument. For such
an instrument, an entity shall apply paragraph 39(a).
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B11B
B11C
B11D
Paragraph 39(b) requires an entity to disclose a quantitative maturity analysis
for derivative financial liabilities that shows remaining contractual maturities if
the contractual maturities are essential for an understanding of the timing of
the cash flows. For example, this would be the case for:
(a)
an interest rate swap with a remaining maturity of five years in a cash
flow hedge of a variable rate financial asset or liability.
(b)
all loan commitments.
Paragraph 39(a) and (b) requires an entity to disclose maturity analyses for
financial liabilities that show the remaining contractual maturities for some
financial liabilities. In this disclosure:
(a)
when a counterparty has a choice of when an amount is paid, the
liability is allocated to the earliest period in which the entity can be
required to pay. For example, financial liabilities that an entity can be
required to repay on demand (eg demand deposits) are included in the
earliest time band.
(b)
when an entity is committed to make amounts available in instalments,
each instalment is allocated to the earliest period in which the entity can
be required to pay. For example, an undrawn loan commitment is
included in the time band containing the earliest date it can be drawn
down.
(c)
for issued financial guarantee contracts the maximum amount of the
guarantee is allocated to the earliest period in which the guarantee
could be called.
The contractual amounts disclosed in the maturity analyses as required by
paragraph 39(a) and (b) are the contractual undiscounted cash flows, for
example:
(a)
gross lease liabilities (before deducting finance charges);
(b)
prices specified in forward agreements to purchase financial assets for
cash;
(c)
net amounts for pay-floating/receive-fixed interest rate swaps for which
net cash flows are exchanged;
(d)
contractual amounts to be exchanged in a derivative financial
instrument (eg a currency swap) for which gross cash flows are
exchanged; and
(e)
gross loan commitments.
Such undiscounted cash flows differ from the amount included in the statement
of financial position because the amount in that statement is based on
discounted cash flows. When the amount payable is not fixed, the amount
disclosed is determined by reference to the conditions existing at the end of the
reporting period. For example, when the amount payable varies with changes in
an index, the amount disclosed may be based on the level of the index at the end
of the period.
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B11E
Paragraph 39(c) requires an entity to describe how it manages the liquidity risk
inherent in the items disclosed in the quantitative disclosures required in
paragraph 39(a) and (b). An entity shall disclose a maturity analysis of financial
assets it holds for managing liquidity risk (eg financial assets that are readily
saleable or expected to generate cash inflows to meet cash outflows on financial
liabilities), if that information is necessary to enable users of its financial
statements to evaluate the nature and extent of liquidity risk.
B11F
Other factors that an entity might consider in providing the disclosure required
in paragraph 39(c) include, but are not limited to, whether the entity:
B12–
B16
(a)
has committed borrowing facilities (eg commercial paper facilities) or
other lines of credit (eg stand-by credit facilities) that it can access to
meet liquidity needs;
(b)
holds deposits at central banks to meet liquidity needs;
(c)
has very diverse funding sources;
(d)
has significant concentrations of liquidity risk in either its assets or its
funding sources;
(e)
has internal control processes and contingency plans for managing
liquidity risk;
(f)
has instruments that include accelerated repayment terms (eg on the
downgrade of the entity’s credit rating);
(g)
has instruments that could require the posting of collateral (eg margin
calls for derivatives);
(h)
has instruments that allow the entity to choose whether it settles its
financial liabilities by delivering cash (or another financial asset) or by
delivering its own shares; or
(i)
has instruments that are subject to master netting agreements.
[Deleted]
Market risk – sensitivity analysis (paragraphs 40 and 41)
B17
Paragraph 40(a) requires a sensitivity analysis for each type of market risk to
which the entity is exposed. In accordance with paragraph B3, an entity decides
how it aggregates information to display the overall picture without combining
information with different characteristics about exposures to risks from
significantly different economic environments. For example:
(a)
an entity that trades financial instruments might disclose this
information separately for financial instruments held for trading and
those not held for trading.
(b)
an entity would not aggregate its exposure to market risks from areas of
hyperinflation with its exposure to the same market risks from areas of
very low inflation.
If an entity has exposure to only one type of market risk in only one economic
environment, it would not show disaggregated information.
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B18
B19
B20
Paragraph 40(a) requires the sensitivity analysis to show the effect on profit or
loss and equity of reasonably possible changes in the relevant risk variable
(eg prevailing market interest rates, currency rates, equity prices or commodity
prices). For this purpose:
(a)
entities are not required to determine what the profit or loss for the
period would have been if relevant risk variables had been different.
Instead, entities disclose the effect on profit or loss and equity at the end
of the reporting period assuming that a reasonably possible change in
the relevant risk variable had occurred at the end of the reporting period
and had been applied to the risk exposures in existence at that date. For
example, if an entity has a floating rate liability at the end of the year,
the entity would disclose the effect on profit or loss (ie interest expense)
for the current year if interest rates had varied by reasonably possible
amounts.
(b)
entities are not required to disclose the effect on profit or loss and equity
for each change within a range of reasonably possible changes of the
relevant risk variable. Disclosure of the effects of the changes at the
limits of the reasonably possible range would be sufficient.
In determining what a reasonably possible change in the relevant risk variable
is, an entity should consider:
(a)
the economic environments in which it operates. A reasonably possible
change should not include remote or ‘worst case’ scenarios or ‘stress
tests’. Moreover, if the rate of change in the underlying risk variable is
stable, the entity need not alter the chosen reasonably possible change in
the risk variable. For example, assume that interest rates are 5 per cent
and an entity determines that a fluctuation in interest rates of ±50 basis
points is reasonably possible. It would disclose the effect on profit or loss
and equity if interest rates were to change to 4.5 per cent or 5.5 per cent.
In the next period, interest rates have increased to 5.5 per cent. The
entity continues to believe that interest rates may fluctuate by ±50 basis
points (ie that the rate of change in interest rates is stable). The entity
would disclose the effect on profit or loss and equity if interest rates were
to change to 5 per cent or 6 per cent. The entity would not be required to
revise its assessment that interest rates might reasonably fluctuate by
±50 basis points, unless there is evidence that interest rates have become
significantly more volatile.
(b)
the time frame over which it is making the assessment. The sensitivity
analysis shall show the effects of changes that are considered to be
reasonably possible over the period until the entity will next present
these disclosures, which is usually its next annual reporting period.
Paragraph 41 permits an entity to use a sensitivity analysis that reflects
interdependencies between risk variables, such as a value-at-risk methodology, if
it uses this analysis to manage its exposure to financial risks. This applies even if
such a methodology measures only the potential for loss and does not measure
the potential for gain. Such an entity might comply with paragraph 41(a) by
disclosing the type of value-at-risk model used (eg whether the model relies on
Monte Carlo simulations), an explanation about how the model works and the
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main assumptions (eg the holding period and confidence level). Entities might
also disclose the historical observation period and weightings applied to
observations within that period, an explanation of how options are dealt with in
the calculations, and which volatilities and correlations (or, alternatively, Monte
Carlo probability distribution simulations) are used.
B21
An entity shall provide sensitivity analyses for the whole of its business, but may
provide different types of sensitivity analysis for different classes of financial
instruments.
Interest rate risk
B22
Interest rate risk arises on interest-bearing financial instruments recognised in the
statement of financial position (eg debt instruments acquired or issued) and on
some financial instruments not recognised in the statement of financial position
(eg some loan commitments).
Currency risk
B23
Currency risk (or foreign exchange risk) arises on financial instruments that are
denominated in a foreign currency, ie in a currency other than the functional
currency in which they are measured. For the purpose of this IFRS, currency risk
does not arise from financial instruments that are non-monetary items or from
financial instruments denominated in the functional currency.
B24
A sensitivity analysis is disclosed for each currency to which an entity has
significant exposure.
Other price risk
B25
Other price risk arises on financial instruments because of changes in, for
example, commodity prices or equity prices. To comply with paragraph 40, an
entity might disclose the effect of a decrease in a specified stock market index,
commodity price, or other risk variable. For example, if an entity gives residual
value guarantees that are financial instruments, the entity discloses an increase
or decrease in the value of the assets to which the guarantee applies.
B26
Two examples of financial instruments that give rise to equity price risk are (a) a
holding of equities in another entity and (b) an investment in a trust that in turn
holds investments in equity instruments. Other examples include forward
contracts and options to buy or sell specified quantities of an equity instrument
and swaps that are indexed to equity prices. The fair values of such financial
instruments are affected by changes in the market price of the underlying equity
instruments.
B27
In accordance with paragraph 40(a), the sensitivity of profit or loss (that arises,
for example, from instruments measured at fair value through profit or loss) is
disclosed separately from the sensitivity of other comprehensive income (that
arises, for example, from investments in equity instruments whose changes in
fair value are presented in other comprehensive income).
B28
Financial instruments that an entity classifies as equity instruments are not
remeasured. Neither profit or loss nor equity will be affected by the equity price
risk of those instruments. Accordingly, no sensitivity analysis is required.
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Derecognition (paragraphs 42C–42H)
Continuing involvement (paragraph 42C)
B29
The assessment of continuing involvement in a transferred financial asset for
the purposes of the disclosure requirements in paragraphs 42E–42H is made at
the level of the reporting entity. For example, if a subsidiary transfers to an
unrelated third party a financial asset in which the parent of the subsidiary has
continuing involvement, the subsidiary does not include the parent’s
involvement in the assessment of whether it has continuing involvement in the
transferred asset in its separate or individual financial statements (ie when the
subsidiary is the reporting entity). However, a parent would include its
continuing involvement (or that of another member of the group) in a financial
asset transferred by its subsidiary in determining whether it has continuing
involvement in the transferred asset in its consolidated financial statements
(ie when the reporting entity is the group).
B30
An entity does not have a continuing involvement in a transferred financial
asset if, as part of the transfer, it neither retains any of the contractual rights or
obligations inherent in the transferred financial asset nor acquires any new
contractual rights or obligations relating to the transferred financial asset. An
entity does not have continuing involvement in a transferred financial asset if it
has neither an interest in the future performance of the transferred financial
asset nor a responsibility under any circumstances to make payments in respect
of the transferred financial asset in the future. The term ‘payment’ in this
context does not include cash flows of the transferred financial asset that an
entity collects and is required to remit to the transferee.
B30A
When an entity transfers a financial asset, the entity may retain the right to
service that financial asset for a fee that is included in, for example, a servicing
contract. The entity assesses the servicing contract in accordance with the
guidance in paragraphs 42C and B30 to decide whether the entity has
continuing involvement as a result of the servicing contract for the purposes of
the disclosure requirements. For example, a servicer will have continuing
involvement in the transferred financial asset for the purposes of the disclosure
requirements if the servicing fee is dependent on the amount or timing of the
cash flows collected from the transferred financial asset. Similarly, a servicer
has continuing involvement for the purposes of the disclosure requirements if a
fixed fee would not be paid in full because of non-performance of the transferred
financial asset. In these examples, the servicer has an interest in the future
performance of the transferred financial asset. This assessment is independent
of whether the fee to be received is expected to compensate the entity
adequately for performing the servicing.
B31
Continuing involvement in a transferred financial asset may result from
contractual provisions in the transfer agreement or in a separate agreement
with the transferee or a third party entered into in connection with the transfer.
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Transferred financial assets that are not derecognised in
their entirety (paragraph 42D)
B32
Paragraph 42D requires disclosures when part or all of the transferred financial
assets do not qualify for derecognition. Those disclosures are required at each
reporting date at which the entity continues to recognise the transferred
financial assets, regardless of when the transfers occurred.
Types of continuing involvement (paragraphs 42E–42H)
B33
Paragraphs 42E–42H require qualitative and quantitative disclosures for each
type of continuing involvement in derecognised financial assets. An entity shall
aggregate its continuing involvement into types that are representative of the
entity’s exposure to risks. For example, an entity may aggregate its continuing
involvement by type of financial instrument (eg guarantees or call options) or by
type of transfer (eg factoring of receivables, securitisations and securities
lending).
Maturity analysis for undiscounted cash outflows to
repurchase transferred assets (paragraph 42E(e))
B34
Paragraph 42E(e) requires an entity to disclose a maturity analysis of the
undiscounted cash outflows to repurchase derecognised financial assets or other
amounts payable to the transferee in respect of the derecognised financial
assets, showing the remaining contractual maturities of the entity’s continuing
involvement. This analysis distinguishes cash flows that are required to be paid
(eg forward contracts), cash flows that the entity may be required to pay
(eg written put options) and cash flows that the entity might choose to pay
(eg purchased call options).
B35
An entity shall use its judgement to determine an appropriate number of time
bands in preparing the maturity analysis required by paragraph 42E(e). For
example, an entity might determine that the following maturity time bands are
appropriate:
B36
(a)
not later than one month;
(b)
later than one month and not later than three months;
(c)
later than three months and not later than six months;
(d)
later than six months and not later than one year;
(e)
later than one year and not later than three years;
(f)
later than three years and not later than five years; and
(g)
more than five years.
If there is a range of possible maturities, the cash flows are included on the basis
of the earliest date on which the entity can be required or is permitted to pay.
Qualitative information (paragraph 42E(f))
B37
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The qualitative information required by paragraph 42E(f) includes a description
of the derecognised financial assets and the nature and purpose of the
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continuing involvement retained after transferring those assets. It also includes
a description of the risks to which an entity is exposed, including:
(a)
a description of how the entity manages the risk inherent in its
continuing involvement in the derecognised financial assets.
(b)
whether the entity is required to bear losses before other parties, and the
ranking and amounts of losses borne by parties whose interests rank
lower than the entity’s interest in the asset (ie its continuing
involvement in the asset).
(c)
a description of any triggers associated with obligations to provide
financial support or to repurchase a transferred financial asset.
Gain or loss on derecognition (paragraph 42G(a))
B38
Paragraph 42G(a) requires an entity to disclose the gain or loss on derecognition
relating to financial assets in which the entity has continuing involvement. The
entity shall disclose if a gain or loss on derecognition arose because the fair
values of the components of the previously recognised asset (ie the interest in
the asset derecognised and the interest retained by the entity) were different
from the fair value of the previously recognised asset as a whole. In that
situation, the entity shall also disclose whether the fair value measurements
included significant inputs that were not based on observable market data, as
described in paragraph 27A.
Supplementary information (paragraph 42H)
B39
The disclosures required in paragraphs 42D–42G may not be sufficient to meet
the disclosure objectives in paragraph 42B. If this is the case, the entity shall
disclose whatever additional information is necessary to meet the disclosure
objectives. The entity shall decide, in the light of its circumstances, how much
additional information it needs to provide to satisfy the information needs of
users and how much emphasis it places on different aspects of the additional
information. It is necessary to strike a balance between burdening financial
statements with excessive detail that may not assist users of financial statements
and obscuring information as a result of too much aggregation.
Offsetting financial assets and financial liabilities
(paragraphs 13A–13F)
Scope (paragraph 13A)
B40
The disclosures in paragraphs 13B–13E are required for all recognised financial
instruments that are set off in accordance with paragraph 42 of IAS 32. In
addition, financial instruments are within the scope of the disclosure
requirements in paragraphs 13B–13E if they are subject to an enforceable master
netting arrangement or similar agreement that covers similar financial
instruments and transactions, irrespective of whether the financial instruments
are set off in accordance with paragraph 42 of IAS 32.
B41
The similar agreements referred to in paragraphs 13A and B40 include
derivative clearing agreements, global master repurchase agreements, global
master securities lending agreements, and any related rights to financial
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collateral. The similar financial instruments and transactions referred to in
paragraph B40 include derivatives, sale and repurchase agreements, reverse sale
and repurchase agreements, securities borrowing, and securities lending
agreements. Examples of financial instruments that are not within the scope of
paragraph 13A are loans and customer deposits at the same institution (unless
they are set off in the statement of financial position), and financial instruments
that are subject only to a collateral agreement.
Disclosure of quantitative information for recognised financial
assets and recognised financial liabilities within the scope of
paragraph 13A (paragraph 13C)
B42
Financial instruments disclosed in accordance with paragraph 13C may be
subject to different measurement requirements (for example, a payable related
to a repurchase agreement may be measured at amortised cost, while a
derivative will be measured at fair value). An entity shall include instruments at
their recognised amounts and describe any resulting measurement differences
in the related disclosures.
Disclosure of the gross amounts of recognised financial assets
and recognised financial liabilities within the scope of
paragraph 13A (paragraph 13C(a))
B43
The amounts required by paragraph 13C(a) relate to recognised financial
instruments that are set off in accordance with paragraph 42 of IAS 32. The
amounts required by paragraph 13C(a) also relate to recognised financial
instruments that are subject to an enforceable master netting arrangement or
similar agreement irrespective of whether they meet the offsetting criteria.
However, the disclosures required by paragraph 13C(a) do not relate to any
amounts recognised as a result of collateral agreements that do not meet the
offsetting criteria in paragraph 42 of IAS 32. Instead, such amounts are required
to be disclosed in accordance with paragraph 13C(d).
Disclosure of the amounts that are set off in accordance with the
criteria in paragraph 42 of IAS 32 (paragraph 13C(b))
B44
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Paragraph 13C(b) requires that entities disclose the amounts set off in
accordance with paragraph 42 of IAS 32 when determining the net amounts
presented in the statement of financial position. The amounts of both the
recognised financial assets and the recognised financial liabilities that are
subject to set-off under the same arrangement will be disclosed in both the
financial asset and financial liability disclosures. However, the amounts
disclosed (in, for example, a table) are limited to the amounts that are subject to
set-off. For example, an entity may have a recognised derivative asset and a
recognised derivative liability that meet the offsetting criteria in paragraph 42
of IAS 32. If the gross amount of the derivative asset is larger than the gross
amount of the derivative liability, the financial asset disclosure table will
include the entire amount of the derivative asset (in accordance with
paragraph 13C(a)) and the entire amount of the derivative liability (in
accordance with paragraph 13C(b)). However, while the financial liability
disclosure table will include the entire amount of the derivative liability (in
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accordance with paragraph 13C(a)), it will only include the amount of the
derivative asset (in accordance with paragraph 13C(b)) that is equal to the
amount of the derivative liability.
Disclosure of the net amounts presented in the statement of
financial position (paragraph 13C(c))
B45
If an entity has instruments that meet the scope of these disclosures (as specified
in paragraph 13A), but that do not meet the offsetting criteria in paragraph 42
of IAS 32, the amounts required to be disclosed by paragraph 13C(c) would equal
the amounts required to be disclosed by paragraph 13C(a).
B46
The amounts required to be disclosed by paragraph 13C(c) must be reconciled to
the individual line item amounts presented in the statement of financial
position. For example, if an entity determines that the aggregation or
disaggregation of individual financial statement line item amounts provides
more relevant information, it must reconcile the aggregated or disaggregated
amounts disclosed in paragraph 13C(c) back to the individual line item amounts
presented in the statement of financial position.
Disclosure of the amounts subject to an enforceable master
netting arrangement or similar agreement that are not otherwise
included in paragraph 13C(b) (paragraph 13C(d))
B47
Paragraph 13C(d) requires that entities disclose amounts that are subject to an
enforceable master netting arrangement or similar agreement that are not
otherwise included in paragraph 13C(b). Paragraph 13C(d)(i) refers to amounts
related to recognised financial instruments that do not meet some or all of the
offsetting criteria in paragraph 42 of IAS 32 (for example, current rights of set-off
that do not meet the criterion in paragraph 42(b) of IAS 32, or conditional rights
of set-off that are enforceable and exercisable only in the event of default, or
only in the event of insolvency or bankruptcy of any of the counterparties).
B48
Paragraph 13C(d)(ii) refers to amounts related to financial collateral, including
cash collateral, both received and pledged. An entity shall disclose the fair value
of those financial instruments that have been pledged or received as collateral.
The amounts disclosed in accordance with paragraph 13C(d)(ii) should relate to
the actual collateral received or pledged and not to any resulting payables or
receivables recognised to return or receive back such collateral.
Limits on the amounts disclosed in paragraph 13C(d)
(paragraph 13D)
B49
When disclosing amounts in accordance with paragraph 13C(d), an entity must
take into account the effects of over-collateralisation by financial instrument. To
do so, the entity must first deduct the amounts disclosed in accordance with
paragraph 13C(d)(i) from the amount disclosed in accordance with
paragraph 13C(c). The entity shall then limit the amounts disclosed in
accordance with paragraph 13C(d)(ii) to the remaining amount in
paragraph 13C(c) for the related financial instrument. However, if rights to
collateral can be enforced across financial instruments, such rights can be
included in the disclosure provided in accordance with paragraph 13D.
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Description of the rights of set-off subject to enforceable master
netting arrangements and similar agreements (paragraph 13E)
B50
An entity shall describe the types of rights of set-off and similar arrangements
disclosed in accordance with paragraph 13C(d), including the nature of those
rights. For example, an entity shall describe its conditional rights. For
instruments subject to rights of set-off that are not contingent on a future event
but that do not meet the remaining criteria in paragraph 42 of IAS 32, the entity
shall describe the reason(s) why the criteria are not met. For any financial
collateral received or pledged, the entity shall describe the terms of the
collateral agreement (for example, when the collateral is restricted).
Disclosure by type of financial instrument or by counterparty
B51
The quantitative disclosures required by paragraph 13C(a)–(e) may be grouped by
type of financial instrument or transaction (for example, derivatives, repurchase
and reverse repurchase agreements or securities borrowing and securities
lending agreements).
B52
Alternatively, an entity may group the quantitative disclosures required by
paragraph 13C(a)–(c) by type of financial instrument, and the quantitative
disclosures required by paragraph 13C(c)–(e) by counterparty. If an entity
provides the required information by counterparty, the entity is not required to
identify the counterparties by name. However, designation of counterparties
(Counterparty A, Counterparty B, Counterparty C, etc) shall remain consistent
from year to year for the years presented to maintain comparability. Qualitative
disclosures shall be considered so that further information can be given about
the types of counterparties. When disclosure of the amounts in paragraph
13C(c)–(e) is provided by counterparty, amounts that are individually significant
in terms of total counterparty amounts shall be separately disclosed and the
remaining individually insignificant counterparty amounts shall be aggregated
into one line item.
Other
B53
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The specific disclosures required by paragraphs 13C–13E are minimum
requirements. To meet the objective in paragraph 13B an entity may need to
supplement them with additional (qualitative) disclosures, depending on the
terms of the enforceable master netting arrangements and related agreements,
including the nature of the rights of set-off, and their effect or potential effect on
the entity’s financial position.
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Appendix C
Amendments to other IFRSs
The amendments in this appendix shall be applied for annual periods beginning on or after
1 January 2007. If an entity applies this IFRS for an earlier period, these amendments shall be
applied for that earlier period.
*****
The amendments contained in this appendix when this IFRS was issued in 2005 have been incorporated
into the text of the relevant IFRSs included in this volume.
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IFRS 8
Operating Segments
In April 2001 the International Accounting Standards Board (the Board) adopted IAS 14
Segment Reporting, which had originally been issued by the International Accounting
Standards Committee in August 1997. IAS 14 Segment Reporting replaced IAS 14 Reporting
Financial Information by Segment, issued in August 1981.
In November 2006 the Board issued IFRS 8 Operating Segments to replace IAS 14. IAS 1
Presentation of Financial Statements (as revised in 2007) amended the terminology used
throughout the Standards, including IFRS 8.
Other Standards have made minor consequential amendments to IFRS 8. They include
IAS 19 Employee Benefits (issued June 2011) and Annual Improvements to IFRSs 2010–2012 Cycle
(issued December 2013).
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CONTENTS
from paragraph
INTERNATIONAL FINANCIAL REPORTING STANDARD 8
OPERATING SEGMENTS
CORE PRINCIPLE
1
SCOPE
2
OPERATING SEGMENTS
5
REPORTABLE SEGMENTS
11
Aggregation criteria
12
Quantitative thresholds
13
DISCLOSURE
20
General information
22
Information about profit or loss, assets and liabilities
23
MEASUREMENT
25
Reconciliations
28
Restatement of previously reported information
29
ENTITY-WIDE DISCLOSURES
31
Information about products and services
32
Information about geographical areas
33
Information about major customers
34
TRANSITION AND EFFECTIVE DATE
35
WITHDRAWAL OF IAS 14
37
APPENDICES
A Defined term
B Amendments to other IFRSs
FOR THE ACCOMPANYING DOCUMENTS LISTED BELOW, SEE PART B OF THIS
EDITION
APPROVAL BY THE BOARD OF IFRS 8 ISSUED IN NOVEMBER 2006
BASIS FOR CONCLUSIONS
APPENDICES
A Background information and basis for conclusions of the US Financial
Accounting Standards Board on SFAS 131
B Amendments to the Basis for Conclusions on other IFRSs
DISSENTING OPINIONS
IMPLEMENTATION GUIDANCE
APPENDIX
Amendments to other Implementation Guidance
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International Financial Reporting Standard 8 Operating Segments (IFRS 8) is set out in
paragraphs 1–37 and Appendices A and B. All the paragraphs have equal authority.
Paragraphs in bold type state the main principles. Definitions of terms are given in the
Glossary for International Financial Reporting Standards. IFRS 8 should be read in the
context of its core principle and the Basis for Conclusions, the Preface to International
Financial Reporting Standards and the Conceptual Framework for Financial Reporting. IAS 8
Accounting Policies, Changes in Accounting Estimates and Errors provides a basis for selecting
and applying accounting policies in the absence of explicit guidance.
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International Financial Reporting Standard 8
Operating Segments
Core principle
1
An entity shall disclose information to enable users of its financial
statements to evaluate the nature and financial effects of the business
activities in which it engages and the economic environments in which it
operates.
Scope
2
This IFRS shall apply to:
(a)
(b)
the separate or individual financial statements of an entity:
(i)
whose debt or equity instruments are traded in a public market
(a domestic or foreign stock exchange or an over-the-counter
market, including local and regional markets), or
(ii)
that files, or is in the process of filing, its financial statements
with a securities commission or other regulatory organisation for
the purpose of issuing any class of instruments in a public
market; and
the consolidated financial statements of a group with a parent:
(i)
whose debt or equity instruments are traded in a public market
(a domestic or foreign stock exchange or an over-the-counter
market, including local and regional markets), or
(ii)
that files, or is in the process of filing, the consolidated financial
statements with a securities commission or other regulatory
organisation for the purpose of issuing any class of instruments
in a public market.
3
If an entity that is not required to apply this IFRS chooses to disclose
information about segments that does not comply with this IFRS, it shall not
describe the information as segment information.
4
If a financial report contains both the consolidated financial statements of a
parent that is within the scope of this IFRS as well as the parent’s separate
financial statements, segment information is required only in the consolidated
financial statements.
Operating segments
5
An operating segment is a component of an entity:
(a)
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that engages in business activities from which it may earn revenues and
incur expenses (including revenues and expenses relating to transactions
with other components of the same entity),
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(b)
whose operating results are regularly reviewed by the entity’s chief
operating decision maker to make decisions about resources to be
allocated to the segment and assess its performance, and
(c)
for which discrete financial information is available.
An operating segment may engage in business activities for which it has yet to
earn revenues, for example, start-up operations may be operating segments
before earning revenues.
6
Not every part of an entity is necessarily an operating segment or part of an
operating segment. For example, a corporate headquarters or some functional
departments may not earn revenues or may earn revenues that are only
incidental to the activities of the entity and would not be operating segments.
For the purposes of this IFRS, an entity’s post-employment benefit plans are not
operating segments.
7
The term ‘chief operating decision maker’ identifies a function, not necessarily a
manager with a specific title. That function is to allocate resources to and assess
the performance of the operating segments of an entity. Often the chief
operating decision maker of an entity is its chief executive officer or chief
operating officer but, for example, it may be a group of executive directors or
others.
8
For many entities, the three characteristics of operating segments described in
paragraph 5 clearly identify its operating segments. However, an entity may
produce reports in which its business activities are presented in a variety of
ways. If the chief operating decision maker uses more than one set of segment
information, other factors may identify a single set of components as
constituting an entity’s operating segments, including the nature of the
business activities of each component, the existence of managers responsible for
them, and information presented to the board of directors.
9
Generally, an operating segment has a segment manager who is directly
accountable to and maintains regular contact with the chief operating decision
maker to discuss operating activities, financial results, forecasts, or plans for the
segment. The term ‘segment manager’ identifies a function, not necessarily a
manager with a specific title. The chief operating decision maker also may be
the segment manager for some operating segments. A single manager may be
the segment manager for more than one operating segment.
If the
characteristics in paragraph 5 apply to more than one set of components of an
organisation but there is only one set for which segment managers are held
responsible, that set of components constitutes the operating segments.
10
The characteristics in paragraph 5 may apply to two or more overlapping sets of
components for which managers are held responsible. That structure is
sometimes referred to as a matrix form of organisation. For example, in some
entities, some managers are responsible for different product and service lines
worldwide, whereas other managers are responsible for specific geographical
areas. The chief operating decision maker regularly reviews the operating
results of both sets of components, and financial information is available for
both. In that situation, the entity shall determine which set of components
constitutes the operating segments by reference to the core principle.
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Reportable segments
11
An entity shall report separately information about each operating segment
that:
(a)
has been identified in accordance with paragraphs 5–10 or results from
aggregating two or more of those segments in accordance with
paragraph 12, and
(b)
exceeds the quantitative thresholds in paragraph 13.
Paragraphs 14–19 specify other situations in which separate information about
an operating segment shall be reported.
Aggregation criteria
12
Operating segments often exhibit similar long-term financial performance if
they have similar economic characteristics. For example, similar long-term
average gross margins for two operating segments would be expected if their
economic characteristics were similar. Two or more operating segments may be
aggregated into a single operating segment if aggregation is consistent with the
core principle of this IFRS, the segments have similar economic characteristics,
and the segments are similar in each of the following respects:
(a)
the nature of the products and services;
(b)
the nature of the production processes;
(c)
the type or class of customer for their products and services;
(d)
the methods used to distribute their products or provide their services;
and
(e)
if applicable, the nature of the regulatory environment, for example,
banking, insurance or public utilities.
Quantitative thresholds
13
An entity shall report separately information about an operating segment that
meets any of the following quantitative thresholds:
(a)
Its reported revenue, including both sales to external customers and
intersegment sales or transfers, is 10 per cent or more of the combined
revenue, internal and external, of all operating segments.
(b)
The absolute amount of its reported profit or loss is 10 per cent or more
of the greater, in absolute amount, of (i) the combined reported profit of
all operating segments that did not report a loss and (ii) the combined
reported loss of all operating segments that reported a loss.
(c)
Its assets are 10 per cent or more of the combined assets of all operating
segments.
Operating segments that do not meet any of the quantitative thresholds may be
considered reportable, and separately disclosed, if management believes that
information about the segment would be useful to users of the financial
statements.
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14
An entity may combine information about operating segments that do not meet
the quantitative thresholds with information about other operating segments
that do not meet the quantitative thresholds to produce a reportable segment
only if the operating segments have similar economic characteristics and share a
majority of the aggregation criteria listed in paragraph 12.
15
If the total external revenue reported by operating segments constitutes less
than 75 per cent of the entity’s revenue, additional operating segments shall be
identified as reportable segments (even if they do not meet the criteria in
paragraph 13) until at least 75 per cent of the entity’s revenue is included in
reportable segments.
16
Information about other business activities and operating segments that are not
reportable shall be combined and disclosed in an ‘all other segments’ category
separately from other reconciling items in the reconciliations required by
paragraph 28. The sources of the revenue included in the ‘all other segments’
category shall be described.
17
If management judges that an operating segment identified as a reportable
segment in the immediately preceding period is of continuing significance,
information about that segment shall continue to be reported separately in the
current period even if it no longer meets the criteria for reportability in
paragraph 13.
18
If an operating segment is identified as a reportable segment in the current
period in accordance with the quantitative thresholds, segment data for a prior
period presented for comparative purposes shall be restated to reflect the newly
reportable segment as a separate segment, even if that segment did not satisfy
the criteria for reportability in paragraph 13 in the prior period, unless the
necessary information is not available and the cost to develop it would be
excessive.
19
There may be a practical limit to the number of reportable segments that an
entity separately discloses beyond which segment information may become too
detailed. Although no precise limit has been determined, as the number of
segments that are reportable in accordance with paragraphs 13–18 increases
above ten, the entity should consider whether a practical limit has been reached.
Disclosure
20
An entity shall disclose information to enable users of its financial
statements to evaluate the nature and financial effects of the business
activities in which it engages and the economic environments in which it
operates.
21
To give effect to the principle in paragraph 20, an entity shall disclose the
following for each period for which a statement of comprehensive income is
presented:
(a)
general information as described in paragraph 22;
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(b)
information about reported segment profit or loss, including specified
revenues and expenses included in reported segment profit or loss,
segment assets, segment liabilities and the basis of measurement, as
described in paragraphs 23–27; and
(c)
reconciliations of the totals of segment revenues, reported segment
profit or loss, segment assets, segment liabilities and other material
segment items to corresponding entity amounts as described in
paragraph 28.
Reconciliations of the amounts in the statement of financial position for
reportable segments to the amounts in the entity’s statement of financial
position are required for each date at which a statement of financial position is
presented. Information for prior periods shall be restated as described in
paragraphs 29 and 30.
General information
22
An entity shall disclose the following general information:
(a)
factors used to identify the entity’s reportable segments, including the
basis of organisation (for example, whether management has chosen to
organise the entity around differences in products and services,
geographical areas, regulatory environments, or a combination of factors
and whether operating segments have been aggregated);
(aa)
the judgements made by management in applying the aggregation
criteria in paragraph 12. This includes a brief description of the
operating segments that have been aggregated in this way and the
economic indicators that have been assessed in determining that the
aggregated operating segments share similar economic characteristics;
and
(b)
types of products and services from which each reportable segment
derives its revenues.
Information about profit or loss, assets and liabilities
23
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An entity shall report a measure of profit or loss for each reportable segment.
An entity shall report a measure of total assets and liabilities for each reportable
segment if such amounts are regularly provided to the chief operating decision
maker. An entity shall also disclose the following about each reportable
segment if the specified amounts are included in the measure of segment profit
or loss reviewed by the chief operating decision maker, or are otherwise
regularly provided to the chief operating decision maker, even if not included in
that measure of segment profit or loss:
(a)
revenues from external customers;
(b)
revenues from transactions with other operating segments of the same
entity;
(c)
interest revenue;
(d)
interest expense;
(e)
depreciation and amortisation;
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(f)
material items of income and expense disclosed in accordance with
paragraph 97 of IAS 1 Presentation of Financial Statements (as revised in
2007);
(g)
the entity’s interest in the profit or loss of associates and joint ventures
accounted for by the equity method;
(h)
income tax expense or income; and
(i)
material non-cash items other than depreciation and amortisation.
An entity shall report interest revenue separately from interest expense for each
reportable segment unless a majority of the segment’s revenues are from
interest and the chief operating decision maker relies primarily on net interest
revenue to assess the performance of the segment and make decisions about
resources to be allocated to the segment. In that situation, an entity may report
that segment’s interest revenue net of its interest expense and disclose that it
has done so.
24
An entity shall disclose the following about each reportable segment if the
specified amounts are included in the measure of segment assets reviewed by
the chief operating decision maker or are otherwise regularly provided to the
chief operating decision maker, even if not included in the measure of segment
assets:
(a)
the amount of investment in associates and joint ventures accounted for
by the equity method, and
(b)
the amounts of additions to non-current assets1 other than financial
instruments, deferred tax assets, net defined benefit assets (see IAS 19
Employee Benefits) and rights arising under insurance contracts.
Measurement
25
The amount of each segment item reported shall be the measure reported to the
chief operating decision maker for the purposes of making decisions about
allocating resources to the segment and assessing its performance. Adjustments
and eliminations made in preparing an entity’s financial statements and
allocations of revenues, expenses, and gains or losses shall be included in
determining reported segment profit or loss only if they are included in the
measure of the segment’s profit or loss that is used by the chief operating
decision maker. Similarly, only those assets and liabilities that are included in
the measures of the segment’s assets and segment’s liabilities that are used by
the chief operating decision maker shall be reported for that segment. If
amounts are allocated to reported segment profit or loss, assets or liabilities,
those amounts shall be allocated on a reasonable basis.
26
If the chief operating decision maker uses only one measure of an operating
segment’s profit or loss, the segment’s assets or the segment’s liabilities in
assessing segment performance and deciding how to allocate resources, segment
profit or loss, assets and liabilities shall be reported at those measures. If the
1
For assets classified according to a liquidity presentation, non-current assets are assets that include
amounts expected to be recovered more than twelve months after the reporting period.
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chief operating decision maker uses more than one measure of an operating
segment’s profit or loss, the segment’s assets or the segment’s liabilities, the
reported measures shall be those that management believes are determined in
accordance with the measurement principles most consistent with those used in
measuring the corresponding amounts in the entity’s financial statements.
27
An entity shall provide an explanation of the measurements of segment profit or
loss, segment assets and segment liabilities for each reportable segment. At a
minimum, an entity shall disclose the following:
(a)
the basis of accounting for any transactions between reportable
segments.
(b)
the nature of any differences between the measurements of the
reportable segments’ profits or losses and the entity’s profit or loss before
income tax expense or income and discontinued operations (if not
apparent from the reconciliations described in paragraph 28). Those
differences could include accounting policies and policies for allocation
of centrally incurred costs that are necessary for an understanding of the
reported segment information.
(c)
the nature of any differences between the measurements of the
reportable segments’ assets and the entity’s assets (if not apparent from
the reconciliations described in paragraph 28). Those differences could
include accounting policies and policies for allocation of jointly used
assets that are necessary for an understanding of the reported segment
information.
(d)
the nature of any differences between the measurements of the
reportable segments’ liabilities and the entity’s liabilities (if not apparent
from the reconciliations described in paragraph 28). Those differences
could include accounting policies and policies for allocation of jointly
utilised liabilities that are necessary for an understanding of the
reported segment information.
(e)
the nature of any changes from prior periods in the measurement
methods used to determine reported segment profit or loss and the
effect, if any, of those changes on the measure of segment profit or loss.
(f)
the nature and effect of any asymmetrical allocations to reportable
segments. For example, an entity might allocate depreciation expense to
a segment without allocating the related depreciable assets to that
segment.
Reconciliations
28
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An entity shall provide reconciliations of all of the following:
(a)
the total of the reportable segments’ revenues to the entity’s revenue.
(b)
the total of the reportable segments’ measures of profit or loss to the
entity’s profit or loss before tax expense (tax income) and discontinued
operations. However, if an entity allocates to reportable segments items
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such as tax expense (tax income), the entity may reconcile the total of the
segments’ measures of profit or loss to the entity’s profit or loss after
those items.
(c)
the total of the reportable segments’ assets to the entity’s assets if the
segment assets are reported in accordance with paragraph 23.
(d)
the total of the reportable segments’ liabilities to the entity’s liabilities if
segment liabilities are reported in accordance with paragraph 23.
(e)
the total of the reportable segments’ amounts for every other material
item of information disclosed to the corresponding amount for the
entity.
All material reconciling items shall be separately identified and described. For
example, the amount of each material adjustment needed to reconcile
reportable segment profit or loss to the entity’s profit or loss arising from
different accounting policies shall be separately identified and described.
Restatement of previously reported information
29
If an entity changes the structure of its internal organisation in a manner that
causes the composition of its reportable segments to change, the corresponding
information for earlier periods, including interim periods, shall be restated
unless the information is not available and the cost to develop it would be
excessive. The determination of whether the information is not available and
the cost to develop it would be excessive shall be made for each individual item
of disclosure. Following a change in the composition of its reportable segments,
an entity shall disclose whether it has restated the corresponding items of
segment information for earlier periods.
30
If an entity has changed the structure of its internal organisation in a manner
that causes the composition of its reportable segments to change and if segment
information for earlier periods, including interim periods, is not restated to
reflect the change, the entity shall disclose in the year in which the change
occurs segment information for the current period on both the old basis and the
new basis of segmentation, unless the necessary information is not available and
the cost to develop it would be excessive.
Entity-wide disclosures
31
Paragraphs 32–34 apply to all entities subject to this IFRS including those
entities that have a single reportable segment. Some entities’ business activities
are not organised on the basis of differences in related products and services or
differences in geographical areas of operations. Such an entity’s reportable
segments may report revenues from a broad range of essentially different
products and services, or more than one of its reportable segments may provide
essentially the same products and services. Similarly, an entity’s reportable
segments may hold assets in different geographical areas and report revenues
from customers in different geographical areas, or more than one of its
reportable segments may operate in the same geographical area. Information
required by paragraphs 32–34 shall be provided only if it is not provided as part
of the reportable segment information required by this IFRS.
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Information about products and services
32
An entity shall report the revenues from external customers for each product
and service, or each group of similar products and services, unless the necessary
information is not available and the cost to develop it would be excessive, in
which case that fact shall be disclosed. The amounts of revenues reported shall
be based on the financial information used to produce the entity’s financial
statements.
Information about geographical areas
33
An entity shall report the following geographical information, unless the
necessary information is not available and the cost to develop it would be
excessive:
(a)
revenues from external customers (i) attributed to the entity’s country of
domicile and (ii) attributed to all foreign countries in total from which
the entity derives revenues. If revenues from external customers
attributed to an individual foreign country are material, those revenues
shall be disclosed separately. An entity shall disclose the basis for
attributing revenues from external customers to individual countries.
(b)
non-current assets2 other than financial instruments, deferred tax assets,
post-employment benefit assets, and rights arising under insurance
contracts (i) located in the entity’s country of domicile and (ii) located in
all foreign countries in total in which the entity holds assets. If assets in
an individual foreign country are material, those assets shall be disclosed
separately.
The amounts reported shall be based on the financial information that is used to
produce the entity’s financial statements. If the necessary information is not
available and the cost to develop it would be excessive, that fact shall be
disclosed. An entity may provide, in addition to the information required by
this paragraph, subtotals of geographical information about groups of countries.
Information about major customers
34
2
An entity shall provide information about the extent of its reliance on its major
customers. If revenues from transactions with a single external customer
amount to 10 per cent or more of an entity’s revenues, the entity shall disclose
that fact, the total amount of revenues from each such customer, and the
identity of the segment or segments reporting the revenues. The entity need not
disclose the identity of a major customer or the amount of revenues that each
segment reports from that customer. For the purposes of this IFRS, a group of
entities known to a reporting entity to be under common control shall be
considered a single customer. However, judgement is required to assess whether
a government (including government agencies and similar bodies whether local,
national or international) and entities known to the reporting entity to be under
For assets classified according to a liquidity presentation, non-current assets are assets that include
amounts expected to be recovered more than twelve months after the reporting period.
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the control of that government are considered a single customer. In assessing
this, the reporting entity shall consider the extent of economic integration
between those entities.
Transition and effective date
35
An entity shall apply this IFRS in its annual financial statements for periods
beginning on or after 1 January 2009. Earlier application is permitted. If an
entity applies this IFRS in its financial statements for a period before 1 January
2009, it shall disclose that fact.
35A
Paragraph 23 was amended by Improvements to IFRSs issued in April 2009. An
entity shall apply that amendment for annual periods beginning on or after
1 January 2010. Earlier application is permitted. If an entity applies the
amendment for an earlier period it shall disclose that fact.
36
Segment information for prior years that is reported as comparative information
for the initial year of application (including application of the amendment to
paragraph 23 made in April 2009) shall be restated to conform to the
requirements of this IFRS, unless the necessary information is not available and
the cost to develop it would be excessive.
36A
IAS 1 (as revised in 2007) amended the terminology used throughout IFRSs. In
addition it amended paragraph 23(f). An entity shall apply those amendments
for annual periods beginning on or after 1 January 2009. If an entity applies
IAS 1 (revised 2007) for an earlier period, the amendments shall be applied for
that earlier period.
36B
IAS 24 Related Party Disclosures (as revised in 2009) amended paragraph 34 for
annual periods beginning on or after 1 January 2011. If an entity applies IAS 24
(revised 2009) for an earlier period, it shall apply the amendment to
paragraph 34 for that earlier period.
36C
Annual Improvements to IFRSs 2010–2012 Cycle, issued in December 2013, amended
paragraphs 22 and 28. An entity shall apply those amendments for annual
periods beginning on or after 1 July 2014. Earlier application is permitted. If an
entity applies those amendments for an earlier period it shall disclose that fact.
Withdrawal of IAS 14
37
This IFRS supersedes IAS 14 Segment Reporting.
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Appendix A
Defined term
This appendix is an integral part of the IFRS.
operating segment
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An operating segment is a component of an entity:
(a)
that engages in business activities from which it may earn
revenues and incur expenses (including revenues and
expenses relating to transactions with other components
of the same entity),
(b)
whose operating results are regularly reviewed by the
entity’s chief operating decision maker to make decisions
about resources to be allocated to the segment and assess
its performance, and
(c)
for which discrete financial information is available.
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Appendix B
Amendments to other IFRSs
The amendments in this appendix shall be applied for annual periods beginning on or after
1 January 2009. If an entity applies this IFRS for an earlier period, these amendments shall be
applied for that earlier period. In the amended paragraphs, new text is underlined and deleted text
is struck through.
*****
The amendments contained in this appendix when this IFRS was issued in 2006 have been incorporated
into the text of the relevant IFRSs in this volume.
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IFRS 9
IFRS 9
Financial Instruments
In April 2001 the International Accounting Standards Board (the Board) adopted IAS 39
Financial Instruments: Recognition and Measurement, which had originally been issued by the
International Accounting Standards Committee in March 1999.
The Board had always intended that IFRS 9 Financial Instruments would replace IAS 39 in its
entirety. However, in response to requests from interested parties that the accounting for
financial instruments should be improved quickly, the Board divided its project to replace
IAS 39 into three main phases. As the Board completed each phase, it issued chapters in
IFRS 9 that replaced the corresponding requirements in IAS 39.
In November 2009 the Board issued the chapters of IFRS 9 relating to the classification and
measurement of financial assets. In October 2010 the Board added the requirements related
to the classification and measurement of financial liabilities to IFRS 9. This includes
requirements on embedded derivatives and how to account for changes in own credit risk
on financial liabilities designated under the fair value option.
In October 2010 the Board also decided to carry forward unchanged from IAS 39 the
requirements related to the derecognition of financial assets and financial liabilities.
Because of these changes, in October 2010 the Board restructured IFRS 9 and its Basis for
Conclusions. In December 2011 the Board deferred the mandatory effective date of IFRS 9.
In November 2013 the Board added a Hedge Accounting chapter.
In July 2014 the Board issued the completed version of IFRS 9. The Board made limited
amendments to the classification and measurement requirements for financial assets by
addressing a narrow range of application questions and by introducing a ‘fair value through
other comprehensive income’ measurement category for particular simple debt
instruments. The Board also added the impairment requirements relating to the
accounting for an entity’s expected credit losses on its financial assets and commitments to
extend credit. A new mandatory effective date was also set.
Other Standards have made minor consequential amendments to IFRS 9. They include
Severe Hyperinflation and Removal of Fixed Dates for First-time Adopters (Amendments to IFRS 1)
(issued December 2010), IFRS 10 Consolidated Financial Statements (issued May 2011), IFRS 11
Joint Arrangements (issued May 2011), IFRS 13 Fair Value Measurement (issued May 2011), IAS 19
Employee Benefits (issued June 2011), Annual Improvements to IFRSs 2010–2012 Cycle (issued
December 2013), IFRS 15 Revenue from Contracts with Customers (issued May 2014) and IFRS 16
Leases (issued January 2016).
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CONTENTS
from paragraph
INTERNATIONAL FINANCIAL REPORTING STANDARD 9
FINANCIAL INSTRUMENTS
CHAPTERS
1 OBJECTIVE
1.1
2 SCOPE
2.1
3 RECOGNITION AND DERECOGNITION
3.1.1
3.1 Initial recognition
3.1.1
3.2 Derecognition of financial assets
3.2.1
3.3 Derecognition of financial liabilities
3.3.1
4 CLASSIFICATION
4.1.1
4.1 Classification of financial assets
4.1.1
4.2 Classification of financial liabilities
4.2.1
4.3 Embedded derivatives
4.3.1
4.4 Reclassification
4.4.1
5 MEASUREMENT
5.1.1
5.1 Initial measurement
5.1.1
5.2 Subsequent measurement of financial assets
5.2.1
5.3 Subsequent measurement of financial liabilities
5.3.1
5.4 Amortised cost measurement
5.4.1
5.5 Impairment
5.5.1
5.6 Reclassification of financial assets
5.6.1
5.7 Gains and losses
5.7.1
6 HEDGE ACCOUNTING
6.1.1
6.1 Objective and scope of hedge accounting
6.1.1
6.2 Hedging instruments
6.2.1
6.3 Hedged items
6.3.1
6.4 Qualifying criteria for hedge accounting
6.4.1
6.5 Accounting for qualifying hedging relationships
6.5.1
6.6 Hedges of a group of items
6.6.1
6.7 Option to designate a credit exposure as measured at fair value through
profit or loss
6.7.1
7 EFFECTIVE DATE AND TRANSITION
7.1.1
7.1 Effective date
7.1.1
7.2 Transition
7.2.1
7.3 Withdrawal of IFRIC 9, IFRS 9 (2009), IFRS 9 (2010) and IFRS 9 (2013)
7.3.1
APPENDICES
A Defined terms
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B Application guidance
C Amendments to other Standards
FOR THE ACCOMPANYING DOCUMENTS LISTED BELOW, SEE PART B OF THIS
EDITION
APPROVAL BY THE BOARD OF IFRS 9 ISSUED IN NOVEMBER 2009
APPROVAL BY THE BOARD OF THE REQUIREMENTS ADDED TO IFRS 9 IN
OCTOBER 2010
APPROVAL BY THE BOARD OF AMENDMENTS TO IFRS 9:
MANDATORY EFFECTIVE DATE IFRS 9 AND TRANSITION DISCLOSURES
(AMENDMENTS TO IFRS 9 (2009), IFRS 9 (2010) AND IFRS 7) ISSUED IN
DECEMBER 2011
IFRS 9 FINANCIAL INSTRUMENTS (HEDGE ACCOUNTING AND
AMENDMENTS TO IFRS 9, IFRS 7 AND IAS 39) ISSUED IN NOVEMBER 2013
APPROVAL BY THE BOARD OF IFRS 9 FINANCIAL INSTRUMENTS ISSUED IN
JULY 2014
BASIS FOR CONCLUSIONS
DISSENTING OPINIONS
APPENDICES
A Previous dissenting opinions
B Amendments to the Basis for Conclusions on other Standards
ILLUSTRATIVE EXAMPLES
GUIDANCE ON IMPLEMENTING IFRS 9 FINANCIAL INSTRUMENTS
APPENDIX
Amendments to the guidance on other Standards
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IFRS 9
International Financial Reporting Standard 9 Financial Instruments (IFRS 9) is set out in
paragraphs 1.1–7.3.2 and Appendices A–C. All the paragraphs have equal authority.
Paragraphs in bold type state the main principles. Terms defined in Appendix A are in
italics the first time they appear in the IFRS. Definitions of other terms are given in the
Glossary for International Financial Reporting Standards. IFRS 9 should be read in the
context of its objective and the Basis for Conclusions, the Preface to International Financial
Reporting Standards and the Conceptual Framework for Financial Reporting. IAS 8 Accounting
Policies, Changes in Accounting Estimates and Errors provides a basis for selecting and applying
accounting policies in the absence of explicit guidance.
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International Financial Reporting Standard 9
Financial Instruments
Chapter 1 Objective
1.1
The objective of this Standard is to establish principles for the financial
reporting of financial assets and financial liabilities that will present relevant and
useful information to users of financial statements for their assessment of the
amounts, timing and uncertainty of an entity’s future cash flows.
Chapter 2 Scope
2.1
This Standard shall be applied by all entities to all types of financial
instruments except:
(a)
those interests in subsidiaries, associates and joint ventures that
are accounted for in accordance with IFRS 10 Consolidated
Financial Statements, IAS 27 Separate Financial Statements or
IAS 28 Investments in Associates and Joint Ventures. However, in
some cases, IFRS 10, IAS 27 or IAS 28 require or permit an entity to
account for an interest in a subsidiary, associate or joint venture
in accordance with some or all of the requirements of this
Standard. Entities shall also apply this Standard to derivatives on
an interest in a subsidiary, associate or joint venture unless the
derivative meets the definition of an equity instrument of the
entity in IAS 32 Financial Instruments: Presentation.
(b)
rights and obligations under leases to which IFRS 16 Leases
applies. However:
(i)
finance lease receivables (ie net investments in finance
leases) and operating lease receivables recognised by a
lessor are subject to the derecognition and impairment
requirements of this Standard;
(ii)
lease liabilities recognised by a lessee are subject to the
derecognition requirements in paragraph 3.3.1 of this
Standard; and
(iii)
derivatives that are embedded in leases are subject to the
embedded derivatives requirements of this Standard.
(c)
employers’ rights and obligations under employee benefit plans,
to which IAS 19 Employee Benefits applies.
(d)
financial instruments issued by the entity that meet the definition
of an equity instrument in IAS 32 (including options and warrants)
or that are required to be classified as an equity instrument in
accordance with paragraphs 16A and 16B or paragraphs 16C
and 16D of IAS 32. However, the holder of such equity instruments
shall apply this Standard to those instruments, unless they meet
the exception in (a).
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(e)
rights and obligations arising under (i) an insurance contract as
defined in IFRS 4 Insurance Contracts, other than an issuer’s rights
and obligations arising under an insurance contract that meets
the definition of a financial guarantee contract, or (ii) a contract
that is within the scope of IFRS 4 because it contains a
discretionary participation feature.
However, this Standard
applies to a derivative that is embedded in a contract within the
scope of IFRS 4 if the derivative is not itself a contract within the
scope of IFRS 4. Moreover, if an issuer of financial guarantee
contracts has previously asserted explicitly that it regards such
contracts as insurance contracts and has used accounting that is
applicable to insurance contracts, the issuer may elect to apply
either this Standard or IFRS 4 to such financial guarantee
contracts (see paragraphs B2.5–B2.6). The issuer may make that
election contract by contract, but the election for each contract is
irrevocable.
(f)
any forward contract between an acquirer and a selling
shareholder to buy or sell an acquiree that will result in a business
combination within the scope of IFRS 3 Business Combinations at
a future acquisition date. The term of the forward contract should
not exceed a reasonable period normally necessary to obtain any
required approvals and to complete the transaction.
(g)
loan commitments other than those loan commitments described
in paragraph 2.3. However, an issuer of loan commitments shall
apply the impairment requirements of this Standard to loan
commitments that are not otherwise within the scope of this
Standard.
Also, all loan commitments are subject to the
derecognition requirements of this Standard.
(h)
financial instruments, contracts and obligations under
share-based payment transactions to which IFRS 2 Share-based
Payment applies, except for contracts within the scope of
paragraphs 2.4–2.7 of this Standard to which this Standard applies.
(i)
rights to payments to reimburse the entity for expenditure that it
is required to make to settle a liability that it recognises as a
provision in accordance with IAS 37 Provisions, Contingent
Liabilities and Contingent Assets, or for which, in an earlier
period, it recognised a provision in accordance with IAS 37.
(j)
rights and obligations within the scope of IFRS 15 Revenue from
Contracts with Customers that are financial instruments, except
for those that IFRS 15 specifies are accounted for in accordance
with this Standard.
2.2
The impairment requirements of this Standard shall be applied to those
rights that IFRS 15 specifies are accounted for in accordance with this
Standard for the purposes of recognising impairment gains or losses.
2.3
The following loan commitments are within the scope of this Standard:
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(a)
loan commitments that the entity designates as financial
liabilities at fair value through profit or loss (see paragraph 4.2.2).
An entity that has a past practice of selling the assets resulting
from its loan commitments shortly after origination shall apply
this Standard to all its loan commitments in the same class.
(b)
loan commitments that can be settled net in cash or by delivering
or issuing another financial instrument. These loan commitments
are derivatives. A loan commitment is not regarded as settled net
merely because the loan is paid out in instalments (for example, a
mortgage construction loan that is paid out in instalments in line
with the progress of construction).
(c)
commitments to provide a loan at a below-market interest rate
(see paragraph 4.2.1(d)).
2.4
This Standard shall be applied to those contracts to buy or sell a
non-financial item that can be settled net in cash or another financial
instrument, or by exchanging financial instruments, as if the contracts
were financial instruments, with the exception of contracts that were
entered into and continue to be held for the purpose of the receipt or
delivery of a non-financial item in accordance with the entity’s expected
purchase, sale or usage requirements. However, this Standard shall be
applied to those contracts that an entity designates as measured at fair
value through profit or loss in accordance with paragraph 2.5.
2.5
A contract to buy or sell a non-financial item that can be settled net in
cash or another financial instrument, or by exchanging financial
instruments, as if the contract was a financial instrument, may be
irrevocably designated as measured at fair value through profit or loss
even if it was entered into for the purpose of the receipt or delivery of a
non-financial item in accordance with the entity’s expected purchase, sale
or usage requirements. This designation is available only at inception of
the contract and only if it eliminates or significantly reduces a
recognition inconsistency (sometimes referred to as an ‘accounting
mismatch’) that would otherwise arise from not recognising that contract
because it is excluded from the scope of this Standard (see paragraph 2.4).
2.6
There are various ways in which a contract to buy or sell a non-financial item
can be settled net in cash or another financial instrument or by exchanging
financial instruments. These include:
(a)
when the terms of the contract permit either party to settle it net in cash
or another financial instrument or by exchanging financial instruments;
(b)
when the ability to settle net in cash or another financial instrument, or
by exchanging financial instruments, is not explicit in the terms of the
contract, but the entity has a practice of settling similar contracts net in
cash or another financial instrument or by exchanging financial
instruments (whether with the counterparty, by entering into offsetting
contracts or by selling the contract before its exercise or lapse);
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(c)
when, for similar contracts, the entity has a practice of taking delivery of
the underlying and selling it within a short period after delivery for the
purpose of generating a profit from short-term fluctuations in price or
dealer’s margin; and
(d)
when the non-financial item that is the subject of the contract is readily
convertible to cash.
A contract to which (b) or (c) applies is not entered into for the purpose of the
receipt or delivery of the non-financial item in accordance with the entity’s
expected purchase, sale or usage requirements and, accordingly, is within the
scope of this Standard. Other contracts to which paragraph 2.4 applies are
evaluated to determine whether they were entered into and continue to be held
for the purpose of the receipt or delivery of the non-financial item in accordance
with the entity’s expected purchase, sale or usage requirements and,
accordingly, whether they are within the scope of this Standard.
2.7
A written option to buy or sell a non-financial item that can be settled net in
cash or another financial instrument, or by exchanging financial instruments,
in accordance with paragraph 2.6(a) or 2.6(d) is within the scope of this
Standard. Such a contract cannot be entered into for the purpose of the receipt
or delivery of the non-financial item in accordance with the entity’s expected
purchase, sale or usage requirements.
Chapter 3 Recognition and derecognition
3.1 Initial recognition
3.1.1
An entity shall recognise a financial asset or a financial liability in its
statement of financial position when, and only when, the entity becomes
party to the contractual provisions of the instrument (see
paragraphs B3.1.1 and B3.1.2). When an entity first recognises a financial
asset, it shall classify it in accordance with paragraphs 4.1.1–4.1.5 and
measure it in accordance with paragraphs 5.1.1–5.1.3. When an entity first
recognises a financial liability, it shall classify it in accordance with
paragraphs 4.2.1 and 4.2.2 and measure it in accordance with
paragraph 5.1.1.
Regular way purchase or sale of financial assets
3.1.2
A regular way purchase or sale of financial assets shall be recognised and
derecognised, as applicable, using trade date accounting or settlement
date accounting (see paragraphs B3.1.3–B3.1.6).
3.2 Derecognition of financial assets
3.2.1
In consolidated financial statements, paragraphs 3.2.2–3.2.9, B3.1.1, B3.1.2 and
B3.2.1–B3.2.17 are applied at a consolidated level. Hence, an entity first
consolidates all subsidiaries in accordance with IFRS 10 and then applies those
paragraphs to the resulting group.
3.2.2
Before evaluating whether, and to what extent, derecognition is
appropriate under paragraphs 3.2.3–3.2.9, an entity determines whether
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those paragraphs should be applied to a part of a financial asset (or a part
of a group of similar financial assets) or a financial asset (or a group of
similar financial assets) in its entirety, as follows.
(a)
(b)
Paragraphs 3.2.3–3.2.9 are applied to a part of a financial asset (or a
part of a group of similar financial assets) if, and only if, the part
being considered for derecognition meets one of the following
three conditions.
(i)
The part comprises only specifically identified cash flows
from a financial asset (or a group of similar financial
assets). For example, when an entity enters into an interest
rate strip whereby the counterparty obtains the right to the
interest cash flows, but not the principal cash flows from a
debt instrument, paragraphs 3.2.3–3.2.9 are applied to the
interest cash flows.
(ii)
The part comprises only a fully proportionate (pro rata)
share of the cash flows from a financial asset (or a group of
similar financial assets). For example, when an entity
enters into an arrangement whereby the counterparty
obtains the rights to a 90 per cent share of all cash flows of a
debt instrument, paragraphs 3.2.3–3.2.9 are applied to
90 per cent of those cash flows. If there is more than one
counterparty, each counterparty is not required to have a
proportionate share of the cash flows provided that the
transferring entity has a fully proportionate share.
(iii)
The part comprises only a fully proportionate (pro rata)
share of specifically identified cash flows from a financial
asset (or a group of similar financial assets). For example,
when an entity enters into an arrangement whereby the
counterparty obtains the rights to a 90 per cent share of
interest cash flows from a financial asset, paragraphs
3.2.3–3.2.9 are applied to 90 per cent of those interest cash
flows. If there is more than one counterparty, each
counterparty is not required to have a proportionate share
of the specifically identified cash flows provided that the
transferring entity has a fully proportionate share.
In all other cases, paragraphs 3.2.3–3.2.9 are applied to the
financial asset in its entirety (or to the group of similar financial
assets in their entirety). For example, when an entity transfers
(i) the rights to the first or the last 90 per cent of cash collections
from a financial asset (or a group of financial assets), or (ii) the
rights to 90 per cent of the cash flows from a group of receivables,
but provides a guarantee to compensate the buyer for any credit
losses up to 8 per cent of the principal amount of the receivables,
paragraphs 3.2.3–3.2.9 are applied to the financial asset (or a group
of similar financial assets) in its entirety.
In paragraphs 3.2.3–3.2.12, the term ‘financial asset’ refers to either a part
of a financial asset (or a part of a group of similar financial assets) as
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identified in (a) above or, otherwise, a financial asset (or a group of
similar financial assets) in its entirety.
3.2.3
An entity shall derecognise a financial asset when, and only when:
(a)
the contractual rights to the cash flows from the financial asset
expire, or
(b)
it transfers the financial asset as set out in paragraphs 3.2.4 and
3.2.5 and the transfer qualifies for derecognition in accordance
with paragraph 3.2.6.
(See paragraph 3.1.2 for regular way sales of financial assets.)
3.2.4
3.2.5
3.2.6
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An entity transfers a financial asset if, and only if, it either:
(a)
transfers the contractual rights to receive the cash flows of the
financial asset, or
(b)
retains the contractual rights to receive the cash flows of the
financial asset, but assumes a contractual obligation to pay the
cash flows to one or more recipients in an arrangement that meets
the conditions in paragraph 3.2.5.
When an entity retains the contractual rights to receive the cash flows of
a financial asset (the ‘original asset’), but assumes a contractual
obligation to pay those cash flows to one or more entities (the ‘eventual
recipients’), the entity treats the transaction as a transfer of a financial
asset if, and only if, all of the following three conditions are met.
(a)
The entity has no obligation to pay amounts to the eventual
recipients unless it collects equivalent amounts from the original
asset. Short-term advances by the entity with the right of full
recovery of the amount lent plus accrued interest at market rates
do not violate this condition.
(b)
The entity is prohibited by the terms of the transfer contract from
selling or pledging the original asset other than as security to the
eventual recipients for the obligation to pay them cash flows.
(c)
The entity has an obligation to remit any cash flows it collects on
behalf of the eventual recipients without material delay. In
addition, the entity is not entitled to reinvest such cash flows,
except for investments in cash or cash equivalents (as defined in
IAS 7 Statement of Cash Flows) during the short settlement period
from the collection date to the date of required remittance to the
eventual recipients, and interest earned on such investments is
passed to the eventual recipients.
When an entity transfers a financial asset (see paragraph 3.2.4), it shall
evaluate the extent to which it retains the risks and rewards of ownership
of the financial asset. In this case:
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(a)
if the entity transfers substantially all the risks and rewards of
ownership of the financial asset, the entity shall derecognise the
financial asset and recognise separately as assets or liabilities any
rights and obligations created or retained in the transfer.
(b)
if the entity retains substantially all the risks and rewards of
ownership of the financial asset, the entity shall continue to
recognise the financial asset.
(c)
if the entity neither transfers nor retains substantially all the risks
and rewards of ownership of the financial asset, the entity shall
determine whether it has retained control of the financial asset.
In this case:
(i)
if the entity has not retained control, it shall derecognise
the financial asset and recognise separately as assets or
liabilities any rights and obligations created or retained in
the transfer.
(ii)
if the entity has retained control, it shall continue to
recognise the financial asset to the extent of its continuing
involvement in the financial asset (see paragraph 3.2.16).
3.2.7
The transfer of risks and rewards (see paragraph 3.2.6) is evaluated by comparing
the entity’s exposure, before and after the transfer, with the variability in the
amounts and timing of the net cash flows of the transferred asset. An entity has
retained substantially all the risks and rewards of ownership of a financial asset
if its exposure to the variability in the present value of the future net cash flows
from the financial asset does not change significantly as a result of the transfer
(eg because the entity has sold a financial asset subject to an agreement to buy it
back at a fixed price or the sale price plus a lender’s return). An entity has
transferred substantially all the risks and rewards of ownership of a financial
asset if its exposure to such variability is no longer significant in relation to the
total variability in the present value of the future net cash flows associated with
the financial asset (eg because the entity has sold a financial asset subject only to
an option to buy it back at its fair value at the time of repurchase or has
transferred a fully proportionate share of the cash flows from a larger financial
asset in an arrangement, such as a loan sub-participation, that meets the
conditions in paragraph 3.2.5).
3.2.8
Often it will be obvious whether the entity has transferred or retained
substantially all risks and rewards of ownership and there will be no need to
perform any computations. In other cases, it will be necessary to compute and
compare the entity’s exposure to the variability in the present value of the
future net cash flows before and after the transfer. The computation and
comparison are made using as the discount rate an appropriate current market
interest rate. All reasonably possible variability in net cash flows is considered,
with greater weight being given to those outcomes that are more likely to occur.
3.2.9
Whether the entity has retained control (see paragraph 3.2.6(c)) of the
transferred asset depends on the transferee’s ability to sell the asset. If the
transferee has the practical ability to sell the asset in its entirety to an unrelated
third party and is able to exercise that ability unilaterally and without needing
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to impose additional restrictions on the transfer, the entity has not retained
control. In all other cases, the entity has retained control.
Transfers that qualify for derecognition
3.2.10
If an entity transfers a financial asset in a transfer that qualifies for
derecognition in its entirety and retains the right to service the financial
asset for a fee, it shall recognise either a servicing asset or a servicing
liability for that servicing contract. If the fee to be received is not
expected to compensate the entity adequately for performing the
servicing, a servicing liability for the servicing obligation shall be
recognised at its fair value. If the fee to be received is expected to be more
than adequate compensation for the servicing, a servicing asset shall be
recognised for the servicing right at an amount determined on the basis
of an allocation of the carrying amount of the larger financial asset in
accordance with paragraph 3.2.13.
3.2.11
If, as a result of a transfer, a financial asset is derecognised in its entirety
but the transfer results in the entity obtaining a new financial asset or
assuming a new financial liability, or a servicing liability, the entity shall
recognise the new financial asset, financial liability or servicing liability
at fair value.
3.2.12
On derecognition of a financial asset in its entirety, the difference
between:
(a)
the carrying amount (measured at the date of derecognition) and
(b)
the consideration received (including any new asset obtained less
any new liability assumed)
shall be recognised in profit or loss.
3.2.13
If the transferred asset is part of a larger financial asset (eg when an
entity transfers interest cash flows that are part of a debt instrument, see
paragraph 3.2.2(a)) and the part transferred qualifies for derecognition in
its entirety, the previous carrying amount of the larger financial asset
shall be allocated between the part that continues to be recognised and
the part that is derecognised, on the basis of the relative fair values of
those parts on the date of the transfer. For this purpose, a retained
servicing asset shall be treated as a part that continues to be recognised.
The difference between:
(a)
the carrying amount (measured at the date of derecognition)
allocated to the part derecognised and
(b)
the consideration received for the part derecognised (including
any new asset obtained less any new liability assumed)
shall be recognised in profit or loss.
3.2.14
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When an entity allocates the previous carrying amount of a larger financial asset
between the part that continues to be recognised and the part that is
derecognised, the fair value of the part that continues to be recognised needs to
be measured. When the entity has a history of selling parts similar to the part
that continues to be recognised or other market transactions exist for such
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parts, recent prices of actual transactions provide the best estimate of its fair
value. When there are no price quotes or recent market transactions to support
the fair value of the part that continues to be recognised, the best estimate of the
fair value is the difference between the fair value of the larger financial asset as
a whole and the consideration received from the transferee for the part that is
derecognised.
Transfers that do not qualify for derecognition
3.2.15
If a transfer does not result in derecognition because the entity has
retained substantially all the risks and rewards of ownership of the
transferred asset, the entity shall continue to recognise the transferred
asset in its entirety and shall recognise a financial liability for the
consideration received. In subsequent periods, the entity shall recognise
any income on the transferred asset and any expense incurred on the
financial liability.
Continuing involvement in transferred assets
3.2.16
3.2.17
If an entity neither transfers nor retains substantially all the risks and
rewards of ownership of a transferred asset, and retains control of the
transferred asset, the entity continues to recognise the transferred asset
to the extent of its continuing involvement. The extent of the entity’s
continuing involvement in the transferred asset is the extent to which it
is exposed to changes in the value of the transferred asset. For example:
(a)
When the entity’s continuing involvement takes the form of
guaranteeing the transferred asset, the extent of the entity’s
continuing involvement is the lower of (i) the amount of the asset
and (ii) the maximum amount of the consideration received that
the entity could be required to repay (‘the guarantee amount’).
(b)
When the entity’s continuing involvement takes the form of a
written or purchased option (or both) on the transferred asset, the
extent of the entity’s continuing involvement is the amount of the
transferred asset that the entity may repurchase. However, in the
case of a written put option on an asset that is measured at fair
value, the extent of the entity’s continuing involvement is limited
to the lower of the fair value of the transferred asset and the
option exercise price (see paragraph B3.2.13).
(c)
When the entity’s continuing involvement takes the form of a
cash-settled option or similar provision on the transferred asset,
the extent of the entity’s continuing involvement is measured in
the same way as that which results from non-cash settled options
as set out in (b) above.
When an entity continues to recognise an asset to the extent of its
continuing involvement, the entity also recognises an associated liability.
Despite the other measurement requirements in this Standard, the
transferred asset and the associated liability are measured on a basis that
reflects the rights and obligations that the entity has retained. The
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associated liability is measured in such a way that the net carrying
amount of the transferred asset and the associated liability is:
(a)
the amortised cost of the rights and obligations retained by the
entity, if the transferred asset is measured at amortised cost, or
(b)
equal to the fair value of the rights and obligations retained by the
entity when measured on a stand-alone basis, if the transferred
asset is measured at fair value.
3.2.18
The entity shall continue to recognise any income arising on the
transferred asset to the extent of its continuing involvement and shall
recognise any expense incurred on the associated liability.
3.2.19
For the purpose of subsequent measurement, recognised changes in the
fair value of the transferred asset and the associated liability are
accounted for consistently with each other in accordance
with paragraph 5.7.1, and shall not be offset.
3.2.20
If an entity’s continuing involvement is in only a part of a financial asset
(eg when an entity retains an option to repurchase part of a transferred
asset, or retains a residual interest that does not result in the retention of
substantially all the risks and rewards of ownership and the entity retains
control), the entity allocates the previous carrying amount of the
financial asset between the part it continues to recognise under
continuing involvement, and the part it no longer recognises on the basis
of the relative fair values of those parts on the date of the transfer. For
this purpose, the requirements of paragraph 3.2.14 apply. The difference
between:
(a)
the carrying amount (measured at the date of derecognition)
allocated to the part that is no longer recognised and
(b)
the consideration received for the part no longer recognised
shall be recognised in profit or loss.
3.2.21
If the transferred asset is measured at amortised cost, the option in this
Standard to designate a financial liability as at fair value through profit or loss is
not applicable to the associated liability.
All transfers
3.2.22
If a transferred asset continues to be recognised, the asset and the
associated liability shall not be offset. Similarly, the entity shall not
offset any income arising from the transferred asset with any expense
incurred on the associated liability (see paragraph 42 of IAS 32).
3.2.23
If a transferor provides non-cash collateral (such as debt or equity
instruments) to the transferee, the accounting for the collateral by the
transferor and the transferee depends on whether the transferee has the
right to sell or repledge the collateral and on whether the transferor has
defaulted. The transferor and transferee shall account for the collateral
as follows:
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(a)
If the transferee has the right by contract or custom to sell or
repledge the collateral, then the transferor shall reclassify that
asset in its statement of financial position (eg as a loaned asset,
pledged equity instruments or repurchase receivable) separately
from other assets.
(b)
If the transferee sells collateral pledged to it, it shall recognise the
proceeds from the sale and a liability measured at fair value for its
obligation to return the collateral.
(c)
If the transferor defaults under the terms of the contract and is no
longer entitled to redeem the collateral, it shall derecognise the
collateral, and the transferee shall recognise the collateral as its
asset initially measured at fair value or, if it has already sold the
collateral, derecognise its obligation to return the collateral.
(d)
Except as provided in (c), the transferor shall continue to carry the
collateral as its asset, and the transferee shall not recognise the
collateral as an asset.
3.3 Derecognition of financial liabilities
3.3.1
An entity shall remove a financial liability (or a part of a financial
liability) from its statement of financial position when, and only when, it
is extinguished—ie when the obligation specified in the contract is
discharged or cancelled or expires.
3.3.2
An exchange between an existing borrower and lender of debt
instruments with substantially different terms shall be accounted for as
an extinguishment of the original financial liability and the recognition
of a new financial liability. Similarly, a substantial modification of the
terms of an existing financial liability or a part of it (whether or not
attributable to the financial difficulty of the debtor) shall be accounted
for as an extinguishment of the original financial liability and the
recognition of a new financial liability.
3.3.3
The difference between the carrying amount of a financial liability (or
part of a financial liability) extinguished or transferred to another party
and the consideration paid, including any non-cash assets transferred or
liabilities assumed, shall be recognised in profit or loss.
3.3.4
If an entity repurchases a part of a financial liability, the entity shall allocate the
previous carrying amount of the financial liability between the part that
continues to be recognised and the part that is derecognised based on the
relative fair values of those parts on the date of the repurchase. The difference
between (a) the carrying amount allocated to the part derecognised and (b) the
consideration paid, including any non-cash assets transferred or liabilities
assumed, for the part derecognised shall be recognised in profit or loss.
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Chapter 4 Classification
4.1 Classification of financial assets
4.1.1
4.1.2
Unless paragraph 4.1.5 applies, an entity shall classify financial assets as
subsequently measured at amortised cost, fair value through other
comprehensive income or fair value through profit or loss on the basis of
both:
(a)
the entity’s business model for managing the financial assets and
(b)
the contractual cash flow characteristics of the financial asset.
A financial asset shall be measured at amortised cost if both of the
following conditions are met:
(a)
the financial asset is held within a business model whose objective
is to hold financial assets in order to collect contractual cash flows
and
(b)
the contractual terms of the financial asset give rise on specified
dates to cash flows that are solely payments of principal and
interest on the principal amount outstanding.
Paragraphs B4.1.1–B4.1.26 provide guidance on how to apply these
conditions.
4.1.2A
A financial asset shall be measured at fair value through other
comprehensive income if both of the following conditions are met:
(a)
the financial asset is held within a business model whose objective
is achieved by both collecting contractual cash flows and selling
financial assets and
(b)
the contractual terms of the financial asset give rise on specified
dates to cash flows that are solely payments of principal and
interest on the principal amount outstanding.
Paragraphs B4.1.1–B4.1.26 provide guidance on how to apply these
conditions.
4.1.3
4.1.4
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For the purpose of applying paragraphs 4.1.2(b) and 4.1.2A(b):
(a)
principal is the fair value of the financial asset at initial
recognition. Paragraph B4.1.7B provides additional guidance on
the meaning of principal.
(b)
interest consists of consideration for the time value of money, for
the credit risk associated with the principal amount outstanding
during a particular period of time and for other basic lending
risks and costs, as well as a profit margin. Paragraphs B4.1.7A
and B4.1.9A–B4.1.9E provide additional guidance on the meaning
of interest, including the meaning of the time value of money.
A financial asset shall be measured at fair value through profit or loss
unless it is measured at amortised cost in accordance with
paragraph 4.1.2 or at fair value through other comprehensive income in
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accordance with paragraph 4.1.2A. However an entity may make an
irrevocable election at initial recognition for particular investments in
equity instruments that would otherwise be measured at fair value
through profit or loss to present subsequent changes in fair value in
other comprehensive income (see paragraphs 5.7.5–5.7.6).
Option to designate a financial asset at fair value
through profit or loss
4.1.5
Despite paragraphs 4.1.1–4.1.4, an entity may, at initial recognition,
irrevocably designate a financial asset as measured at fair value through
profit or loss if doing so eliminates or significantly reduces a
measurement or recognition inconsistency (sometimes referred to as an
‘accounting mismatch’) that would otherwise arise from measuring assets
or liabilities or recognising the gains and losses on them on different
bases (see paragraphs B4.1.29–B4.1.32).
4.2 Classification of financial liabilities
4.2.1
An entity shall classify all financial liabilities as subsequently measured
at amortised cost, except for:
(a)
financial liabilities at fair value through profit or loss. Such
liabilities, including derivatives that are liabilities, shall be
subsequently measured at fair value.
(b)
financial liabilities that arise when a transfer of a financial asset
does not qualify for derecognition or when the continuing
involvement approach applies. Paragraphs 3.2.15 and 3.2.17 apply
to the measurement of such financial liabilities.
(c)
financial guarantee contracts. After initial recognition, an issuer
of such a contract shall (unless paragraph 4.2.1(a) or (b) applies)
subsequently measure it at the higher of:
(d)
(i)
the amount of the loss allowance determined in accordance
with Section 5.5 and
(ii)
the amount initially recognised (see paragraph 5.1.1) less,
when appropriate, the cumulative amount of income
recognised in accordance with the principles of IFRS 15.
commitments to provide a loan at a below-market interest rate.
An issuer of such a commitment shall (unless paragraph 4.2.1(a)
applies) subsequently measure it at the higher of:
(i)
the amount of the loss allowance determined in accordance
with Section 5.5 and
(ii)
the amount initially recognised (see paragraph 5.1.1) less,
when appropriate, the cumulative amount of income
recognised in accordance with the principles of IFRS 15.
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(e)
contingent consideration recognised by an acquirer in a business
combination to which IFRS 3 applies.
Such contingent
consideration shall subsequently be measured at fair value with
changes recognised in profit or loss.
Option to designate a financial liability at fair value
through profit or loss
4.2.2
An entity may, at initial recognition, irrevocably designate a financial
liability as measured at fair value through profit or loss when permitted
by paragraph 4.3.5, or when doing so results in more relevant
information, because either:
(a)
it eliminates or significantly reduces a measurement or
recognition inconsistency (sometimes referred to as ‘an
accounting mismatch’) that would otherwise arise from measuring
assets or liabilities or recognising the gains and losses on them on
different bases (see paragraphs B4.1.29–B4.1.32); or
(b)
a group of financial liabilities or financial assets and financial
liabilities is managed and its performance is evaluated on a fair
value basis, in accordance with a documented risk management or
investment strategy, and information about the group is provided
internally on that basis to the entity’s key management personnel
(as defined in IAS 24 Related Party Disclosures), for example, the
entity’s board of directors and chief executive officer (see
paragraphs B4.1.33–B4.1.36).
4.3 Embedded derivatives
4.3.1
An embedded derivative is a component of a hybrid contract that also includes a
non-derivative host—with the effect that some of the cash flows of the combined
instrument vary in a way similar to a stand-alone derivative. An embedded
derivative causes some or all of the cash flows that otherwise would be required
by the contract to be modified according to a specified interest rate, financial
instrument price, commodity price, foreign exchange rate, index of prices or
rates, credit rating or credit index, or other variable, provided in the case of a
non-financial variable that the variable is not specific to a party to the contract.
A derivative that is attached to a financial instrument but is contractually
transferable independently of that instrument, or has a different counterparty,
is not an embedded derivative, but a separate financial instrument.
Hybrid contracts with financial asset hosts
4.3.2
If a hybrid contract contains a host that is an asset within the scope of
this Standard, an entity shall apply the requirements in
paragraphs 4.1.1–4.1.5 to the entire hybrid contract.
Other hybrid contracts
4.3.3
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If a hybrid contract contains a host that is not an asset within the scope of
this Standard, an embedded derivative shall be separated from the host
and accounted for as a derivative under this Standard if, and only if:
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(a)
the economic characteristics and risks of the embedded derivative
are not closely related to the economic characteristics and risks of
the host (see paragraphs B4.3.5 and B4.3.8);
(b)
a separate instrument with the same terms as the embedded
derivative would meet the definition of a derivative; and
(c)
the hybrid contract is not measured at fair value with changes in
fair value recognised in profit or loss (ie a derivative that is
embedded in a financial liability at fair value through profit or
loss is not separated).
4.3.4
If an embedded derivative is separated, the host contract shall be
accounted for in accordance with the appropriate Standards. This
Standard does not address whether an embedded derivative shall be
presented separately in the statement of financial position.
4.3.5
Despite paragraphs 4.3.3 and 4.3.4, if a contract contains one or more
embedded derivatives and the host is not an asset within the scope of this
Standard, an entity may designate the entire hybrid contract as at fair
value through profit or loss unless:
(a)
the embedded derivative(s) do(es) not significantly modify the cash
flows that otherwise would be required by the contract; or
(b)
it is clear with little or no analysis when a similar hybrid
instrument is first considered that separation of the embedded
derivative(s) is prohibited, such as a prepayment option embedded
in a loan that permits the holder to prepay the loan for
approximately its amortised cost.
4.3.6
If an entity is required by this Standard to separate an embedded
derivative from its host, but is unable to measure the embedded
derivative separately either at acquisition or at the end of a subsequent
financial reporting period, it shall designate the entire hybrid contract as
at fair value through profit or loss.
4.3.7
If an entity is unable to measure reliably the fair value of an embedded
derivative on the basis of its terms and conditions, the fair value of the
embedded derivative is the difference between the fair value of the hybrid
contract and the fair value of the host. If the entity is unable to measure the fair
value of the embedded derivative using this method, paragraph 4.3.6 applies and
the hybrid contract is designated as at fair value through profit or loss.
4.4 Reclassification
4.4.1
When, and only when, an entity changes its business model for managing
financial assets it shall reclassify all affected financial assets in
accordance with paragraphs 4.1.1–4.1.4.
See paragraphs 5.6.1–5.6.7,
B4.4.1–B4.4.3 and B5.6.1–B5.6.2 for additional guidance on reclassifying
financial assets.
4.4.2
An entity shall not reclassify any financial liability.
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4.4.3
The following changes in circumstances are not reclassifications for the
purposes of paragraphs 4.4.1–4.4.2:
(a)
an item that was previously a designated and effective hedging
instrument in a cash flow hedge or net investment hedge no longer
qualifies as such;
(b)
an item becomes a designated and effective hedging instrument in a cash
flow hedge or net investment hedge; and
(c)
changes in measurement in accordance with Section 6.7.
Chapter 5 Measurement
5.1 Initial measurement
5.1.1
Except for trade receivables within the scope of paragraph 5.1.3, at initial
recognition, an entity shall measure a financial asset or financial liability
at its fair value plus or minus, in the case of a financial asset or financial
liability not at fair value through profit or loss, transaction costs that are
directly attributable to the acquisition or issue of the financial asset or
financial liability.
5.1.1A
However, if the fair value of the financial asset or financial liability at
initial recognition differs from the transaction price, an entity shall
apply paragraph B5.1.2A.
5.1.2
When an entity uses settlement date accounting for an asset that is subsequently
measured at amortised cost, the asset is recognised initially at its fair value on
the trade date (see paragraphs B3.1.3–B3.1.6).
5.1.3
Despite the requirement in paragraph 5.1.1, at initial recognition, an entity
shall measure trade receivables at their transaction price (as defined in IFRS 15)
if the trade receivables do not contain a significant financing component in
accordance with IFRS 15 (or when the entity applies the practical expedient in
accordance with paragraph 63 of IFRS 15).
5.2 Subsequent measurement of financial assets
5.2.1
After initial recognition, an entity shall measure a financial asset in
accordance with paragraphs 4.1.1–4.1.5 at:
(a)
amortised cost;
(b)
fair value through other comprehensive income; or
(c)
fair value through profit or loss.
5.2.2
An entity shall apply the impairment requirements in Section 5.5 to
financial assets that are measured at amortised cost in accordance with
paragraph 4.1.2 and to financial assets that are measured at fair value
through
other
comprehensive
income
in
accordance
with
paragraph 4.1.2A.
5.2.3
An entity shall apply the hedge accounting requirements in
paragraphs 6.5.8–6.5.14 (and, if applicable, paragraphs 89–94 of IAS 39
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Financial Instruments: Recognition and Measurement for the fair value
hedge accounting for a portfolio hedge of interest rate risk) to a financial
asset that is designated as a hedged item.1
5.3 Subsequent measurement of financial liabilities
5.3.1
After initial recognition, an entity shall measure a financial liability in
accordance with paragraphs 4.2.1–4.2.2.
5.3.2
An entity shall apply the hedge accounting requirements in
paragraphs 6.5.8–6.5.14 (and, if applicable, paragraphs 89–94 of IAS 39 for
the fair value hedge accounting for a portfolio hedge of interest rate risk)
to a financial liability that is designated as a hedged item.
5.4 Amortised cost measurement
Financial assets
Effective interest method
5.4.1
5.4.2
1
Interest revenue shall be calculated by using the effective interest method
(see Appendix A and paragraphs B5.4.1–B5.4.7). This shall be calculated by
applying the effective interest rate to the gross carrying amount of a
financial asset except for:
(a)
purchased or originated credit-impaired financial assets. For
those financial assets, the entity shall apply the credit-adjusted
effective interest rate to the amortised cost of the financial asset
from initial recognition.
(b)
financial assets that are not purchased or originated
credit-impaired financial assets but subsequently have become
credit-impaired financial assets. For those financial assets, the
entity shall apply the effective interest rate to the amortised cost
of the financial asset in subsequent reporting periods.
An entity that, in a reporting period, calculates interest revenue by applying the
effective interest method to the amortised cost of a financial asset in accordance
with paragraph 5.4.1(b), shall, in subsequent reporting periods, calculate the
interest revenue by applying the effective interest rate to the gross carrying
amount if the credit risk on the financial instrument improves so that the
financial asset is no longer credit-impaired and the improvement can be related
objectively to an event occurring after the requirements in paragraph 5.4.1(b)
were applied (such as an improvement in the borrower’s credit rating).
In accordance with paragraph 7.2.21, an entity may choose as its accounting policy to continue to
apply the hedge accounting requirements in IAS 39 instead of the requirements in Chapter 6 of this
Standard. If an entity has made this election, the references in this Standard to particular hedge
accounting requirements in Chapter 6 are not relevant. Instead the entity applies the relevant
hedge accounting requirements in IAS 39.
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Modification of contractual cash flows
5.4.3
When the contractual cash flows of a financial asset are renegotiated or
otherwise modified and the renegotiation or modification does not result in the
derecognition of that financial asset in accordance with this Standard, an entity
shall recalculate the gross carrying amount of the financial asset and shall
recognise a modification gain or loss in profit or loss. The gross carrying amount of
the financial asset shall be recalculated as the present value of the renegotiated
or modified contractual cash flows that are discounted at the financial asset’s
original effective interest rate (or credit-adjusted effective interest rate for
purchased or originated credit-impaired financial assets) or, when applicable,
the revised effective interest rate calculated in accordance with
paragraph 6.5.10. Any costs or fees incurred adjust the carrying amount of the
modified financial asset and are amortised over the remaining term of the
modified financial asset.
Write-off
5.4.4
An entity shall directly reduce the gross carrying amount of a financial
asset when the entity has no reasonable expectations of recovering a
financial asset in its entirety or a portion thereof. A write-off constitutes
a derecognition event (see paragraph B3.2.16(r)).
5.5 Impairment
Recognition of expected credit losses
General approach
5.5.1
An entity shall recognise a loss allowance for expected credit losses on a
financial asset that is measured in accordance with paragraphs 4.1.2 or
4.1.2A, a lease receivable, a contract asset or a loan commitment and a
financial guarantee contract to which the impairment requirements
apply in accordance with paragraphs 2.1(g), 4.2.1(c) or 4.2.1(d).
5.5.2
An entity shall apply the impairment requirements for the recognition and
measurement of a loss allowance for financial assets that are measured at fair
value through other comprehensive income in accordance with
paragraph 4.1.2A. However, the loss allowance shall be recognised in other
comprehensive income and shall not reduce the carrying amount of the
financial asset in the statement of financial position.
5.5.3
Subject to paragraphs 5.5.13–5.5.16, at each reporting date, an entity shall
measure the loss allowance for a financial instrument at an amount
equal to the lifetime expected credit losses if the credit risk on that
financial instrument has increased significantly since initial recognition.
5.5.4
The objective of the impairment requirements is to recognise lifetime expected
credit losses for all financial instruments for which there have been significant
increases in credit risk since initial recognition — whether assessed on an
individual or collective basis — considering all reasonable and supportable
information, including that which is forward-looking.
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5.5.5
Subject to paragraphs 5.5.13–5.5.16, if, at the reporting date, the credit risk
on a financial instrument has not increased significantly since initial
recognition, an entity shall measure the loss allowance for that financial
instrument at an amount equal to 12-month expected credit losses.
5.5.6
For loan commitments and financial guarantee contracts, the date that the
entity becomes a party to the irrevocable commitment shall be considered to be
the date of initial recognition for the purposes of applying the impairment
requirements.
5.5.7
If an entity has measured the loss allowance for a financial instrument at an
amount equal to lifetime expected credit losses in the previous reporting period,
but determines at the current reporting date that paragraph 5.5.3 is no longer
met, the entity shall measure the loss allowance at an amount equal to
12-month expected credit losses at the current reporting date.
5.5.8
An entity shall recognise in profit or loss, as an impairment gain or loss, the
amount of expected credit losses (or reversal) that is required to adjust the loss
allowance at the reporting date to the amount that is required to be recognised
in accordance with this Standard.
Determining significant increases in credit risk
5.5.9
At each reporting date, an entity shall assess whether the credit risk on a
financial instrument has increased significantly since initial recognition. When
making the assessment, an entity shall use the change in the risk of a default
occurring over the expected life of the financial instrument instead of the
change in the amount of expected credit losses. To make that assessment, an
entity shall compare the risk of a default occurring on the financial instrument
as at the reporting date with the risk of a default occurring on the financial
instrument as at the date of initial recognition and consider reasonable and
supportable information, that is available without undue cost or effort, that is
indicative of significant increases in credit risk since initial recognition.
5.5.10
An entity may assume that the credit risk on a financial instrument has not
increased significantly since initial recognition if the financial instrument is
determined to have low credit risk at the reporting date (see
paragraphs B5.5.22‒B5.5.24).
5.5.11
If reasonable and supportable forward-looking information is available without
undue cost or effort, an entity cannot rely solely on past due information when
determining whether credit risk has increased significantly since initial
recognition. However, when information that is more forward-looking than past
due status (either on an individual or a collective basis) is not available without
undue cost or effort, an entity may use past due information to determine
whether there have been significant increases in credit risk since initial
recognition. Regardless of the way in which an entity assesses significant
increases in credit risk, there is a rebuttable presumption that the credit risk on
a financial asset has increased significantly since initial recognition when
contractual payments are more than 30 days past due. An entity can rebut this
presumption if the entity has reasonable and supportable information that is
available without undue cost or effort, that demonstrates that the credit risk has
not increased significantly since initial recognition even though the contractual
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payments are more than 30 days past due. When an entity determines that
there have been significant increases in credit risk before contractual payments
are more than 30 days past due, the rebuttable presumption does not apply.
Modified financial assets
5.5.12
If the contractual cash flows on a financial asset have been renegotiated or
modified and the financial asset was not derecognised, an entity shall assess
whether there has been a significant increase in the credit risk of the financial
instrument in accordance with paragraph 5.5.3 by comparing:
(a)
the risk of a default occurring at the reporting date (based on the
modified contractual terms); and
(b)
the risk of a default occurring at initial recognition (based on the
original, unmodified contractual terms).
Purchased or originated credit-impaired financial assets
5.5.13
Despite paragraphs 5.5.3 and 5.5.5, at the reporting date, an entity shall
only recognise the cumulative changes in lifetime expected credit losses
since initial recognition as a loss allowance for purchased or originated
credit-impaired financial assets.
5.5.14
At each reporting date, an entity shall recognise in profit or loss the amount of
the change in lifetime expected credit losses as an impairment gain or loss. An
entity shall recognise favourable changes in lifetime expected credit losses as an
impairment gain, even if the lifetime expected credit losses are less than the
amount of expected credit losses that were included in the estimated cash flows
on initial recognition.
Simplified approach for trade receivables, contract
assets and lease receivables
5.5.15
Despite paragraphs 5.5.3 and 5.5.5, an entity shall always measure the loss
allowance at an amount equal to lifetime expected credit losses for:
(a)
(b)
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trade receivables or contract assets that result from transactions
that are within the scope of IFRS 15, and that:
(i)
do not contain a significant financing component in
accordance with IFRS 15 (or when the entity applies the
practical expedient in accordance with paragraph 63 of
IFRS 15); or
(ii)
contain a significant financing component in accordance
with IFRS 15, if the entity chooses as its accounting policy to
measure the loss allowance at an amount equal to lifetime
expected credit losses. That accounting policy shall be
applied to all such trade receivables or contract assets but
may be applied separately to trade receivables and contract
assets.
lease receivables that result from transactions that are within the
scope of IFRS 16, if the entity chooses as its accounting policy to
measure the loss allowance at an amount equal to lifetime
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expected credit losses. That accounting policy shall be applied to
all lease receivables but may be applied separately to finance and
operating lease receivables.
5.5.16
An entity may select its accounting policy for trade receivables, lease receivables
and contract assets independently of each other.
Measurement of expected credit losses
5.5.17
An entity shall measure expected credit losses of a financial instrument
in a way that reflects:
(a)
an unbiased and probability-weighted amount that is determined
by evaluating a range of possible outcomes;
(b)
the time value of money; and
(c)
reasonable and supportable information that is available without
undue cost or effort at the reporting date about past events,
current conditions and forecasts of future economic conditions.
5.5.18
When measuring expected credit losses, an entity need not necessarily identify
every possible scenario. However, it shall consider the risk or probability that a
credit loss occurs by reflecting the possibility that a credit loss occurs and the
possibility that no credit loss occurs, even if the possibility of a credit loss
occurring is very low.
5.5.19
The maximum period to consider when measuring expected credit losses is the
maximum contractual period (including extension options) over which the
entity is exposed to credit risk and not a longer period, even if that longer period
is consistent with business practice.
5.5.20
However, some financial instruments include both a loan and an undrawn
commitment component and the entity’s contractual ability to demand
repayment and cancel the undrawn commitment does not limit the entity’s
exposure to credit losses to the contractual notice period. For such financial
instruments, and only those financial instruments, the entity shall measure
expected credit losses over the period that the entity is exposed to credit risk and
expected credit losses would not be mitigated by credit risk management
actions, even if that period extends beyond the maximum contractual period.
5.6 Reclassification of financial assets
5.6.1
If an entity reclassifies financial assets in accordance with
paragraph 4.4.1, it shall apply the reclassification prospectively from the
reclassification date.
The entity shall not restate any previously
recognised gains, losses (including impairment gains or losses) or
interest.
Paragraphs 5.6.2–5.6.7 set out the requirements for
reclassifications.
5.6.2
If an entity reclassifies a financial asset out of the amortised cost
measurement category and into the fair value through profit or loss
measurement category, its fair value is measured at the reclassification
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date. Any gain or loss arising from a difference between the previous
amortised cost of the financial asset and fair value is recognised in profit
or loss.
5.6.3
If an entity reclassifies a financial asset out of the fair value through
profit or loss measurement category and into the amortised cost
measurement category, its fair value at the reclassification date becomes
its new gross carrying amount. (See paragraph B5.6.2 for guidance on
determining an effective interest rate and a loss allowance at the
reclassification date.)
5.6.4
If an entity reclassifies a financial asset out of the amortised cost
measurement category and into the fair value through other
comprehensive income measurement category, its fair value is measured
at the reclassification date. Any gain or loss arising from a difference
between the previous amortised cost of the financial asset and fair value
is recognised in other comprehensive income. The effective interest rate
and the measurement of expected credit losses are not adjusted as a
result of the reclassification. (See paragraph B5.6.1.)
5.6.5
If an entity reclassifies a financial asset out of the fair value through
other comprehensive income measurement category and into the
amortised cost measurement category, the financial asset is reclassified
at its fair value at the reclassification date. However, the cumulative gain
or loss previously recognised in other comprehensive income is removed
from equity and adjusted against the fair value of the financial asset at
the reclassification date. As a result, the financial asset is measured at
the reclassification date as if it had always been measured at amortised
cost. This adjustment affects other comprehensive income but does not
affect profit or loss and therefore is not a reclassification adjustment (see
IAS 1 Presentation of Financial Statements). The effective interest rate
and the measurement of expected credit losses are not adjusted as a
result of the reclassification. (See paragraph B5.6.1.)
5.6.6
If an entity reclassifies a financial asset out of the fair value through
profit or loss measurement category and into the fair value through other
comprehensive income measurement category, the financial asset
continues to be measured at fair value. (See paragraph B5.6.2 for
guidance on determining an effective interest rate and a loss allowance at
the reclassification date.)
5.6.7
If an entity reclassifies a financial asset out of the fair value through
other comprehensive income measurement category and into the fair
value through profit or loss measurement category, the financial asset
continues to be measured at fair value. The cumulative gain or loss
previously recognised in other comprehensive income is reclassified from
equity to profit or loss as a reclassification adjustment (see IAS 1) at the
reclassification date.
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5.7 Gains and losses
5.7.1
5.7.1A
A gain or loss on a financial asset or financial liability that is measured at
fair value shall be recognised in profit or loss unless:
(a)
it is part of a hedging relationship (see paragraphs 6.5.8–6.5.14 and,
if applicable, paragraphs 89–94 of IAS 39 for the fair value hedge
accounting for a portfolio hedge of interest rate risk);
(b)
it is an investment in an equity instrument and the entity has
elected to present gains and losses on that investment in other
comprehensive income in accordance with paragraph 5.7.5;
(c)
it is a financial liability designated as at fair value through profit
or loss and the entity is required to present the effects of changes
in the liability’s credit risk in other comprehensive income in
accordance with paragraph 5.7.7; or
(d)
it is a financial asset measured at fair value through other
comprehensive income in accordance with paragraph 4.1.2A and
the entity is required to recognise some changes in fair value in
other comprehensive income in accordance with paragraph 5.7.10.
Dividends are recognised in profit or loss only when:
(a)
the entity’s right to receive payment of the dividend is established;
(b)
it is probable that the economic benefits associated with the dividend
will flow to the entity; and
(c)
the amount of the dividend can be measured reliably.
5.7.2
A gain or loss on a financial asset that is measured at amortised cost and
is not part of a hedging relationship (see paragraphs 6.5.8–6.5.14 and, if
applicable, paragraphs 89–94 of IAS 39 for the fair value hedge accounting
for a portfolio hedge of interest rate risk) shall be recognised in profit or
loss when the financial asset is derecognised, reclassified in accordance
with paragraph 5.6.2, through the amortisation process or in order to
recognise impairment gains or losses.
An entity shall apply
paragraphs 5.6.2 and 5.6.4 if it reclassifies financial assets out of the
amortised cost measurement category. A gain or loss on a financial
liability that is measured at amortised cost and is not part of a hedging
relationship (see paragraphs 6.5.8–6.5.14 and, if applicable, paragraphs
89–94 of IAS 39 for the fair value hedge accounting for a portfolio hedge of
interest rate risk) shall be recognised in profit or loss when the financial
liability is derecognised and through the amortisation process. (See
paragraph B5.7.2 for guidance on foreign exchange gains or losses.)
5.7.3
A gain or loss on financial assets or financial liabilities that are hedged
items in a hedging relationship shall be recognised in accordance with
paragraphs 6.5.8–6.5.14 and, if applicable, paragraphs 89–94 of IAS 39 for
the fair value hedge accounting for a portfolio hedge of interest rate risk.
5.7.4
If an entity recognises financial assets using settlement date accounting
(see paragraphs 3.1.2, B3.1.3 and B3.1.6), any change in the fair value of the
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asset to be received during the period between the trade date and the
settlement date is not recognised for assets measured at amortised cost.
For assets measured at fair value, however, the change in fair value shall
be recognised in profit or loss or in other comprehensive income, as
appropriate in accordance with paragraph 5.7.1. The trade date shall be
considered the date of initial recognition for the purposes of applying the
impairment requirements.
Investments in equity instruments
5.7.5
At initial recognition, an entity may make an irrevocable election to
present in other comprehensive income subsequent changes in the fair
value of an investment in an equity instrument within the scope of this
Standard that is neither held for trading nor contingent consideration
recognised by an acquirer in a business combination to which IFRS 3
applies. (See paragraph B5.7.3 for guidance on foreign exchange gains or
losses.)
5.7.6
If an entity makes the election in paragraph 5.7.5, it shall recognise in profit or
loss dividends from that investment in accordance with paragraph 5.7.1A.
Liabilities designated as at fair value through profit or
loss
5.7.7
An entity shall present a gain or loss on a financial liability that is
designated as at fair value through profit or loss in accordance with
paragraph 4.2.2 or paragraph 4.3.5 as follows:
(a)
The amount of change in the fair value of the financial liability
that is attributable to changes in the credit risk of that liability
shall be presented in other comprehensive income (see
paragraphs B5.7.13–B5.7.20), and
(b)
the remaining amount of change in the fair value of the liability
shall be presented in profit or loss
unless the treatment of the effects of changes in the liability’s credit risk
described in (a) would create or enlarge an accounting mismatch in profit
or loss (in which case paragraph 5.7.8 applies). Paragraphs B5.7.5–B5.7.7
and B5.7.10–B5.7.12 provide guidance on determining whether an
accounting mismatch would be created or enlarged.
5.7.8
If the requirements in paragraph 5.7.7 would create or enlarge an
accounting mismatch in profit or loss, an entity shall present all gains or
losses on that liability (including the effects of changes in the credit risk
of that liability) in profit or loss.
5.7.9
Despite the requirements in paragraphs 5.7.7 and 5.7.8, an entity shall present
in profit or loss all gains and losses on loan commitments and financial
guarantee contracts that are designated as at fair value through profit or loss.
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Assets measured at fair value through other
comprehensive income
5.7.10
A gain or loss on a financial asset measured at fair value through other
comprehensive income in accordance with paragraph 4.1.2A shall be
recognised in other comprehensive income, except for impairment gains
or losses (see Section 5.5) and foreign exchange gains and losses (see
paragraphs B5.7.2–B5.7.2A), until the financial asset is derecognised or
reclassified. When the financial asset is derecognised the cumulative
gain or loss previously recognised in other comprehensive income is
reclassified from equity to profit or loss as a reclassification adjustment
(see IAS 1). If the financial asset is reclassified out of the fair value
through other comprehensive income measurement category, the entity
shall account for the cumulative gain or loss that was previously
recognised in other comprehensive income in accordance with
paragraphs 5.6.5 and 5.6.7. Interest calculated using the effective interest
method is recognised in profit or loss.
5.7.11
As described in paragraph 5.7.10, if a financial asset is measured at fair
value through other comprehensive income in accordance with
paragraph 4.1.2A, the amounts that are recognised in profit or loss are the
same as the amounts that would have been recognised in profit or loss if
the financial asset had been measured at amortised cost.
Chapter 6 Hedge accounting
6.1 Objective and scope of hedge accounting
6.1.1
The objective of hedge accounting is to represent, in the financial statements,
the effect of an entity’s risk management activities that use financial
instruments to manage exposures arising from particular risks that could affect
profit or loss (or other comprehensive income, in the case of investments in
equity instruments for which an entity has elected to present changes in fair
value in other comprehensive income in accordance with paragraph 5.7.5). This
approach aims to convey the context of hedging instruments for which hedge
accounting is applied in order to allow insight into their purpose and effect.
6.1.2
An entity may choose to designate a hedging relationship between a hedging
instrument and a hedged item in accordance with paragraphs 6.2.1–6.3.7 and
B6.2.1–B6.3.25. For hedging relationships that meet the qualifying criteria, an
entity shall account for the gain or loss on the hedging instrument and the
hedged item in accordance with paragraphs 6.5.1–6.5.14 and B6.5.1–B6.5.28.
When the hedged item is a group of items, an entity shall comply with the
additional requirements in paragraphs 6.6.1–6.6.6 and B6.6.1–B6.6.16.
6.1.3
For a fair value hedge of the interest rate exposure of a portfolio of financial
assets or financial liabilities (and only for such a hedge), an entity may apply the
hedge accounting requirements in IAS 39 instead of those in this Standard. In
that case, the entity must also apply the specific requirements for the fair value
hedge accounting for a portfolio hedge of interest rate risk and designate as the
hedged item a portion that is a currency amount (see paragraphs 81A, 89A and
AG114–AG132 of IAS 39).
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6.2 Hedging instruments
Qualifying instruments
6.2.1
A derivative measured at fair value through profit or loss may be
designated as a hedging instrument, except for some written options (see
paragraph B6.2.4).
6.2.2
A non-derivative financial asset or a non-derivative financial liability
measured at fair value through profit or loss may be designated as a
hedging instrument unless it is a financial liability designated as at fair
value through profit or loss for which the amount of its change in fair
value that is attributable to changes in the credit risk of that liability is
presented in other comprehensive income in accordance with
paragraph 5.7.7. For a hedge of foreign currency risk, the foreign
currency risk component of a non-derivative financial asset or a
non-derivative financial liability may be designated as a hedging
instrument provided that it is not an investment in an equity instrument
for which an entity has elected to present changes in fair value in other
comprehensive income in accordance with paragraph 5.7.5.
6.2.3
For hedge accounting purposes, only contracts with a party external to
the reporting entity (ie external to the group or individual entity that is
being reported on) can be designated as hedging instruments.
Designation of hedging instruments
6.2.4
6.2.5
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A qualifying instrument must be designated in its entirety as a hedging
instrument. The only exceptions permitted are:
(a)
separating the intrinsic value and time value of an option contract and
designating as the hedging instrument only the change in intrinsic value
of an option and not the change in its time value (see paragraphs 6.5.15
and B6.5.29–B6.5.33);
(b)
separating the forward element and the spot element of a forward
contract and designating as the hedging instrument only the change in
the value of the spot element of a forward contract and not the forward
element; similarly, the foreign currency basis spread may be separated
and excluded from the designation of a financial instrument as the
hedging instrument (see paragraphs 6.5.16 and B6.5.34–B6.5.39); and
(c)
a proportion of the entire hedging instrument, such as 50 per cent of the
nominal amount, may be designated as the hedging instrument in a
hedging relationship. However, a hedging instrument may not be
designated for a part of its change in fair value that results from only a
portion of the time period during which the hedging instrument
remains outstanding.
An entity may view in combination, and jointly designate as the hedging
instrument, any combination of the following (including those circumstances in
which the risk or risks arising from some hedging instruments offset those
arising from others):
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6.2.6
(a)
derivatives or a proportion of them; and
(b)
non-derivatives or a proportion of them.
However, a derivative instrument that combines a written option and a
purchased option (for example, an interest rate collar) does not qualify as a
hedging instrument if it is, in effect, a net written option at the date of
designation (unless it qualifies in accordance with paragraph B6.2.4). Similarly,
two or more instruments (or proportions of them) may be jointly designated as
the hedging instrument only if, in combination, they are not, in effect, a net
written option at the date of designation (unless it qualifies in accordance with
paragraph B6.2.4).
6.3 Hedged items
Qualifying items
6.3.1
A hedged item can be a recognised asset or liability, an unrecognised firm
commitment, a forecast transaction or a net investment in a foreign
operation. The hedged item can be:
(a)
a single item; or
(b)
a group of items
B6.6.1–B6.6.16).
(subject
to
paragraphs
6.6.1–6.6.6
and
A hedged item can also be a component of such an item or group of items
(see paragraphs 6.3.7 and B6.3.7–B6.3.25).
6.3.2
The hedged item must be reliably measurable.
6.3.3
If a hedged item is a forecast transaction (or a component thereof), that
transaction must be highly probable.
6.3.4
An aggregated exposure that is a combination of an exposure that could
qualify as a hedged item in accordance with paragraph 6.3.1 and a
derivative may be designated as a hedged item (see paragraphs
B6.3.3–B6.3.4). This includes a forecast transaction of an aggregated
exposure (ie uncommitted but anticipated future transactions that would
give rise to an exposure and a derivative) if that aggregated exposure is
highly probable and, once it has occurred and is therefore no longer
forecast, is eligible as a hedged item.
6.3.5
For hedge accounting purposes, only assets, liabilities, firm commitments
or highly probable forecast transactions with a party external to the
reporting entity can be designated as hedged items. Hedge accounting
can be applied to transactions between entities in the same group only in
the individual or separate financial statements of those entities and not
in the consolidated financial statements of the group, except for the
consolidated financial statements of an investment entity, as defined in
IFRS 10, where transactions between an investment entity and its
subsidiaries measured at fair value through profit or loss will not be
eliminated in the consolidated financial statements.
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6.3.6
However, as an exception to paragraph 6.3.5, the foreign currency risk of an
intragroup monetary item (for example, a payable/receivable between two
subsidiaries) may qualify as a hedged item in the consolidated financial
statements if it results in an exposure to foreign exchange rate gains or losses
that are not fully eliminated on consolidation in accordance with IAS 21 The
Effects of Changes in Foreign Exchange Rates. In accordance with IAS 21, foreign
exchange rate gains and losses on intragroup monetary items are not fully
eliminated on consolidation when the intragroup monetary item is transacted
between two group entities that have different functional currencies. In
addition, the foreign currency risk of a highly probable forecast intragroup
transaction may qualify as a hedged item in consolidated financial statements
provided that the transaction is denominated in a currency other than the
functional currency of the entity entering into that transaction and the foreign
currency risk will affect consolidated profit or loss.
Designation of hedged items
6.3.7
An entity may designate an item in its entirety or a component of an item as the
hedged item in a hedging relationship. An entire item comprises all changes in
the cash flows or fair value of an item. A component comprises less than the
entire fair value change or cash flow variability of an item. In that case, an
entity may designate only the following types of components (including
combinations) as hedged items:
(a)
only changes in the cash flows or fair value of an item attributable to a
specific risk or risks (risk component), provided that, based on an
assessment within the context of the particular market structure, the
risk component is separately identifiable and reliably measurable (see
paragraphs B6.3.8–B6.3.15). Risk components include a designation of
only changes in the cash flows or the fair value of a hedged item above or
below a specified price or other variable (a one-sided risk).
(b)
one or more selected contractual cash flows.
(c)
components of a nominal amount, ie a specified part of the amount of an
item (see paragraphs B6.3.16–B6.3.20).
6.4 Qualifying criteria for hedge accounting
6.4.1
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A hedging relationship qualifies for hedge accounting only if all of the
following criteria are met:
(a)
the hedging relationship consists only of eligible hedging
instruments and eligible hedged items.
(b)
at the inception of the hedging relationship there is formal
designation and documentation of the hedging relationship and
the entity’s risk management objective and strategy for
undertaking the hedge.
That documentation shall include
identification of the hedging instrument, the hedged item, the
nature of the risk being hedged and how the entity will assess
whether the hedging relationship meets the hedge effectiveness
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requirements (including its analysis of the sources of hedge
ineffectiveness and how it determines the hedge ratio).
(c)
the hedging relationship meets all of the following hedge
effectiveness requirements:
(i)
there is an economic relationship between the hedged item
and the hedging instrument (see paragraphs B6.4.4–B6.4.6);
(ii)
the effect of credit risk does not dominate the value
changes that result from that economic relationship (see
paragraphs B6.4.7–B6.4.8); and
(iii)
the hedge ratio of the hedging relationship is the same as
that resulting from the quantity of the hedged item that the
entity actually hedges and the quantity of the hedging
instrument that the entity actually uses to hedge that
quantity of hedged item. However, that designation shall
not reflect an imbalance between the weightings of the
hedged item and the hedging instrument that would create
hedge ineffectiveness (irrespective of whether recognised or
not) that could result in an accounting outcome that would
be inconsistent with the purpose of hedge accounting (see
paragraphs B6.4.9–B6.4.11).
6.5 Accounting for qualifying hedging relationships
6.5.1
An entity applies hedge accounting to hedging relationships that meet
the qualifying criteria in paragraph 6.4.1 (which include the entity’s
decision to designate the hedging relationship).
6.5.2
There are three types of hedging relationships:
6.5.3
(a)
fair value hedge: a hedge of the exposure to changes in fair value of
a recognised asset or liability or an unrecognised firm
commitment, or a component of any such item, that is attributable
to a particular risk and could affect profit or loss.
(b)
cash flow hedge: a hedge of the exposure to variability in cash
flows that is attributable to a particular risk associated with all, or
a component of, a recognised asset or liability (such as all or some
future interest payments on variable-rate debt) or a highly
probable forecast transaction, and could affect profit or loss.
(c)
hedge of a net investment in a foreign operation as defined in
IAS 21.
If the hedged item is an equity instrument for which an entity has elected to
present changes in fair value in other comprehensive income in accordance with
paragraph 5.7.5, the hedged exposure referred to in paragraph 6.5.2(a) must be
one that could affect other comprehensive income. In that case, and only in that
case, the recognised hedge ineffectiveness is presented in other comprehensive
income.
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6.5.4
A hedge of the foreign currency risk of a firm commitment may be accounted for
as a fair value hedge or a cash flow hedge.
6.5.5
If a hedging relationship ceases to meet the hedge effectiveness
requirement relating to the hedge ratio (see paragraph 6.4.1(c)(iii)) but the
risk management objective for that designated hedging relationship
remains the same, an entity shall adjust the hedge ratio of the hedging
relationship so that it meets the qualifying criteria again (this is referred
to in this Standard as ‘rebalancing’—see paragraphs B6.5.7–B6.5.21).
6.5.6
An entity shall discontinue hedge accounting prospectively only when the
hedging relationship (or a part of a hedging relationship) ceases to meet
the qualifying criteria (after taking into account any rebalancing of the
hedging relationship, if applicable). This includes instances when the
hedging instrument expires or is sold, terminated or exercised. For this
purpose, the replacement or rollover of a hedging instrument into
another hedging instrument is not an expiration or termination if such a
replacement or rollover is part of, and consistent with, the entity’s
documented risk management objective. Additionally, for this purpose
there is not an expiration or termination of the hedging instrument if:
(a)
as a consequence of laws or regulations or the introduction of laws
or regulations, the parties to the hedging instrument agree that
one or more clearing counterparties replace their original
counterparty to become the new counterparty to each of the
parties. For this purpose, a clearing counterparty is a central
counterparty (sometimes called a ‘clearing organisation’ or
‘clearing agency’) or an entity or entities, for example, a clearing
member of a clearing organisation or a client of a clearing
member of a clearing organisation, that are acting as a
counterparty in order to effect clearing by a central counterparty.
However, when the parties to the hedging instrument replace their
original counterparties with different counterparties the
requirement in this subparagraph is met only if each of those
parties effects clearing with the same central counterparty.
(b)
other changes, if any, to the hedging instrument are limited to
those that are necessary to effect such a replacement of the
counterparty.
Such changes are limited to those that are
consistent with the terms that would be expected if the hedging
instrument were originally cleared with the clearing counterparty.
These changes include changes in the collateral requirements,
rights to offset receivables and payables balances, and charges
levied.
Discontinuing hedge accounting can either affect a hedging relationship
in its entirety or only a part of it (in which case hedge accounting
continues for the remainder of the hedging relationship).
6.5.7
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(a)
paragraph 6.5.10 when it discontinues hedge accounting for a fair value
hedge for which the hedged item is (or is a component of) a financial
instrument measured at amortised cost; and
(b)
paragraph 6.5.12 when it discontinues hedge accounting for cash flow
hedges.
Fair value hedges
6.5.8
As long as a fair value hedge meets the qualifying criteria in
paragraph 6.4.1, the hedging relationship shall be accounted for as
follows:
(a)
the gain or loss on the hedging instrument shall be recognised in
profit or loss (or other comprehensive income, if the hedging
instrument hedges an equity instrument for which an entity has
elected to present changes in fair value in other comprehensive
income in accordance with paragraph 5.7.5).
(b)
the hedging gain or loss on the hedged item shall adjust the
carrying amount of the hedged item (if applicable) and be
recognised in profit or loss. If the hedged item is a financial asset
(or a component thereof) that is measured at fair value through
other comprehensive income in accordance with paragraph 4.1.2A,
the hedging gain or loss on the hedged item shall be recognised in
profit or loss. However, if the hedged item is an equity instrument
for which an entity has elected to present changes in fair value in
other comprehensive income in accordance with paragraph 5.7.5,
those amounts shall remain in other comprehensive income.
When a hedged item is an unrecognised firm commitment (or a
component thereof), the cumulative change in the fair value of the
hedged item subsequent to its designation is recognised as an
asset or a liability with a corresponding gain or loss recognised in
profit or loss.
6.5.9
When a hedged item in a fair value hedge is a firm commitment (or a
component thereof) to acquire an asset or assume a liability, the initial carrying
amount of the asset or the liability that results from the entity meeting the firm
commitment is adjusted to include the cumulative change in the fair value of
the hedged item that was recognised in the statement of financial position.
6.5.10
Any adjustment arising from paragraph 6.5.8(b) shall be amortised to profit or
loss if the hedged item is a financial instrument (or a component thereof)
measured at amortised cost. Amortisation may begin as soon as an adjustment
exists and shall begin no later than when the hedged item ceases to be adjusted
for hedging gains and losses. The amortisation is based on a recalculated
effective interest rate at the date that amortisation begins. In the case of a
financial asset (or a component thereof) that is a hedged item and that is
measured at fair value through other comprehensive income in accordance with
paragraph 4.1.2A, amortisation applies in the same manner but to the amount
that represents the cumulative gain or loss previously recognised in accordance
with paragraph 6.5.8(b) instead of by adjusting the carrying amount.
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Cash flow hedges
6.5.11
As long as a cash flow hedge meets the qualifying criteria in
paragraph 6.4.1, the hedging relationship shall be accounted for as
follows:
(a)
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the separate component of equity associated with the hedged item
(cash flow hedge reserve) is adjusted to the lower of the following
(in absolute amounts):
(i)
the cumulative gain or loss on the hedging instrument
from inception of the hedge; and
(ii)
the cumulative change in fair value (present value) of the
hedged item (ie the present value of the cumulative change
in the hedged expected future cash flows) from inception of
the hedge.
(b)
the portion of the gain or loss on the hedging instrument that is
determined to be an effective hedge (ie the portion that is offset by
the change in the cash flow hedge reserve calculated in accordance
with (a)) shall be recognised in other comprehensive income.
(c)
any remaining gain or loss on the hedging instrument (or any gain
or loss required to balance the change in the cash flow hedge
reserve calculated in accordance with (a)) is hedge ineffectiveness
that shall be recognised in profit or loss.
(d)
the amount that has been accumulated in the cash flow hedge
reserve in accordance with (a) shall be accounted for as follows:
(i)
if a hedged forecast transaction subsequently results in the
recognition of a non-financial asset or non-financial
liability, or a hedged forecast transaction for a
non-financial asset or a non-financial liability becomes a
firm commitment for which fair value hedge accounting is
applied, the entity shall remove that amount from the cash
flow hedge reserve and include it directly in the initial cost
or other carrying amount of the asset or the liability. This
is not a reclassification adjustment (see IAS 1) and hence it
does not affect other comprehensive income.
(ii)
for cash flow hedges other than those covered by (i), that
amount shall be reclassified from the cash flow hedge
reserve to profit or loss as a reclassification adjustment (see
IAS 1) in the same period or periods during which the
hedged expected future cash flows affect profit or loss (for
example, in the periods that interest income or interest
expense is recognised or when a forecast sale occurs).
(iii)
however, if that amount is a loss and an entity expects that
all or a portion of that loss will not be recovered in one or
more future periods, it shall immediately reclassify the
amount that is not expected to be recovered into profit or
loss as a reclassification adjustment (see IAS 1).
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6.5.12
When an entity discontinues hedge accounting for a cash flow hedge (see
paragraphs 6.5.6 and 6.5.7(b)) it shall account for the amount that has been
accumulated in the cash flow hedge reserve in accordance with
paragraph 6.5.11(a) as follows:
(a)
if the hedged future cash flows are still expected to occur, that amount
shall remain in the cash flow hedge reserve until the future cash flows
occur or until paragraph 6.5.11(d)(iii) applies. When the future cash
flows occur, paragraph 6.5.11(d) applies.
(b)
if the hedged future cash flows are no longer expected to occur, that
amount shall be immediately reclassified from the cash flow hedge
reserve to profit or loss as a reclassification adjustment (see IAS 1). A
hedged future cash flow that is no longer highly probable to occur may
still be expected to occur.
Hedges of a net investment in a foreign operation
6.5.13
6.5.14
Hedges of a net investment in a foreign operation, including a hedge of a
monetary item that is accounted for as part of the net investment (see
IAS 21), shall be accounted for similarly to cash flow hedges:
(a)
the portion of the gain or loss on the hedging instrument that is
determined to be an effective hedge shall be recognised in other
comprehensive income (see paragraph 6.5.11); and
(b)
the ineffective portion shall be recognised in profit or loss.
The cumulative gain or loss on the hedging instrument relating to the
effective portion of the hedge that has been accumulated in the foreign
currency translation reserve shall be reclassified from equity to profit or
loss as a reclassification adjustment (see IAS 1) in accordance with
paragraphs 48–49 of IAS 21 on the disposal or partial disposal of the
foreign operation.
Accounting for the time value of options
6.5.15
When an entity separates the intrinsic value and time value of an option
contract and designates as the hedging instrument only the change in intrinsic
value of the option (see paragraph 6.2.4(a)), it shall account for the time value of
the option as follows (see paragraphs B6.5.29–B6.5.33):
(a)
(b)
an entity shall distinguish the time value of options by the type of
hedged item that the option hedges (see paragraph B6.5.29):
(i)
a transaction related hedged item; or
(ii)
a time-period related hedged item.
the change in fair value of the time value of an option that hedges a
transaction related hedged item shall be recognised in other
comprehensive income to the extent that it relates to the hedged item
and shall be accumulated in a separate component of equity. The
cumulative change in fair value arising from the time value of the option
that has been accumulated in a separate component of equity (the
‘amount’) shall be accounted for as follows:
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(c)
(i)
if the hedged item subsequently results in the recognition of a
non-financial asset or a non-financial liability, or a firm
commitment for a non-financial asset or a non-financial liability
for which fair value hedge accounting is applied, the entity shall
remove the amount from the separate component of equity and
include it directly in the initial cost or other carrying amount of
the asset or the liability. This is not a reclassification adjustment
(see IAS 1) and hence does not affect other comprehensive
income.
(ii)
for hedging relationships other than those covered by (i), the
amount shall be reclassified from the separate component of
equity to profit or loss as a reclassification adjustment (see IAS 1)
in the same period or periods during which the hedged expected
future cash flows affect profit or loss (for example, when a
forecast sale occurs).
(iii)
however, if all or a portion of that amount is not expected to be
recovered in one or more future periods, the amount that is not
expected to be recovered shall be immediately reclassified into
profit or loss as a reclassification adjustment (see IAS 1).
the change in fair value of the time value of an option that hedges a
time-period related hedged item shall be recognised in other
comprehensive income to the extent that it relates to the hedged item
and shall be accumulated in a separate component of equity. The time
value at the date of designation of the option as a hedging instrument, to
the extent that it relates to the hedged item, shall be amortised on a
systematic and rational basis over the period during which the hedge
adjustment for the option’s intrinsic value could affect profit or loss (or
other comprehensive income, if the hedged item is an equity instrument
for which an entity has elected to present changes in fair value in other
comprehensive income in accordance with paragraph 5.7.5). Hence, in
each reporting period, the amortisation amount shall be reclassified
from the separate component of equity to profit or loss as a
reclassification adjustment (see IAS 1). However, if hedge accounting is
discontinued for the hedging relationship that includes the change in
intrinsic value of the option as the hedging instrument, the net amount
(ie including cumulative amortisation) that has been accumulated in the
separate component of equity shall be immediately reclassified into
profit or loss as a reclassification adjustment (see IAS 1).
Accounting for the forward element of forward contracts
and foreign currency basis spreads of financial
instruments
6.5.16
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When an entity separates the forward element and the spot element of a forward
contract and designates as the hedging instrument only the change in the value
of the spot element of the forward contract, or when an entity separates the
foreign currency basis spread from a financial instrument and excludes it from
the designation of that financial instrument as the hedging instrument (see
paragraph 6.2.4(b)), the entity may apply paragraph 6.5.15 to the forward
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element of the forward contract or to the foreign currency basis spread in the
same manner as it is applied to the time value of an option. In that case, the
entity shall apply the application guidance in paragraphs B6.5.34–B6.5.39.
6.6 Hedges of a group of items
Eligibility of a group of items as the hedged item
6.6.1
A group of items (including a group of items that constitute a net
position; see paragraphs B6.6.1–B6.6.8) is an eligible hedged item only if:
(a)
it consists of items (including components of items) that are,
individually, eligible hedged items;
(b)
the items in the group are managed together on a group basis for
risk management purposes; and
(c)
in the case of a cash flow hedge of a group of items whose
variabilities in cash flows are not expected to be approximately
proportional to the overall variability in cash flows of the group so
that offsetting risk positions arise:
(i)
it is a hedge of foreign currency risk; and
(ii)
the designation of that net position specifies the reporting
period in which the forecast transactions are expected to
affect profit or loss, as well as their nature and volume (see
paragraphs B6.6.7–B6.6.8).
Designation of a component of a nominal amount
6.6.2
A component that is a proportion of an eligible group of items is an eligible
hedged item provided that designation is consistent with the entity’s risk
management objective.
6.6.3
A layer component of an overall group of items (for example, a bottom layer) is
eligible for hedge accounting only if:
(a)
it is separately identifiable and reliably measurable;
(b)
the risk management objective is to hedge a layer component;
(c)
the items in the overall group from which the layer is identified are
exposed to the same hedged risk (so that the measurement of the hedged
layer is not significantly affected by which particular items from the
overall group form part of the hedged layer);
(d)
for a hedge of existing items (for example, an unrecognised firm
commitment or a recognised asset) an entity can identify and track the
overall group of items from which the hedged layer is defined (so that
the entity is able to comply with the requirements for the accounting for
qualifying hedging relationships); and
(e)
any items in the group that contain prepayment options meet the
requirements for components of a nominal amount (see
paragraph B6.3.20).
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Presentation
6.6.4
For a hedge of a group of items with offsetting risk positions (ie in a hedge of a
net position) whose hedged risk affects different line items in the statement of
profit or loss and other comprehensive income, any hedging gains or losses in
that statement shall be presented in a separate line from those affected by the
hedged items. Hence, in that statement the amount in the line item that relates
to the hedged item itself (for example, revenue or cost of sales) remains
unaffected.
6.6.5
For assets and liabilities that are hedged together as a group in a fair value
hedge, the gain or loss in the statement of financial position on the individual
assets and liabilities shall be recognised as an adjustment of the carrying
amount of the respective individual items comprising the group in accordance
with paragraph 6.5.8(b).
Nil net positions
6.6.6
When the hedged item is a group that is a nil net position (ie the hedged items
among themselves fully offset the risk that is managed on a group basis), an
entity is permitted to designate it in a hedging relationship that does not
include a hedging instrument, provided that:
(a)
the hedge is part of a rolling net risk hedging strategy, whereby the
entity routinely hedges new positions of the same type as time moves on
(for example, when transactions move into the time horizon for which
the entity hedges);
(b)
the hedged net position changes in size over the life of the rolling net
risk hedging strategy and the entity uses eligible hedging instruments to
hedge the net risk (ie when the net position is not nil);
(c)
hedge accounting is normally applied to such net positions when the net
position is not nil and it is hedged with eligible hedging instruments;
and
(d)
not applying hedge accounting to the nil net position would give rise to
inconsistent accounting outcomes, because the accounting would not
recognise the offsetting risk positions that would otherwise be
recognised in a hedge of a net position.
6.7 Option to designate a credit exposure as measured at fair
value through profit or loss
Eligibility of credit exposures for designation at fair
value through profit or loss
6.7.1
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If an entity uses a credit derivative that is measured at fair value through
profit or loss to manage the credit risk of all, or a part of, a financial
instrument (credit exposure) it may designate that financial instrument
to the extent that it is so managed (ie all or a proportion of it) as
measured at fair value through profit or loss if:
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(a)
the name of the credit exposure (for example, the borrower, or the
holder of a loan commitment) matches the reference entity of the
credit derivative (‘name matching’); and
(b)
the seniority of the financial instrument matches that of the
instruments that can be delivered in accordance with the credit
derivative.
An entity may make this designation irrespective of whether the financial
instrument that is managed for credit risk is within the scope of this
Standard (for example, an entity may designate loan commitments that
are outside the scope of this Standard). The entity may designate that
financial instrument at, or subsequent to, initial recognition, or while it
is unrecognised. The entity shall document the designation concurrently.
Accounting for credit exposures designated at fair value
through profit or loss
6.7.2
If a financial instrument is designated in accordance with paragraph 6.7.1 as
measured at fair value through profit or loss after its initial recognition, or was
previously not recognised, the difference at the time of designation between the
carrying amount, if any, and the fair value shall immediately be recognised in
profit or loss. For financial assets measured at fair value through other
comprehensive income in accordance with paragraph 4.1.2A, the cumulative
gain or loss previously recognised in other comprehensive income shall
immediately be reclassified from equity to profit or loss as a reclassification
adjustment (see IAS 1).
6.7.3
An entity shall discontinue measuring the financial instrument that gave rise to
the credit risk, or a proportion of that financial instrument, at fair value
through profit or loss if:
(a)
(b)
6.7.4
the qualifying criteria in paragraph 6.7.1 are no longer met, for example:
(i)
the credit derivative or the related financial instrument that
gives rise to the credit risk expires or is sold, terminated or
settled; or
(ii)
the credit risk of the financial instrument is no longer managed
using credit derivatives. For example, this could occur because of
improvements in the credit quality of the borrower or the loan
commitment holder or changes to capital requirements imposed
on an entity; and
the financial instrument that gives rise to the credit risk is not otherwise
required to be measured at fair value through profit or loss (ie the
entity’s business model has not changed in the meantime so that a
reclassification in accordance with paragraph 4.4.1 was required).
When an entity discontinues measuring the financial instrument that gives rise
to the credit risk, or a proportion of that financial instrument, at fair value
through profit or loss, that financial instrument’s fair value at the date of
discontinuation becomes its new carrying amount. Subsequently, the same
measurement that was used before designating the financial instrument at fair
value through profit or loss shall be applied (including amortisation that results
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from the new carrying amount). For example, a financial asset that had
originally been classified as measured at amortised cost would revert to that
measurement and its effective interest rate would be recalculated based on its
new gross carrying amount on the date of discontinuing measurement at fair
value through profit or loss.
Chapter 7 Effective date and transition
7.1 Effective date
7.1.1
An entity shall apply this Standard for annual periods beginning on or after
1 January 2018. Earlier application is permitted. If an entity elects to apply this
Standard early, it must disclose that fact and apply all of the requirements in
this Standard at the same time (but see also paragraphs 7.1.2, 7.2.21 and 7.3.2). It
shall also, at the same time, apply the amendments in Appendix C.
7.1.2
Despite the requirements in paragraph 7.1.1, for annual periods beginning
before 1 January 2018, an entity may elect to early apply only the requirements
for the presentation of gains and losses on financial liabilities designated as at
fair value through profit or loss in paragraphs 5.7.1(c), 5.7.7–5.7.9, 7.2.14 and
B5.7.5–B5.7.20 without applying the other requirements in this Standard. If an
entity elects to apply only those paragraphs, it shall disclose that fact and
provide on an ongoing basis the related disclosures set out in paragraphs 10–11
of IFRS 7 Financial Instruments: Disclosures (as amended by IFRS 9 (2010)). (See also
paragraphs 7.2.2 and 7.2.15.)
7.1.3
Annual Improvements to IFRSs 2010–2012 Cycle, issued in December 2013, amended
paragraphs 4.2.1 and 5.7.5 as a consequential amendment derived from the
amendment to IFRS 3. An entity shall apply that amendment prospectively to
business combinations to which the amendment to IFRS 3 applies.
7.1.4
IFRS 15, issued in May 2014, amended paragraphs 3.1.1, 4.2.1, 5.1.1, 5.2.1, 5.7.6,
B3.2.13, B5.7.1, C5 and C42 and deleted paragraph C16 and its related heading.
Paragraphs 5.1.3 and 5.7.1A, and a definition to Appendix A, were added. An
entity shall apply those amendments when it applies IFRS 15.
7.1.5
IFRS 16, issued in January 2016, amended paragraphs 2.1, 5.5.15, B4.3.8, B5.5.34
and B5.5.46. An entity shall apply those amendments when it applies IFRS 16.
7.2 Transition
7.2.1
An entity shall apply this Standard retrospectively, in accordance with IAS 8
Accounting Policies, Changes in Accounting Estimates and Errors, except as specified in
paragraphs 7.2.4–7.2.26 and 7.2.28. This Standard shall not be applied to items
that have already been derecognised at the date of initial application.
7.2.2
For the purposes of the transition provisions in paragraphs 7.2.1, 7.2.3–7.2.28
and 7.3.2, the date of initial application is the date when an entity first applies
those requirements of this Standard and must be the beginning of a reporting
period after the issue of this Standard. Depending on the entity’s chosen
approach to applying IFRS 9, the transition can involve one or more than one
date of initial application for different requirements.
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Transition for classification and measurement
(Chapters 4 and 5)
7.2.3
At the date of initial application, an entity shall assess whether a financial asset
meets the condition in paragraphs 4.1.2(a) or 4.1.2A(a) on the basis of the facts
and circumstances that exist at that date. The resulting classification shall be
applied retrospectively irrespective of the entity’s business model in prior
reporting periods.
7.2.4
If, at the date of initial application, it is impracticable (as defined in IAS 8) for an
entity to assess a modified time value of money element in accordance with
paragraphs B4.1.9B–B4.1.9D on the basis of the facts and circumstances that
existed at the initial recognition of the financial asset, an entity shall assess the
contractual cash flow characteristics of that financial asset on the basis of the
facts and circumstances that existed at the initial recognition of the financial
asset without taking into account the requirements related to the modification
of the time value of money element in paragraphs B4.1.9B–B4.1.9D. (See also
paragraph 42R of IFRS 7.)
7.2.5
If, at the date of initial application, it is impracticable (as defined in IAS 8) for an
entity to assess whether the fair value of a prepayment feature was insignificant
in accordance with paragraph B4.1.12(c) on the basis of the facts and
circumstances that existed at the initial recognition of the financial asset, an
entity shall assess the contractual cash flow characteristics of that financial asset
on the basis of the facts and circumstances that existed at the initial recognition
of the financial asset without taking into account the exception for prepayment
features in paragraph B4.1.12. (See also paragraph 42S of IFRS 7.)
7.2.6
If an entity measures a hybrid contract at fair value in accordance with
paragraphs 4.1.2A, 4.1.4 or 4.1.5 but the fair value of the hybrid contract had not
been measured in comparative reporting periods, the fair value of the hybrid
contract in the comparative reporting periods shall be the sum of the fair values
of the components (ie the non-derivative host and the embedded derivative) at
the end of each comparative reporting period if the entity restates prior periods
(see paragraph 7.2.15).
7.2.7
If an entity has applied paragraph 7.2.6 then at the date of initial application the
entity shall recognise any difference between the fair value of the entire hybrid
contract at the date of initial application and the sum of the fair values of the
components of the hybrid contract at the date of initial application in the
opening retained earnings (or other component of equity, as appropriate) of the
reporting period that includes the date of initial application.
7.2.8
At the date of initial application an entity may designate:
(a)
a financial asset as measured at fair value through profit or loss in
accordance with paragraph 4.1.5; or
(b)
an investment in an equity instrument as at fair value through other
comprehensive income in accordance with paragraph 5.7.5.
Such a designation shall be made on the basis of the facts and circumstances
that exist at the date of initial application. That classification shall be applied
retrospectively.
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7.2.9
At the date of initial application an entity:
(a)
shall revoke its previous designation of a financial asset as measured at
fair value through profit or loss if that financial asset does not meet the
condition in paragraph 4.1.5.
(b)
may revoke its previous designation of a financial asset as measured at
fair value through profit or loss if that financial asset meets the
condition in paragraph 4.1.5.
Such a revocation shall be made on the basis of the facts and circumstances that
exist at the date of initial application. That classification shall be applied
retrospectively.
7.2.10
At the date of initial application, an entity:
(a)
may designate a financial liability as measured at fair value through
profit or loss in accordance with paragraph 4.2.2(a).
(b)
shall revoke its previous designation of a financial liability as measured
at fair value through profit or loss if such designation was made at initial
recognition in accordance with the condition now in paragraph 4.2.2(a)
and such designation does not satisfy that condition at the date of initial
application.
(c)
may revoke its previous designation of a financial liability as measured
at fair value through profit or loss if such designation was made at initial
recognition in accordance with the condition now in paragraph 4.2.2(a)
and such designation satisfies that condition at the date of initial
application.
Such a designation and revocation shall be made on the basis of the facts and
circumstances that exist at the date of initial application. That classification
shall be applied retrospectively.
7.2.11
7.2.12
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If it is impracticable (as defined in IAS 8) for an entity to apply retrospectively
the effective interest method, the entity shall treat:
(a)
the fair value of the financial asset or the financial liability at the end of
each comparative period presented as the gross carrying amount of that
financial asset or the amortised cost of that financial liability if the
entity restates prior periods; and
(b)
the fair value of the financial asset or the financial liability at the date of
initial application as the new gross carrying amount of that financial
asset or the new amortised cost of that financial liability at the date of
initial application of this Standard.
If an entity previously accounted at cost (in accordance with IAS 39), for an
investment in an equity instrument that does not have a quoted price in an
active market for an identical instrument (ie a Level 1 input) (or for a derivative
asset that is linked to and must be settled by delivery of such an equity
instrument) it shall measure that instrument at fair value at the date of initial
application. Any difference between the previous carrying amount and the fair
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value shall be recognised in the opening retained earnings (or other component
of equity, as appropriate) of the reporting period that includes the date of initial
application.
7.2.13
If an entity previously accounted for a derivative liability that is linked to, and
must be settled by, delivery of an equity instrument that does not have a quoted
price in an active market for an identical instrument (ie a Level 1 input) at cost
in accordance with IAS 39, it shall measure that derivative liability at fair value
at the date of initial application. Any difference between the previous carrying
amount and the fair value shall be recognised in the opening retained earnings
of the reporting period that includes the date of initial application.
7.2.14
At the date of initial application, an entity shall determine whether the
treatment in paragraph 5.7.7 would create or enlarge an accounting mismatch
in profit or loss on the basis of the facts and circumstances that exist at the date
of initial application. This Standard shall be applied retrospectively on the basis
of that determination.
7.2.14A
At the date of initial application, an entity is permitted to make the designation
in paragraph 2.5 for contracts that already exist on the date but only if it
designates all similar contracts. The change in the net assets resulting from
such designations shall be recognised in retained earnings at the date of initial
application.
7.2.15
Despite the requirement in paragraph 7.2.1, an entity that adopts the
classification and measurement requirements of this Standard (which include
the requirements related to amortised cost measurement for financial assets and
impairment in Sections 5.4 and 5.5) shall provide the disclosures set out in
paragraphs 42L–42O of IFRS 7 but need not restate prior periods. The entity may
restate prior periods if, and only if, it is possible without the use of hindsight. If
an entity does not restate prior periods, the entity shall recognise any difference
between the previous carrying amount and the carrying amount at the
beginning of the annual reporting period that includes the date of initial
application in the opening retained earnings (or other component of equity, as
appropriate) of the annual reporting period that includes the date of initial
application. However, if an entity restates prior periods, the restated financial
statements must reflect all of the requirements in this Standard. If an entity’s
chosen approach to applying IFRS 9 results in more than one date of initial
application for different requirements, this paragraph applies at each date of
initial application (see paragraph 7.2.2). This would be the case, for example, if
an entity elects to early apply only the requirements for the presentation of
gains and losses on financial liabilities designated as at fair value through profit
or loss in accordance with paragraph 7.1.2 before applying the other
requirements in this Standard.
7.2.16
If an entity prepares interim financial reports in accordance with IAS 34 Interim
Financial Reporting the entity need not apply the requirements in this Standard to
interim periods prior to the date of initial application if it is impracticable
(as defined in IAS 8).
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Impairment (Section 5.5)
7.2.17
An entity shall apply the impairment requirements in Section 5.5 retrospectively
in accordance with IAS 8 subject to paragraphs 7.2.15 and 7.2.18–7.2.20.
7.2.18
At the date of initial application, an entity shall use reasonable and supportable
information that is available without undue cost or effort to determine the
credit risk at the date that a financial instrument was initially recognised (or for
loan commitments and financial guarantee contracts at the date that the entity
became a party to the irrevocable commitment in accordance with
paragraph 5.5.6) and compare that to the credit risk at the date of initial
application of this Standard.
7.2.19
When determining whether there has been a significant increase in credit risk
since initial recognition, an entity may apply:
7.2.20
(a)
the requirements in paragraphs 5.5.10 and B5.5.22–B5.5.24; and
(b)
the rebuttable presumption in paragraph 5.5.11 for contractual
payments that are more than 30 days past due if an entity will apply the
impairment requirements by identifying significant increases in credit
risk since initial recognition for those financial instruments on the basis
of past due information.
If, at the date of initial application, determining whether there has been a
significant increase in credit risk since initial recognition would require undue
cost or effort, an entity shall recognise a loss allowance at an amount equal to
lifetime expected credit losses at each reporting date until that financial
instrument is derecognised (unless that financial instrument is low credit risk at
a reporting date, in which case paragraph 7.2.19(a) applies).
Transition for hedge accounting (Chapter 6)
7.2.21
When an entity first applies this Standard, it may choose as its accounting policy
to continue to apply the hedge accounting requirements of IAS 39 instead of the
requirements in Chapter 6 of this Standard. An entity shall apply that policy to
all of its hedging relationships. An entity that chooses that policy shall also
apply IFRIC 16 Hedges of a Net Investment in a Foreign Operation without the
amendments that conform that Interpretation to the requirements in Chapter 6
of this Standard.
7.2.22
Except as provided in paragraph 7.2.26, an entity shall apply the hedge
accounting requirements of this Standard prospectively.
7.2.23
To apply hedge accounting from the date of initial application of the hedge
accounting requirements of this Standard, all qualifying criteria must be met as
at that date.
7.2.24
Hedging relationships that qualified for hedge accounting in accordance with
IAS 39 that also qualify for hedge accounting in accordance with the criteria of
this Standard (see paragraph 6.4.1), after taking into account any rebalancing of
the hedging relationship on transition (see paragraph 7.2.25(b)), shall be
regarded as continuing hedging relationships.
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7.2.25
7.2.26
On initial application of the hedge accounting requirements of this Standard, an
entity:
(a)
may start to apply those requirements from the same point in time as it
ceases to apply the hedge accounting requirements of IAS 39; and
(b)
shall consider the hedge ratio in accordance with IAS 39 as the starting
point for rebalancing the hedge ratio of a continuing hedging
relationship, if applicable. Any gain or loss from such a rebalancing
shall be recognised in profit or loss.
As an exception to prospective application of the hedge accounting
requirements of this Standard, an entity:
(a)
shall apply the accounting for the time value of options in accordance
with paragraph 6.5.15 retrospectively if, in accordance with IAS 39, only
the change in an option’s intrinsic value was designated as a hedging
instrument in a hedging relationship. This retrospective application
applies only to those hedging relationships that existed at the beginning
of the earliest comparative period or were designated thereafter.
(b)
may apply the accounting for the forward element of forward contracts
in accordance with paragraph 6.5.16 retrospectively if, in accordance
with IAS 39, only the change in the spot element of a forward contract
was designated as a hedging instrument in a hedging relationship. This
retrospective application applies only to those hedging relationships
that existed at the beginning of the earliest comparative period or were
designated thereafter. In addition, if an entity elects retrospective
application of this accounting, it shall be applied to all hedging
relationships that qualify for this election (ie on transition this election
is not available on a hedging-relationship-by-hedging-relationship basis).
The accounting for foreign currency basis spreads (see paragraph 6.5.16)
may be applied retrospectively for those hedging relationships that
existed at the beginning of the earliest comparative period or were
designated thereafter.
(c)
shall apply retrospectively the requirement of paragraph 6.5.6 that there
is not an expiration or termination of the hedging instrument if:
(i)
as a consequence of laws or regulations, or the introduction of
laws or regulations, the parties to the hedging instrument agree
that one or more clearing counterparties replace their original
counterparty to become the new counterparty to each of the
parties; and
(ii)
other changes, if any, to the hedging instrument are limited to
those that are necessary to effect such a replacement of the
counterparty.
Entities that have applied IFRS 9 (2009), IFRS 9 (2010) or
IFRS 9 (2013) early
7.2.27
An entity shall apply the transition requirements in paragraphs 7.2.1–7.2.26 at
the relevant date of initial application. An entity shall apply each of the
transition provisions in paragraphs 7.2.3–7.2.14A and 7.2.17–7.2.26 only once
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(ie if an entity chooses an approach of applying IFRS 9 that involves more than
one date of initial application, it cannot apply any of those provisions again if
they were already applied at an earlier date). (See paragraphs 7.2.2 and 7.3.2.)
7.2.28
An entity that applied IFRS 9 (2009), IFRS 9 (2010) or IFRS 9 (2013) and
subsequently applies this Standard:
(a)
shall revoke its previous designation of a financial asset as measured at
fair value through profit or loss if that designation was previously made
in accordance with the condition in paragraph 4.1.5 but that condition is
no longer satisfied as a result of the application of this Standard;
(b)
may designate a financial asset as measured at fair value through profit
or loss if that designation would not have previously satisfied the
condition in paragraph 4.1.5 but that condition is now satisfied as a
result of the application of this Standard;
(c)
shall revoke its previous designation of a financial liability as measured
at fair value through profit or loss if that designation was previously
made in accordance with the condition in paragraph 4.2.2(a) but that
condition is no longer satisfied as a result of the application of this
Standard; and
(d)
may designate a financial liability as measured at fair value through
profit or loss if that designation would not have previously satisfied the
condition in paragraph 4.2.2(a) but that condition is now satisfied as a
result of the application of this Standard.
Such a designation and revocation shall be made on the basis of the facts and
circumstances that exist at the date of initial application of this Standard. That
classification shall be applied retrospectively.
7.3 Withdrawal of IFRIC 9, IFRS 9 (2009), IFRS 9 (2010) and
IFRS 9 (2013)
7.3.1
This Standard supersedes IFRIC 9 Reassessment of Embedded Derivatives. The
requirements added to IFRS 9 in October 2010 incorporated the requirements
previously set out in paragraphs 5 and 7 of IFRIC 9. As a consequential
amendment, IFRS 1 First-time Adoption of International Financial Reporting Standards
incorporated the requirements previously set out in paragraph 8 of IFRIC 9.
7.3.2
This Standard supersedes IFRS 9 (2009), IFRS 9 (2010) and IFRS 9 (2013). However,
for annual periods beginning before 1 January 2018, an entity may elect to apply
those earlier versions of IFRS 9 instead of applying this Standard if, and only if,
the entity’s relevant date of initial application is before 1 February 2015.
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Appendix A
Defined terms
This appendix is an integral part of the Standard.
12-month expected
credit losses
The portion of lifetime expected credit losses that represent
the expected credit losses that result from default events on a
financial instrument that are possible within the 12 months after
the reporting date.
amortised cost of a
financial asset or
financial liability
The amount at which the financial asset or financial liability is
measured at initial recognition minus the principal repayments,
plus or minus the cumulative amortisation using the effective
interest method of any difference between that initial amount
and the maturity amount and, for financial assets, adjusted for
any loss allowance.
contract assets
Those rights that IFRS 15 Revenue from Contracts with Customers
specifies are accounted for in accordance with this Standard for
the purposes of recognising and measuring impairment gains or
losses.
credit-impaired
financial asset
A financial asset is credit-impaired when one or more events that
have a detrimental impact on the estimated future cash flows of
that financial asset have occurred. Evidence that a financial asset
is credit-impaired include observable data about the following
events:
(a)
significant financial difficulty of the issuer or the
borrower;
(b)
a breach of contract, such as a default or past due event;
(c)
the lender(s) of the borrower, for economic or contractual
reasons relating to the borrower’s financial difficulty,
having granted to the borrower a concession(s) that the
lender(s) would not otherwise consider;
(d)
it is becoming probable that the borrower will enter
bankruptcy or other financial reorganisation;
(e)
the disappearance of an active market for that financial
asset because of financial difficulties; or
(f)
the purchase or origination of a financial asset at a deep
discount that reflects the incurred credit losses.
It may not be possible to identify a single discrete event—instead,
the combined effect of several events may have caused financial
assets to become credit-impaired.
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credit loss
The difference between all contractual cash flows that are due to
an entity in accordance with the contract and all the cash flows
that the entity expects to receive (ie all cash shortfalls),
discounted at the original effective interest rate (or
credit-adjusted effective interest rate for purchased or
originated credit-impaired financial assets). An entity shall
estimate cash flows by considering all contractual terms of the
financial instrument (for example, prepayment, extension, call
and similar options) through the expected life of that financial
instrument. The cash flows that are considered shall include
cash flows from the sale of collateral held or other credit
enhancements that are integral to the contractual terms. There
is a presumption that the expected life of a financial instrument
can be estimated reliably. However, in those rare cases when it is
not possible to reliably estimate the expected life of a financial
instrument, the entity shall use the remaining contractual term
of the financial instrument.
credit-adjusted
effective interest rate
The rate that exactly discounts the estimated future cash
payments or receipts through the expected life of the financial
asset to the amortised cost of a financial asset that is a
purchased or originated credit-impaired financial asset.
When calculating the credit-adjusted effective interest rate, an
entity shall estimate the expected cash flows by considering all
contractual terms of the financial asset (for example,
prepayment, extension, call and similar options) and expected
credit losses. The calculation includes all fees and points paid
or received between parties to the contract that are an integral
part of the effective interest rate (see paragraphs B5.4.1‒B5.4.3),
transaction costs, and all other premiums or discounts. There
is a presumption that the cash flows and the expected life of a
group of similar financial instruments can be estimated reliably.
However, in those rare cases when it is not possible to reliably
estimate the cash flows or the remaining life of a financial
instrument (or group of financial instruments), the entity shall
use the contractual cash flows over the full contractual term of
the financial instrument (or group of financial instruments).
derecognition
The removal of a previously recognised financial asset or
financial liability from an entity’s statement of financial position.
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derivative
A financial instrument or other contract within the scope of this
Standard with all three of the following characteristics.
(a)
its value changes in response to the change in a specified
interest rate, financial instrument price, commodity
price, foreign exchange rate, index of prices or rates,
credit rating or credit index, or other variable, provided
in the case of a non-financial variable that the variable is
not specific to a party to the contract (sometimes called
the ‘underlying’).
(b)
it requires no initial net investment or an initial net
investment that is smaller than would be required for
other types of contracts that would be expected to have a
similar response to changes in market factors.
(c)
it is settled at a future date.
dividends
Distributions of profits to holders of equity instruments in
proportion to their holdings of a particular class of capital.
effective interest
method
The method that is used in the calculation of the amortised cost
of a financial asset or a financial liability and in the
allocation and recognition of the interest revenue or interest
expense in profit or loss over the relevant period.
effective interest rate
The rate that exactly discounts estimated future cash payments
or receipts through the expected life of the financial asset or
financial liability to the gross carrying amount of a financial
asset or to the amortised cost of a financial liability. When
calculating the effective interest rate, an entity shall estimate the
expected cash flows by considering all the contractual terms of
the financial instrument (for example, prepayment, extension,
call and similar options) but shall not consider the expected
credit losses. The calculation includes all fees and points paid
or received between parties to the contract that are an integral
part of the effective interest rate (see paragraphs B5.4.1–B5.4.3),
transaction costs, and all other premiums or discounts. There
is a presumption that the cash flows and the expected life of a
group of similar financial instruments can be estimated reliably.
However, in those rare cases when it is not possible to reliably
estimate the cash flows or the expected life of a financial
instrument (or group of financial instruments), the entity shall
use the contractual cash flows over the full contractual term of
the financial instrument (or group of financial instruments).
expected credit losses
The weighted average of credit losses with the respective risks of
a default occurring as the weights.
financial guarantee
contract
A contract that requires the issuer to make specified payments to
reimburse the holder for a loss it incurs because a specified
debtor fails to make payment when due in accordance with the
original or modified terms of a debt instrument.
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financial liability at
fair value through
profit or loss
A financial liability that meets one of the following conditions:
(a)
it meets the definition of held for trading.
(b)
upon initial recognition it is designated by the entity as at
fair value through profit or loss in accordance with
paragraph 4.2.2 or 4.3.5.
(c)
it is designated either upon initial recognition or
subsequently as at fair value through profit or loss in
accordance with paragraph 6.7.1.
firm commitment
A binding agreement for the exchange of a specified quantity of
resources at a specified price on a specified future date or dates.
forecast transaction
An uncommitted but anticipated future transaction.
gross carrying amount
of a financial asset
The amortised cost of a financial asset, before adjusting for
any loss allowance.
hedge ratio
The relationship between the quantity of the hedging instrument
and the quantity of the hedged item in terms of their relative
weighting.
held for trading
A financial asset or financial liability that:
(a)
is acquired or incurred principally for the purpose of
selling or repurchasing it in the near term;
(b)
on initial recognition is part of a portfolio of identified
financial instruments that are managed together and for
which there is evidence of a recent actual pattern of
short-term profit-taking; or
(c)
is a derivative (except for a derivative that is a financial
guarantee contract or a designated and effective hedging
instrument).
impairment gain or
loss
Gains or losses that are recognised in profit or loss in accordance
with paragraph 5.5.8 and that arise from applying the
impairment requirements in Section 5.5.
lifetime expected
credit losses
The expected credit losses that result from all possible default
events over the expected life of a financial instrument.
loss allowance
The allowance for expected credit losses on financial assets
measured in accordance with paragraph 4.1.2, lease receivables
and contract assets, the accumulated impairment amount for
financial assets measured in accordance with paragraph 4.1.2A
and the provision for expected credit losses on loan
commitments and financial guarantee contracts.
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modification gain or
loss
The amount arising from adjusting the gross carrying amount
of a financial asset to reflect the renegotiated or modified
contractual cash flows. The entity recalculates the gross carrying
amount of a financial asset as the present value of the estimated
future cash payments or receipts through the expected life of the
renegotiated or modified financial asset that are discounted at
the financial asset’s original effective interest rate (or the
original credit-adjusted effective interest rate for purchased
or originated credit-impaired financial assets) or, when
applicable, the revised effective interest rate calculated in
accordance with paragraph 6.5.10.
When estimating the
expected cash flows of a financial asset, an entity shall consider
all contractual terms of the financial asset (for example,
prepayment, call and similar options) but shall not consider the
expected credit losses, unless the financial asset is a purchased
or originated credit-impaired financial asset, in which case
an entity shall also consider the initial expected credit losses that
were considered when calculating the original credit-adjusted
effective interest rate.
past due
A financial asset is past due when a counterparty has failed to
make a payment when that payment was contractually due.
purchased or
originated
credit-impaired
financial asset
Purchased or originated financial
credit-impaired on initial recognition.
reclassification date
The first day of the first reporting period following the change in
business model that results in an entity reclassifying financial
assets.
regular way purchase
or sale
A purchase or sale of a financial asset under a contract whose
terms require delivery of the asset within the time frame
established generally by regulation or convention in the
marketplace concerned.
transaction costs
Incremental costs that are directly attributable to the acquisition,
issue or disposal of a financial asset or financial liability (see
paragraph B5.4.8). An incremental cost is one that would not
have been incurred if the entity had not acquired, issued or
disposed of the financial instrument.
asset(s)
that
are
The following terms are defined in paragraph 11 of IAS 32, Appendix A of IFRS 7,
Appendix A of IFRS 13 or Appendix A of IFRS 15 and are used in this Standard with the
meanings specified in IAS 32, IFRS 7, IFRS 13 or IFRS 15:
(a)
credit risk;2
(b)
equity instrument;
(c)
fair value;
2
This term (as defined in IFRS 7) is used in the requirements for presenting the effects of changes in
credit risk on liabilities designated as at fair value through profit or loss (see paragraph 5.7.7).
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(d)
financial asset;
(e)
financial instrument;
(f)
financial liability;
(g)
transaction price.
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Appendix B
Application guidance
This appendix is an integral part of the Standard.
Scope (Chapter 2)
B2.1
Some contracts require a payment based on climatic, geological or other
physical variables. (Those based on climatic variables are sometimes referred to
as ‘weather derivatives’.) If those contracts are not within the scope of IFRS 4
Insurance Contracts, they are within the scope of this Standard.
B2.2
This Standard does not change the requirements relating to employee benefit
plans that comply with IAS 26 Accounting and Reporting by Retirement Benefit Plans
and royalty agreements based on the volume of sales or service revenues that are
accounted for under IFRS 15 Revenue from Contracts with Customers.
B2.3
Sometimes, an entity makes what it views as a ‘strategic investment’ in equity
instruments issued by another entity, with the intention of establishing or
maintaining a long-term operating relationship with the entity in which the
investment is made. The investor or joint venturer entity uses IAS 28 Investments
in Associates and Joint Ventures to determine whether the equity method of
accounting shall be applied to such an investment.
B2.4
This Standard applies to the financial assets and financial liabilities of insurers,
other than rights and obligations that paragraph 2.1(e) excludes because they
arise under contracts within the scope of IFRS 4.
B2.5
Financial guarantee contracts may have various legal forms, such as a guarantee,
some types of letter of credit, a credit default contract or an insurance contract.
Their accounting treatment does not depend on their legal form. The following
are examples of the appropriate treatment (see paragraph 2.1(e)):
(a)
Although a financial guarantee contract meets the definition of an
insurance contract in IFRS 4 if the risk transferred is significant, the
issuer applies this Standard. Nevertheless, if the issuer has previously
asserted explicitly that it regards such contracts as insurance contracts
and has used accounting that is applicable to insurance contracts, the
issuer may elect to apply either this Standard or IFRS 4 to such financial
guarantee contracts. If this Standard applies, paragraph 5.1.1 requires
the issuer to recognise a financial guarantee contract initially at fair
value. If the financial guarantee contract was issued to an unrelated
party in a stand-alone arm’s length transaction, its fair value at inception
is likely to equal the premium received, unless there is evidence to the
contrary. Subsequently, unless the financial guarantee contract was
designated at inception as at fair value through profit or loss or unless
paragraphs 3.2.15–3.2.23 and B3.2.12–B3.2.17 apply (when a transfer of a
financial asset does not qualify for derecognition or the continuing
involvement approach applies), the issuer measures it at the higher of:
(i)
the amount determined in accordance with Section 5.5; and
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(ii)
B2.6
the amount initially recognised less, when appropriate, the
cumulative amount of income recognised in accordance with the
principles of IFRS 15 (see paragraph 4.2.1(c)).
(b)
Some credit-related guarantees do not, as a precondition for payment,
require that the holder is exposed to, and has incurred a loss on, the
failure of the debtor to make payments on the guaranteed asset when
due. An example of such a guarantee is one that requires payments in
response to changes in a specified credit rating or credit index. Such
guarantees are not financial guarantee contracts as defined in this
Standard, and are not insurance contracts as defined in IFRS 4. Such
guarantees are derivatives and the issuer applies this Standard to them.
(c)
If a financial guarantee contract was issued in connection with the sale
of goods, the issuer applies IFRS 15 in determining when it recognises
the revenue from the guarantee and from the sale of goods.
Assertions that an issuer regards contracts as insurance contracts are typically
found throughout the issuer’s communications with customers and regulators,
contracts, business documentation and financial statements. Furthermore,
insurance contracts are often subject to accounting requirements that are
distinct from the requirements for other types of transaction, such as contracts
issued by banks or commercial companies. In such cases, an issuer’s financial
statements typically include a statement that the issuer has used those
accounting requirements.
Recognition and derecognition (Chapter 3)
Initial recognition (Section 3.1)
B3.1.1
As a consequence of the principle in paragraph 3.1.1, an entity recognises all of
its contractual rights and obligations under derivatives in its statement of
financial position as assets and liabilities, respectively, except for derivatives
that prevent a transfer of financial assets from being accounted for as a sale (see
paragraph B3.2.14). If a transfer of a financial asset does not qualify for
derecognition, the transferee does not recognise the transferred asset as its asset
(see paragraph B3.2.15).
B3.1.2
The following are examples of applying the principle in paragraph 3.1.1:
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(a)
Unconditional receivables and payables are recognised as assets or
liabilities when the entity becomes a party to the contract and, as a
consequence, has a legal right to receive or a legal obligation to pay cash.
(b)
Assets to be acquired and liabilities to be incurred as a result of a firm
commitment to purchase or sell goods or services are generally not
recognised until at least one of the parties has performed under the
agreement. For example, an entity that receives a firm order does not
generally recognise an asset (and the entity that places the order does not
recognise a liability) at the time of the commitment but, instead, delays
recognition until the ordered goods or services have been shipped,
delivered or rendered. If a firm commitment to buy or sell non-financial
items is within the scope of this Standard in accordance with
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paragraphs 2.4–2.7, its net fair value is recognised as an asset or a
liability on the commitment date (see paragraph B4.1.30(c)). In addition,
if a previously unrecognised firm commitment is designated as a hedged
item in a fair value hedge, any change in the net fair value attributable
to the hedged risk is recognised as an asset or a liability after the
inception of the hedge (see paragraphs 6.5.8(b) and 6.5.9).
(c)
A forward contract that is within the scope of this Standard (see
paragraph 2.1) is recognised as an asset or a liability on the commitment
date, instead of on the date on which settlement takes place. When an
entity becomes a party to a forward contract, the fair values of the right
and obligation are often equal, so that the net fair value of the forward is
zero. If the net fair value of the right and obligation is not zero, the
contract is recognised as an asset or liability.
(d)
Option contracts that are within the scope of this Standard (see
paragraph 2.1) are recognised as assets or liabilities when the holder or
writer becomes a party to the contract.
(e)
Planned future transactions, no matter how likely, are not assets and
liabilities because the entity has not become a party to a contract.
Regular way purchase or sale of financial assets
B3.1.3
A regular way purchase or sale of financial assets is recognised using either trade
date accounting or settlement date accounting as described in paragraphs B3.1.5
and B3.1.6. An entity shall apply the same method consistently for all purchases
and sales of financial assets that are classified in the same way in accordance
with this Standard. For this purpose assets that are mandatorily measured at
fair value through profit or loss form a separate classification from assets
designated as measured at fair value through profit or loss. In addition,
investments in equity instruments accounted for using the option provided in
paragraph 5.7.5 form a separate classification.
B3.1.4
A contract that requires or permits net settlement of the change in the value of
the contract is not a regular way contract. Instead, such a contract is accounted
for as a derivative in the period between the trade date and the settlement date.
B3.1.5
The trade date is the date that an entity commits itself to purchase or sell an
asset. Trade date accounting refers to (a) the recognition of an asset to be
received and the liability to pay for it on the trade date, and (b) derecognition of
an asset that is sold, recognition of any gain or loss on disposal and the
recognition of a receivable from the buyer for payment on the trade date.
Generally, interest does not start to accrue on the asset and corresponding
liability until the settlement date when title passes.
B3.1.6
The settlement date is the date that an asset is delivered to or by an entity.
Settlement date accounting refers to (a) the recognition of an asset on the day it
is received by the entity, and (b) the derecognition of an asset and recognition of
any gain or loss on disposal on the day that it is delivered by the entity. When
settlement date accounting is applied an entity accounts for any change in the
fair value of the asset to be received during the period between the trade date
and the settlement date in the same way as it accounts for the acquired asset. In
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other words, the change in value is not recognised for assets measured at
amortised cost; it is recognised in profit or loss for assets classified as financial
assets measured at fair value through profit or loss; and it is recognised in other
comprehensive income for financial assets measured at fair value through other
comprehensive income in accordance with paragraph 4.1.2A and for
investments in equity instruments accounted for in accordance with
paragraph 5.7.5.
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Derecognition of financial assets (Section 3.2)
B3.2.1
The following flow chart illustrates the evaluation of whether and to what
extent a financial asset is derecognised.
Derecognise the asset
Continue to recognise the asset
Derecognise the asset
Continue to recognise the asset
Derecognise the asset
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Arrangements under which an entity retains the contractual rights to
receive the cash flows of a financial asset, but assumes a contractual
obligation to pay the cash flows to one or more recipients
(paragraph 3.2.4(b))
B3.2.2
The situation described in paragraph 3.2.4(b) (when an entity retains the
contractual rights to receive the cash flows of the financial asset, but assumes a
contractual obligation to pay the cash flows to one or more recipients) occurs,
for example, if the entity is a trust, and issues to investors beneficial interests in
the underlying financial assets that it owns and provides servicing of those
financial assets. In that case, the financial assets qualify for derecognition if the
conditions in paragraphs 3.2.5 and 3.2.6 are met.
B3.2.3
In applying paragraph 3.2.5, the entity could be, for example, the originator of
the financial asset, or it could be a group that includes a subsidiary that has
acquired the financial asset and passes on cash flows to unrelated third party
investors.
Evaluation of the transfer of risks and rewards of ownership
(paragraph 3.2.6)
B3.2.4
B3.2.5
B3.2.6
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Examples of when an entity has transferred substantially all the risks and
rewards of ownership are:
(a)
an unconditional sale of a financial asset;
(b)
a sale of a financial asset together with an option to repurchase the
financial asset at its fair value at the time of repurchase; and
(c)
a sale of a financial asset together with a put or call option that is deeply
out of the money (ie an option that is so far out of the money it is highly
unlikely to go into the money before expiry).
Examples of when an entity has retained substantially all the risks and rewards
of ownership are:
(a)
a sale and repurchase transaction where the repurchase price is a fixed
price or the sale price plus a lender’s return;
(b)
a securities lending agreement;
(c)
a sale of a financial asset together with a total return swap that transfers
the market risk exposure back to the entity;
(d)
a sale of a financial asset together with a deep in-the-money put or call
option (ie an option that is so far in the money that it is highly unlikely
to go out of the money before expiry); and
(e)
a sale of short-term receivables in which the entity guarantees to
compensate the transferee for credit losses that are likely to occur.
If an entity determines that as a result of the transfer, it has transferred
substantially all the risks and rewards of ownership of the transferred asset, it
does not recognise the transferred asset again in a future period, unless it
reacquires the transferred asset in a new transaction.
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Evaluation of the transfer of control
B3.2.7
An entity has not retained control of a transferred asset if the transferee has the
practical ability to sell the transferred asset. An entity has retained control of a
transferred asset if the transferee does not have the practical ability to sell the
transferred asset. A transferee has the practical ability to sell the transferred
asset if it is traded in an active market because the transferee could repurchase
the transferred asset in the market if it needs to return the asset to the entity.
For example, a transferee may have the practical ability to sell a transferred asset
if the transferred asset is subject to an option that allows the entity to
repurchase it, but the transferee can readily obtain the transferred asset in the
market if the option is exercised. A transferee does not have the practical ability
to sell the transferred asset if the entity retains such an option and the
transferee cannot readily obtain the transferred asset in the market if the entity
exercises its option.
B3.2.8
The transferee has the practical ability to sell the transferred asset only if the
transferee can sell the transferred asset in its entirety to an unrelated third party
and is able to exercise that ability unilaterally and without imposing additional
restrictions on the transfer. The critical question is what the transferee is able to
do in practice, not what contractual rights the transferee has concerning what it
can do with the transferred asset or what contractual prohibitions exist. In
particular:
B3.2.9
(a)
a contractual right to dispose of the transferred asset has little practical
effect if there is no market for the transferred asset, and
(b)
an ability to dispose of the transferred asset has little practical effect if it
cannot be exercised freely. For that reason:
(i)
the transferee’s ability to dispose of the transferred asset must be
independent of the actions of others (ie it must be a unilateral
ability), and
(ii)
the transferee must be able to dispose of the transferred asset
without needing to attach restrictive conditions or ‘strings’ to the
transfer (eg conditions about how a loan asset is serviced or an
option giving the transferee the right to repurchase the asset).
That the transferee is unlikely to sell the transferred asset does not, of itself,
mean that the transferor has retained control of the transferred asset. However,
if a put option or guarantee constrains the transferee from selling the
transferred asset, then the transferor has retained control of the transferred
asset. For example, if a put option or guarantee is sufficiently valuable it
constrains the transferee from selling the transferred asset because the
transferee would, in practice, not sell the transferred asset to a third party
without attaching a similar option or other restrictive conditions. Instead, the
transferee would hold the transferred asset so as to obtain payments under the
guarantee or put option. Under these circumstances the transferor has retained
control of the transferred asset.
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Transfers that qualify for derecognition
B3.2.10
An entity may retain the right to a part of the interest payments on transferred
assets as compensation for servicing those assets. The part of the interest
payments that the entity would give up upon termination or transfer of the
servicing contract is allocated to the servicing asset or servicing liability. The
part of the interest payments that the entity would not give up is an
interest-only strip receivable. For example, if the entity would not give up any
interest upon termination or transfer of the servicing contract, the entire
interest spread is an interest-only strip receivable. For the purposes of applying
paragraph 3.2.13, the fair values of the servicing asset and interest-only strip
receivable are used to allocate the carrying amount of the receivable between
the part of the asset that is derecognised and the part that continues to be
recognised. If there is no servicing fee specified or the fee to be received is not
expected to compensate the entity adequately for performing the servicing, a
liability for the servicing obligation is recognised at fair value.
B3.2.11
When measuring the fair values of the part that continues to be recognised and
the part that is derecognised for the purposes of applying paragraph 3.2.13, an
entity applies the fair value measurement requirements in IFRS 13 Fair Value
Measurement in addition to paragraph 3.2.14.
Transfers that do not qualify for derecognition
B3.2.12
The following is an application of the principle outlined in paragraph 3.2.15. If
a guarantee provided by the entity for default losses on the transferred asset
prevents a transferred asset from being derecognised because the entity has
retained substantially all the risks and rewards of ownership of the transferred
asset, the transferred asset continues to be recognised in its entirety and the
consideration received is recognised as a liability.
Continuing involvement in transferred assets
B3.2.13
The following are examples of how an entity measures a transferred asset and
the associated liability under paragraph 3.2.16.
All assets
(a)
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If a guarantee provided by an entity to pay for default losses on a
transferred asset prevents the transferred asset from being derecognised
to the extent of the continuing involvement, the transferred asset at the
date of the transfer is measured at the lower of (i) the carrying amount of
the asset and (ii) the maximum amount of the consideration received in
the transfer that the entity could be required to repay (‘the guarantee
amount’). The associated liability is initially measured at the guarantee
amount plus the fair value of the guarantee (which is normally the
consideration received for the guarantee). Subsequently, the initial fair
value of the guarantee is recognised in profit or loss when (or as) the
obligation is satisfied (in accordance with the principles of IFRS 15) and
the carrying value of the asset is reduced by any loss allowance.
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Assets measured at amortised cost
(b)
If a put option obligation written by an entity or call option right held by
an entity prevents a transferred asset from being derecognised and the
entity measures the transferred asset at amortised cost, the associated
liability is measured at its cost (ie the consideration received) adjusted
for the amortisation of any difference between that cost and the gross
carrying amount of the transferred asset at the expiration date of the
option. For example, assume that the gross carrying amount of the asset
on the date of the transfer is CU98 and that the consideration received is
CU95. The gross carrying amount of the asset on the option exercise date
will be CU100. The initial carrying amount of the associated liability is
CU95 and the difference between CU95 and CU100 is recognised in profit
or loss using the effective interest method. If the option is exercised, any
difference between the carrying amount of the associated liability and
the exercise price is recognised in profit or loss.
Assets measured at fair value
(c)
If a call option right retained by an entity prevents a transferred asset
from being derecognised and the entity measures the transferred asset at
fair value, the asset continues to be measured at its fair value. The
associated liability is measured at (i) the option exercise price less the
time value of the option if the option is in or at the money, or (ii) the fair
value of the transferred asset less the time value of the option if the
option is out of the money. The adjustment to the measurement of the
associated liability ensures that the net carrying amount of the asset and
the associated liability is the fair value of the call option right. For
example, if the fair value of the underlying asset is CU80, the option
exercise price is CU95 and the time value of the option is CU5, the
carrying amount of the associated liability is CU75 (CU80 – CU5) and the
carrying amount of the transferred asset is CU80 (ie its fair value).
(d)
If a put option written by an entity prevents a transferred asset from
being derecognised and the entity measures the transferred asset at fair
value, the associated liability is measured at the option exercise price
plus the time value of the option. The measurement of the asset at fair
value is limited to the lower of the fair value and the option exercise
price because the entity has no right to increases in the fair value of the
transferred asset above the exercise price of the option. This ensures that
the net carrying amount of the asset and the associated liability is the
fair value of the put option obligation. For example, if the fair value of
the underlying asset is CU120, the option exercise price is CU100 and the
time value of the option is CU5, the carrying amount of the associated
liability is CU105 (CU100 + CU5) and the carrying amount of the asset is
CU100 (in this case the option exercise price).
(e)
If a collar, in the form of a purchased call and written put, prevents a
transferred asset from being derecognised and the entity measures the
asset at fair value, it continues to measure the asset at fair value. The
associated liability is measured at (i) the sum of the call exercise price
and fair value of the put option less the time value of the call option, if
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the call option is in or at the money, or (ii) the sum of the fair value of
the asset and the fair value of the put option less the time value of the
call option if the call option is out of the money. The adjustment to the
associated liability ensures that the net carrying amount of the asset and
the associated liability is the fair value of the options held and written by
the entity. For example, assume an entity transfers a financial asset that
is measured at fair value while simultaneously purchasing a call with an
exercise price of CU120 and writing a put with an exercise price of CU80.
Assume also that the fair value of the asset is CU100 at the date of the
transfer. The time value of the put and call are CU1 and CU5
respectively. In this case, the entity recognises an asset of CU100 (the fair
value of the asset) and a liability of CU96 [(CU100 + CU1) – CU5]. This
gives a net asset value of CU4, which is the fair value of the options held
and written by the entity.
All transfers
B3.2.14
To the extent that a transfer of a financial asset does not qualify for
derecognition, the transferor’s contractual rights or obligations related to the
transfer are not accounted for separately as derivatives if recognising both the
derivative and either the transferred asset or the liability arising from the
transfer would result in recognising the same rights or obligations twice. For
example, a call option retained by the transferor may prevent a transfer of
financial assets from being accounted for as a sale. In that case, the call option is
not separately recognised as a derivative asset.
B3.2.15
To the extent that a transfer of a financial asset does not qualify for
derecognition, the transferee does not recognise the transferred asset as its asset.
The transferee derecognises the cash or other consideration paid and recognises
a receivable from the transferor. If the transferor has both a right and an
obligation to reacquire control of the entire transferred asset for a fixed amount
(such as under a repurchase agreement), the transferee may measure its
receivable at amortised cost if it meets the criteria in paragraph 4.1.2.
Examples
B3.2.16
The following examples illustrate the application of the derecognition
principles of this Standard.
(a)
Repurchase agreements and securities lending. If a financial asset is sold under
an agreement to repurchase it at a fixed price or at the sale price plus a
lender’s return or if it is loaned under an agreement to return it to the
transferor, it is not derecognised because the transferor retains
substantially all the risks and rewards of ownership. If the transferee
obtains the right to sell or pledge the asset, the transferor reclassifies the
asset in its statement of financial position, for example, as a loaned asset
or repurchase receivable.
(b)
Repurchase agreements and securities lending—assets that are substantially the
same. If a financial asset is sold under an agreement to repurchase the
same or substantially the same asset at a fixed price or at the sale price
plus a lender’s return or if a financial asset is borrowed or loaned under
an agreement to return the same or substantially the same asset to the
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transferor, it is not derecognised because the transferor retains
substantially all the risks and rewards of ownership.
(c)
Repurchase agreements and securities lending—right of substitution. If a
repurchase agreement at a fixed repurchase price or a price equal to the
sale price plus a lender’s return, or a similar securities lending
transaction, provides the transferee with a right to substitute assets that
are similar and of equal fair value to the transferred asset at the
repurchase date, the asset sold or lent under a repurchase or securities
lending transaction is not derecognised because the transferor retains
substantially all the risks and rewards of ownership.
(d)
Repurchase right of first refusal at fair value. If an entity sells a financial asset
and retains only a right of first refusal to repurchase the transferred
asset at fair value if the transferee subsequently sells it, the entity
derecognises the asset because it has transferred substantially all the
risks and rewards of ownership.
(e)
Wash sale transaction. The repurchase of a financial asset shortly after it
has been sold is sometimes referred to as a wash sale. Such a repurchase
does not preclude derecognition provided that the original transaction
met the derecognition requirements. However, if an agreement to sell a
financial asset is entered into concurrently with an agreement to
repurchase the same asset at a fixed price or the sale price plus a lender’s
return, then the asset is not derecognised.
(f)
Put options and call options that are deeply in the money. If a transferred
financial asset can be called back by the transferor and the call option is
deeply in the money, the transfer does not qualify for derecognition
because the transferor has retained substantially all the risks and
rewards of ownership. Similarly, if the financial asset can be put back by
the transferee and the put option is deeply in the money, the transfer
does not qualify for derecognition because the transferor has retained
substantially all the risks and rewards of ownership.
(g)
Put options and call options that are deeply out of the money. A financial asset
that is transferred subject only to a deep out-of-the-money put option
held by the transferee or a deep out-of-the-money call option held by the
transferor is derecognised. This is because the transferor has transferred
substantially all the risks and rewards of ownership.
(h)
Readily obtainable assets subject to a call option that is neither deeply in the money
nor deeply out of the money. If an entity holds a call option on an asset that
is readily obtainable in the market and the option is neither deeply in
the money nor deeply out of the money, the asset is derecognised. This is
because the entity (i) has neither retained nor transferred substantially
all the risks and rewards of ownership, and (ii) has not retained control.
However, if the asset is not readily obtainable in the market,
derecognition is precluded to the extent of the amount of the asset that
is subject to the call option because the entity has retained control of the
asset.
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(i)
A not readily obtainable asset subject to a put option written by an entity that is
neither deeply in the money nor deeply out of the money. If an entity transfers a
financial asset that is not readily obtainable in the market, and writes a
put option that is not deeply out of the money, the entity neither retains
nor transfers substantially all the risks and rewards of ownership
because of the written put option. The entity retains control of the asset
if the put option is sufficiently valuable to prevent the transferee from
selling the asset, in which case the asset continues to be recognised to
the extent of the transferor’s continuing involvement (see
paragraph B3.2.9). The entity transfers control of the asset if the put
option is not sufficiently valuable to prevent the transferee from selling
the asset, in which case the asset is derecognised.
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(j)
Assets subject to a fair value put or call option or a forward repurchase agreement.
A transfer of a financial asset that is subject only to a put or call option
or a forward repurchase agreement that has an exercise or repurchase
price equal to the fair value of the financial asset at the time of
repurchase results in derecognition because of the transfer of
substantially all the risks and rewards of ownership.
(k)
Cash-settled call or put options. An entity evaluates the transfer of a
financial asset that is subject to a put or call option or a forward
repurchase agreement that will be settled net in cash to determine
whether it has retained or transferred substantially all the risks and
rewards of ownership. If the entity has not retained substantially all the
risks and rewards of ownership of the transferred asset, it determines
whether it has retained control of the transferred asset. That the put or
the call or the forward repurchase agreement is settled net in cash does
not automatically mean that the entity has transferred control (see
paragraphs B3.2.9 and (g), (h) and (i) above).
(l)
Removal of accounts provision. A removal of accounts provision is an
unconditional repurchase (call) option that gives an entity the right to
reclaim assets transferred subject to some restrictions. Provided that
such an option results in the entity neither retaining nor transferring
substantially all the risks and rewards of ownership, it precludes
derecognition only to the extent of the amount subject to repurchase
(assuming that the transferee cannot sell the assets). For example, if the
carrying amount and proceeds from the transfer of loan assets are
CU100,000 and any individual loan could be called back but the
aggregate amount of loans that could be repurchased could not exceed
CU10,000, CU90,000 of the loans would qualify for derecognition.
(m)
Clean-up calls.
An entity, which may be a transferor, that services
transferred assets may hold a clean-up call to purchase remaining
transferred assets when the amount of outstanding assets falls to a
specified level at which the cost of servicing those assets becomes
burdensome in relation to the benefits of servicing. Provided that such a
clean-up call results in the entity neither retaining nor transferring
substantially all the risks and rewards of ownership and the transferee
cannot sell the assets, it precludes derecognition only to the extent of the
amount of the assets that is subject to the call option.
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(n)
Subordinated retained interests and credit guarantees. An entity may provide
the transferee with credit enhancement by subordinating some or all of
its interest retained in the transferred asset. Alternatively, an entity may
provide the transferee with credit enhancement in the form of a credit
guarantee that could be unlimited or limited to a specified amount. If
the entity retains substantially all the risks and rewards of ownership of
the transferred asset, the asset continues to be recognised in its entirety.
If the entity retains some, but not substantially all, of the risks and
rewards of ownership and has retained control, derecognition is
precluded to the extent of the amount of cash or other assets that the
entity could be required to pay.
(o)
Total return swaps. An entity may sell a financial asset to a transferee and
enter into a total return swap with the transferee, whereby all of the
interest payment cash flows from the underlying asset are remitted to
the entity in exchange for a fixed payment or variable rate payment and
any increases or declines in the fair value of the underlying asset are
absorbed by the entity. In such a case, derecognition of all of the asset is
prohibited.
(p)
Interest rate swaps. An entity may transfer to a transferee a fixed rate
financial asset and enter into an interest rate swap with the transferee to
receive a fixed interest rate and pay a variable interest rate based on a
notional amount that is equal to the principal amount of the transferred
financial asset. The interest rate swap does not preclude derecognition
of the transferred asset provided the payments on the swap are not
conditional on payments being made on the transferred asset.
(q)
Amortising interest rate swaps. An entity may transfer to a transferee a fixed
rate financial asset that is paid off over time, and enter into an
amortising interest rate swap with the transferee to receive a fixed
interest rate and pay a variable interest rate based on a notional amount.
If the notional amount of the swap amortises so that it equals the
principal amount of the transferred financial asset outstanding at any
point in time, the swap would generally result in the entity retaining
substantial prepayment risk, in which case the entity either continues to
recognise all of the transferred asset or continues to recognise the
transferred asset to the extent of its continuing involvement.
Conversely, if the amortisation of the notional amount of the swap is not
linked to the principal amount outstanding of the transferred asset, such
a swap would not result in the entity retaining prepayment risk on the
asset. Hence, it would not preclude derecognition of the transferred
asset provided the payments on the swap are not conditional on interest
payments being made on the transferred asset and the swap does not
result in the entity retaining any other significant risks and rewards of
ownership on the transferred asset.
(r)
Write-off. An entity has no reasonable expectations of recovering the
contractual cash flows on a financial asset in its entirety or a portion
thereof.
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B3.2.17
This paragraph illustrates the application of the continuing involvement
approach when the entity’s continuing involvement is in a part of a financial
asset.
Assume an entity has a portfolio of prepayable loans whose coupon and
effective interest rate is 10 per cent and whose principal amount and
amortised cost is CU10,000. It enters into a transaction in which, in return
for a payment of CU9,115, the transferee obtains the right to CU9,000 of any
collections of principal plus interest thereon at 9.5 per cent. The entity
retains rights to CU1,000 of any collections of principal plus interest thereon
at 10 per cent, plus the excess spread of 0.5 per cent on the remaining
CU9,000 of principal. Collections from prepayments are allocated between
the entity and the transferee proportionately in the ratio of 1:9, but any
defaults are deducted from the entity’s interest of CU1,000 until that interest
is exhausted. The fair value of the loans at the date of the transaction is
CU10,100 and the fair value of the excess spread of 0.5 per cent is CU40.
The entity determines that it has transferred some significant risks and
rewards of ownership (for example, significant prepayment risk) but has also
retained some significant risks and rewards of ownership (because of its
subordinated retained interest) and has retained control. It therefore applies
the continuing involvement approach.
To apply this Standard, the entity analyses the transaction as (a) a retention
of a fully proportionate retained interest of CU1,000, plus (b) the
subordination of that retained interest to provide credit enhancement to the
transferee for credit losses.
The entity calculates that CU9,090 (90% × CU10,100) of the consideration
received of CU9,115 represents the consideration for a fully proportionate
90 per cent share. The remainder of the consideration received (CU25)
represents consideration received for subordinating its retained interest to
provide credit enhancement to the transferee for credit losses. In addition,
the excess spread of 0.5 per cent represents consideration received for the
credit enhancement. Accordingly, the total consideration received for the
credit enhancement is CU65 (CU25 + CU40).
continued...
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...continued
The entity calculates the gain or loss on the sale of the 90 per cent share of
cash flows. Assuming that separate fair values of the 90 per cent part
transferred and the 10 per cent part retained are not available at the date of
the transfer, the entity allocates the carrying amount of the asset in
accordance with paragraph 3.2.14 of IFRS 9 as follows:
Fair value
Percentage
Allocated
carrying
amount
Portion transferred
Portion retained
Total
9,090
1,010
90%
10%
10,100
9,000
1,000
10,000
The entity computes its gain or loss on the sale of the 90 per cent share of
the cash flows by deducting the allocated carrying amount of the portion
transferred from the consideration received, ie CU90 (CU9,090 – CU9,000).
The carrying amount of the portion retained by the entity is CU1,000.
In addition, the entity recognises the continuing involvement that results
from the subordination of its retained interest for credit losses. Accordingly,
it recognises an asset of CU1,000 (the maximum amount of the cash flows it
would not receive under the subordination), and an associated liability of
CU1,065 (which is the maximum amount of the cash flows it would not
receive under the subordination, ie CU1,000 plus the fair value of the
subordination of CU65).
The entity uses all of the above information to account for the transaction as
follows:
Original asset
Asset recognised for subordination or the
residual interest
Asset for the consideration received in the
form of excess spread
Profit or loss (gain on transfer)
Liability
Cash received
Total
Debit
Credit
—
9,000
1,000
—
40
—
—
9,115
—
90
1,065
—
10,155
10,155
continued...
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...continued
Immediately following the transaction, the carrying amount of the asset is
CU2,040 comprising CU1,000, representing the allocated cost of the portion
retained, and CU1,040, representing the entity’s additional continuing
involvement from the subordination of its retained interest for credit losses
(which includes the excess spread of CU40).
In subsequent periods, the entity recognises the consideration received for
the credit enhancement (CU65) on a time proportion basis, accrues interest
on the recognised asset using the effective interest method and recognises
any impairment losses on the recognised assets. As an example of the latter,
assume that in the following year there is an impairment loss on the
underlying loans of CU300. The entity reduces its recognised asset by CU600
(CU300 relating to its retained interest and CU300 relating to the additional
continuing involvement that arises from the subordination of its retained
interest for impairment losses), and reduces its recognised liability by CU300.
The net result is a charge to profit or loss for impairment losses of CU300.
Derecognition of financial liabilities (Section 3.3)
B3.3.1
A financial liability (or part of it) is extinguished when the debtor either:
(a)
discharges the liability (or part of it) by paying the creditor, normally
with cash, other financial assets, goods or services; or
(b)
is legally released from primary responsibility for the liability (or part of
it) either by process of law or by the creditor. (If the debtor has given a
guarantee this condition may still be met.)
B3.3.2
If an issuer of a debt instrument repurchases that instrument, the debt is
extinguished even if the issuer is a market maker in that instrument or intends
to resell it in the near term.
B3.3.3
Payment to a third party, including a trust (sometimes called ‘in-substance
defeasance’), does not, by itself, relieve the debtor of its primary obligation to the
creditor, in the absence of legal release.
B3.3.4
If a debtor pays a third party to assume an obligation and notifies its creditor
that the third party has assumed its debt obligation, the debtor does not
derecognise the debt obligation unless the condition in paragraph B3.3.1(b) is
met. If the debtor pays a third party to assume an obligation and obtains a legal
release from its creditor, the debtor has extinguished the debt. However, if the
debtor agrees to make payments on the debt to the third party or direct to its
original creditor, the debtor recognises a new debt obligation to the third party.
B3.3.5
Although legal release, whether judicially or by the creditor, results in
derecognition of a liability, the entity may recognise a new liability if the
derecognition criteria in paragraphs 3.2.1–3.2.23 are not met for the financial
assets transferred. If those criteria are not met, the transferred assets are not
derecognised, and the entity recognises a new liability relating to the transferred
assets.
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B3.3.6
For the purpose of paragraph 3.3.2, the terms are substantially different if the
discounted present value of the cash flows under the new terms, including any
fees paid net of any fees received and discounted using the original effective
interest rate, is at least 10 per cent different from the discounted present value
of the remaining cash flows of the original financial liability. If an exchange of
debt instruments or modification of terms is accounted for as an
extinguishment, any costs or fees incurred are recognised as part of the gain or
loss on the extinguishment. If the exchange or modification is not accounted
for as an extinguishment, any costs or fees incurred adjust the carrying amount
of the liability and are amortised over the remaining term of the modified
liability.
B3.3.7
In some cases, a creditor releases a debtor from its present obligation to make
payments, but the debtor assumes a guarantee obligation to pay if the party
assuming primary responsibility defaults. In these circumstances the debtor:
(a)
recognises a new financial liability based on the fair value of its
obligation for the guarantee, and
(b)
recognises a gain or loss based on the difference between (i) any proceeds
paid and (ii) the carrying amount of the original financial liability less
the fair value of the new financial liability.
Classification (Chapter 4)
Classification of financial assets (Section 4.1)
The entity’s business model for managing financial assets
B4.1.1
Paragraph 4.1.1(a) requires an entity to classify financial assets on the basis of
the entity’s business model for managing the financial assets, unless
paragraph 4.1.5 applies. An entity assesses whether its financial assets meet the
condition in paragraph 4.1.2(a) or the condition in paragraph 4.1.2A(a) on the
basis of the business model as determined by the entity’s key management
personnel (as defined in IAS 24 Related Party Disclosures).
B4.1.2
An entity’s business model is determined at a level that reflects how groups of
financial assets are managed together to achieve a particular business objective.
The entity’s business model does not depend on management’s intentions for an
individual instrument.
Accordingly, this condition is not an
instrument-by-instrument approach to classification and should be determined
on a higher level of aggregation. However, a single entity may have more than
one business model for managing its financial instruments. Consequently,
classification need not be determined at the reporting entity level. For example,
an entity may hold a portfolio of investments that it manages in order to collect
contractual cash flows and another portfolio of investments that it manages in
order to trade to realise fair value changes. Similarly, in some circumstances, it
may be appropriate to separate a portfolio of financial assets into subportfolios
in order to reflect the level at which an entity manages those financial assets.
For example, that may be the case if an entity originates or purchases a portfolio
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of mortgage loans and manages some of the loans with an objective of collecting
contractual cash flows and manages the other loans with an objective of selling
them.
B4.1.2A
An entity’s business model refers to how an entity manages its financial assets in
order to generate cash flows. That is, the entity’s business model determines
whether cash flows will result from collecting contractual cash flows, selling
financial assets or both. Consequently, this assessment is not performed on the
basis of scenarios that the entity does not reasonably expect to occur, such as
so-called ‘worst case’ or ‘stress case’ scenarios. For example, if an entity expects
that it will sell a particular portfolio of financial assets only in a stress case
scenario, that scenario would not affect the entity’s assessment of the business
model for those assets if the entity reasonably expects that such a scenario will
not occur. If cash flows are realised in a way that is different from the entity’s
expectations at the date that the entity assessed the business model
(for example, if the entity sells more or fewer financial assets than it expected
when it classified the assets), that does not give rise to a prior period error in the
entity’s financial statements (see IAS 8 Accounting Policies, Changes in Accounting
Estimates and Errors) nor does it change the classification of the remaining
financial assets held in that business model (ie those assets that the entity
recognised in prior periods and still holds) as long as the entity considered all
relevant information that was available at the time that it made the business
model assessment. However, when an entity assesses the business model for
newly originated or newly purchased financial assets, it must consider
information about how cash flows were realised in the past, along with all other
relevant information.
B4.1.2B
An entity’s business model for managing financial assets is a matter of fact and
not merely an assertion. It is typically observable through the activities that the
entity undertakes to achieve the objective of the business model. An entity will
need to use judgement when it assesses its business model for managing
financial assets and that assessment is not determined by a single factor or
activity. Instead, the entity must consider all relevant evidence that is available
at the date of the assessment. Such relevant evidence includes, but is not limited
to:
(a)
how the performance of the business model and the financial assets held
within that business model are evaluated and reported to the entity’s key
management personnel;
(b)
the risks that affect the performance of the business model (and the
financial assets held within that business model) and, in particular, the
way in which those risks are managed; and
(c)
how managers of the business are compensated (for example, whether
the compensation is based on the fair value of the assets managed or on
the contractual cash flows collected).
A business model whose objective is to hold assets in order to collect
contractual cash flows
B4.1.2C
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Financial assets that are held within a business model whose objective is to hold
assets in order to collect contractual cash flows are managed to realise cash
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flows by collecting contractual payments over the life of the instrument. That is,
the entity manages the assets held within the portfolio to collect those
particular contractual cash flows (instead of managing the overall return on the
portfolio by both holding and selling assets). In determining whether cash flows
are going to be realised by collecting the financial assets’ contractual cash flows,
it is necessary to consider the frequency, value and timing of sales in prior
periods, the reasons for those sales and expectations about future sales activity.
However sales in themselves do not determine the business model and therefore
cannot be considered in isolation. Instead, information about past sales and
expectations about future sales provide evidence related to how the entity’s
stated objective for managing the financial assets is achieved and, specifically,
how cash flows are realised. An entity must consider information about past
sales within the context of the reasons for those sales and the conditions that
existed at that time as compared to current conditions.
B4.1.3
Although the objective of an entity’s business model may be to hold financial
assets in order to collect contractual cash flows, the entity need not hold all of
those instruments until maturity. Thus an entity’s business model can be to
hold financial assets to collect contractual cash flows even when sales of
financial assets occur or are expected to occur in the future.
B4.1.3A
The business model may be to hold assets to collect contractual cash flows even
if the entity sells financial assets when there is an increase in the assets’ credit
risk. To determine whether there has been an increase in the assets’ credit risk,
the entity considers reasonable and supportable information, including forward
looking information. Irrespective of their frequency and value, sales due to an
increase in the assets’ credit risk are not inconsistent with a business model
whose objective is to hold financial assets to collect contractual cash flows
because the credit quality of financial assets is relevant to the entity’s ability to
collect contractual cash flows. Credit risk management activities that are aimed
at minimising potential credit losses due to credit deterioration are integral to
such a business model. Selling a financial asset because it no longer meets the
credit criteria specified in the entity’s documented investment policy is an
example of a sale that has occurred due to an increase in credit risk. However, in
the absence of such a policy, the entity may demonstrate in other ways that the
sale occurred due to an increase in credit risk.
B4.1.3B
Sales that occur for other reasons, such as sales made to manage credit
concentration risk (without an increase in the assets’ credit risk), may also be
consistent with a business model whose objective is to hold financial assets in
order to collect contractual cash flows. In particular, such sales may be
consistent with a business model whose objective is to hold financial assets in
order to collect contractual cash flows if those sales are infrequent (even if
significant in value) or insignificant in value both individually and in aggregate
(even if frequent). If more than an infrequent number of such sales are made out
of a portfolio and those sales are more than insignificant in value (either
individually or in aggregate), the entity needs to assess whether and how such
sales are consistent with an objective of collecting contractual cash flows.
Whether a third party imposes the requirement to sell the financial assets, or
that activity is at the entity’s discretion, is not relevant to this assessment. An
increase in the frequency or value of sales in a particular period is not
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necessarily inconsistent with an objective to hold financial assets in order to
collect contractual cash flows, if an entity can explain the reasons for those sales
and demonstrate why those sales do not reflect a change in the entity’s business
model. In addition, sales may be consistent with the objective of holding
financial assets in order to collect contractual cash flows if the sales are made
close to the maturity of the financial assets and the proceeds from the sales
approximate the collection of the remaining contractual cash flows.
B4.1.4
The following are examples of when the objective of an entity’s business model
may be to hold financial assets to collect the contractual cash flows. This list of
examples is not exhaustive. Furthermore, the examples are not intended to
discuss all factors that may be relevant to the assessment of the entity’s business
model nor specify the relative importance of the factors.
Example
Analysis
Although the entity considers, among
other information, the financial
An entity holds investments to collect
assets’ fair values from a liquidity
their contractual cash flows. The
perspective (ie the cash amount that
funding needs of the entity are
would be realised if the entity needs
predictable and the maturity of its
to sell assets), the entity’s objective is
financial assets is matched to the
to hold the financial assets in order
entity’s estimated funding needs.
to collect the contractual cash flows.
The entity performs credit risk
Sales would not contradict that
management activities with the
objective if they were in response to
objective of minimising credit losses. an increase in the assets’ credit risk,
In the past, sales have typically
for example if the assets no longer
occurred when the financial assets’
meet the credit criteria specified in
credit risk has increased such that
the entity’s documented investment
the assets no longer meet the credit
policy. Infrequent sales resulting
criteria specified in the entity’s
from unanticipated funding needs
documented investment policy. In
(eg in a stress case scenario) also
addition, infrequent sales have
would not contradict that objective,
occurred as a result of unanticipated even if such sales are significant in
funding needs.
value.
Example 1
Reports to key management
personnel focus on the credit quality
of the financial assets and the
contractual return. The entity also
monitors fair values of the financial
assets, among other information.
continued...
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...continued
Example
Analysis
Example 2
The objective of the entity’s business
model is to hold the financial assets
in order to collect the contractual
cash flows.
An entity’s business model is to
purchase portfolios of financial
assets, such as loans. Those portfolios
may or may not include financial
The same analysis would apply even
assets that are credit impaired.
if the entity does not expect to
receive all of the contractual cash
If payment on the loans is not made
flows (eg some of the financial assets
on a timely basis, the entity attempts
are credit impaired at initial
to realise the contractual cash flows
recognition).
through various means—for example,
by contacting the debtor by mail,
Moreover, the fact that the entity
telephone or other methods. The
enters into derivatives to modify the
entity’s objective is to collect the
cash flows of the portfolio does not in
contractual cash flows and the entity itself change the entity’s business
does not manage any of the loans in model.
this portfolio with an objective of
realising cash flows by selling them.
In some cases, the entity enters into
interest rate swaps to change the
interest rate on particular financial
assets in a portfolio from a floating
interest rate to a fixed interest rate.
continued...
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...continued
Example
Analysis
Example 3
The consolidated group originated
the loans with the objective of
holding them to collect the
contractual cash flows.
An entity has a business model with
the objective of originating loans to
customers and subsequently selling
those loans to a securitisation vehicle. However, the originating entity has
The securitisation vehicle issues
an objective of realising cash flows on
instruments to investors.
the loan portfolio by selling the loans
to the securitisation vehicle, so for
The originating entity controls the
the purposes of its separate financial
securitisation vehicle and thus
statements it would not be
consolidates it.
considered to be managing this
The securitisation vehicle collects the portfolio in order to collect the
contractual cash flows from the loans contractual cash flows.
and passes them on to its investors.
It is assumed for the purposes of this
example that the loans continue to
be recognised in the consolidated
statement of financial position
because they are not derecognised by
the securitisation vehicle.
continued...
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...continued
Example
Analysis
The objective of the entity’s business
model is to hold the financial assets
A financial institution holds financial
to collect contractual cash flows.
assets to meet liquidity needs in a
‘stress case’ scenario (eg, a run on the The analysis would not change even
bank’s deposits). The entity does not if during a previous stress case
anticipate selling these assets except scenario the entity had sales that
in such scenarios.
were significant in value in order to
meet its liquidity needs. Similarly,
The entity monitors the credit quality
recurring sales activity that is
of the financial assets and its
insignificant in value is not
objective in managing the financial
inconsistent with holding financial
assets is to collect the contractual
assets to collect contractual cash
cash flows. The entity evaluates the
flows.
performance of the assets on the
basis of interest revenue earned and
In contrast, if an entity holds
credit losses realised.
financial assets to meet its everyday
liquidity needs and meeting that
However, the entity also monitors the
objective involves frequent sales that
fair value of the financial assets from
are significant in value, the objective
a liquidity perspective to ensure that
of the entity’s business model is not
the cash amount that would be
to hold the financial assets to collect
realised if the entity needed to sell
contractual cash flows.
the assets in a stress case scenario
would be sufficient to meet the
Similarly, if the entity is required by
entity’s liquidity needs. Periodically, its regulator to routinely sell
the entity makes sales that are
financial assets to demonstrate that
insignificant in value to demonstrate the assets are liquid, and the value of
liquidity.
the assets sold is significant, the
entity’s business model is not to hold
financial assets to collect contractual
cash flows. Whether a third party
imposes the requirement to sell the
financial assets, or that activity is at
the entity’s discretion, is not relevant
to the analysis.
Example 4
A business model whose objective is achieved by both collecting
contractual cash flows and selling financial assets
B4.1.4A
An entity may hold financial assets in a business model whose objective is
achieved by both collecting contractual cash flows and selling financial assets.
In this type of business model, the entity’s key management personnel have
made a decision that both collecting contractual cash flows and selling financial
assets are integral to achieving the objective of the business model. There are
various objectives that may be consistent with this type of business model. For
example, the objective of the business model may be to manage everyday
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liquidity needs, to maintain a particular interest yield profile or to match the
duration of the financial assets to the duration of the liabilities that those assets
are funding. To achieve such an objective, the entity will both collect
contractual cash flows and sell financial assets.
B4.1.4B
Compared to a business model whose objective is to hold financial assets to
collect contractual cash flows, this business model will typically involve greater
frequency and value of sales. This is because selling financial assets is integral to
achieving the business model’s objective instead of being only incidental to it.
However, there is no threshold for the frequency or value of sales that must
occur in this business model because both collecting contractual cash flows and
selling financial assets are integral to achieving its objective.
B4.1.4C
The following are examples of when the objective of the entity’s business model
may be achieved by both collecting contractual cash flows and selling financial
assets. This list of examples is not exhaustive. Furthermore, the examples are
not intended to describe all the factors that may be relevant to the assessment of
the entity’s business model nor specify the relative importance of the factors.
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Example
Analysis
The objective of the business model is
achieved by both collecting
An entity anticipates capital
contractual cash flows and selling
expenditure in a few years. The
financial assets. The entity will make
entity invests its excess cash in short
decisions on an ongoing basis about
and long-term financial assets so that
whether collecting contractual cash
it can fund the expenditure when the
flows or selling financial assets will
need arises. Many of the financial
maximise the return on the portfolio
assets have contractual lives that
until the need arises for the invested
exceed the entity’s anticipated
cash.
investment period.
In contrast, consider an entity that
The entity will hold financial assets
anticipates a cash outflow in five
to collect the contractual cash flows
years to fund capital expenditure and
and, when an opportunity arises, it
invests excess cash in short-term
will sell financial assets to re-invest
financial assets. When the
the cash in financial assets with a
investments mature, the entity
higher return.
reinvests the cash in new short-term
The managers responsible for the
financial assets. The entity maintains
portfolio are remunerated based on
this strategy until the funds are
the overall return generated by the
needed, at which time the entity uses
portfolio.
the proceeds from the maturing
financial assets to fund the capital
expenditure. Only sales that are
insignificant in value occur before
maturity (unless there is an increase
in credit risk). The objective of this
contrasting business model is to hold
financial assets to collect contractual
cash flows.
Example 5
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...continued
Example
Analysis
The objective of the business model is
to maximise the return on the
A financial institution holds financial
portfolio to meet everyday liquidity
assets to meet its everyday liquidity
needs and the entity achieves that
needs. The entity seeks to minimise
objective by both collecting
the costs of managing those liquidity
contractual cash flows and selling
needs and therefore actively manages
financial assets. In other words, both
the return on the portfolio. That
collecting contractual cash flows and
return consists of collecting
selling financial assets are integral to
contractual payments as well as gains
achieving the business model’s
and losses from the sale of financial
objective.
assets.
Example 6
As a result, the entity holds financial
assets to collect contractual cash
flows and sells financial assets to
reinvest in higher yielding financial
assets or to better match the duration
of its liabilities. In the past, this
strategy has resulted in frequent sales
activity and such sales have been
significant in value. This activity is
expected to continue in the future.
The objective of the business model is
to fund the insurance contract
An insurer holds financial assets in
liabilities. To achieve this objective,
order to fund insurance contract
the entity collects contractual cash
liabilities. The insurer uses the
flows as they come due and sells
proceeds from the contractual cash
financial assets to maintain the
flows on the financial assets to settle
desired profile of the asset portfolio.
insurance contract liabilities as they
Thus both collecting contractual cash
come due. To ensure that the
flows and selling financial assets are
contractual cash flows from the
integral to achieving the business
financial assets are sufficient to settle
model’s objective.
those liabilities, the insurer
undertakes significant buying and
selling activity on a regular basis to
rebalance its portfolio of assets and to
meet cash flow needs as they arise.
Example 7
Other business models
B4.1.5
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Financial assets are measured at fair value through profit or loss if they are not
held within a business model whose objective is to hold assets to collect
contractual cash flows or within a business model whose objective is achieved by
both collecting contractual cash flows and selling financial assets (but see also
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paragraph 5.7.5). One business model that results in measurement at fair value
through profit or loss is one in which an entity manages the financial assets
with the objective of realising cash flows through the sale of the assets. The
entity makes decisions based on the assets’ fair values and manages the assets to
realise those fair values. In this case, the entity’s objective will typically result in
active buying and selling. Even though the entity will collect contractual cash
flows while it holds the financial assets, the objective of such a business model is
not achieved by both collecting contractual cash flows and selling financial
assets. This is because the collection of contractual cash flows is not integral to
achieving the business model’s objective; instead, it is incidental to it.
B4.1.6
A portfolio of financial assets that is managed and whose performance is
evaluated on a fair value basis (as described in paragraph 4.2.2(b)) is neither held
to collect contractual cash flows nor held both to collect contractual cash flows
and to sell financial assets. The entity is primarily focused on fair value
information and uses that information to assess the assets’ performance and to
make decisions. In addition, a portfolio of financial assets that meets the
definition of held for trading is not held to collect contractual cash flows or held
both to collect contractual cash flows and to sell financial assets. For such
portfolios, the collection of contractual cash flows is only incidental to achieving
the business model’s objective. Consequently, such portfolios of financial assets
must be measured at fair value through profit or loss.
Contractual cash flows that are solely payments of principal and
interest on the principal amount outstanding
B4.1.7
Paragraph 4.1.1(b) requires an entity to classify a financial asset on the basis of
its contractual cash flow characteristics if the financial asset is held within a
business model whose objective is to hold assets to collect contractual cash flows
or within a business model whose objective is achieved by both collecting
contractual cash flows and selling financial assets, unless paragraph 4.1.5
applies. To do so, the condition in paragraphs 4.1.2(b) and 4.1.2A(b) requires an
entity to determine whether the asset’s contractual cash flows are solely
payments of principal and interest on the principal amount outstanding.
B4.1.7A
Contractual cash flows that are solely payments of principal and interest on the
principal amount outstanding are consistent with a basic lending arrangement.
In a basic lending arrangement, consideration for the time value of money (see
paragraphs B4.1.9A–B4.1.9E) and credit risk are typically the most significant
elements of interest. However, in such an arrangement, interest can also
include consideration for other basic lending risks (for example, liquidity risk)
and costs (for example, administrative costs) associated with holding the
financial asset for a particular period of time. In addition, interest can include a
profit margin that is consistent with a basic lending arrangement. In extreme
economic circumstances, interest can be negative if, for example, the holder of a
financial asset either explicitly or implicitly pays for the deposit of its money for
a particular period of time (and that fee exceeds the consideration that the
holder receives for the time value of money, credit risk and other basic lending
risks and costs). However, contractual terms that introduce exposure to risks or
volatility in the contractual cash flows that is unrelated to a basic lending
arrangement, such as exposure to changes in equity prices or commodity prices,
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do not give rise to contractual cash flows that are solely payments of principal
and interest on the principal amount outstanding. An originated or a purchased
financial asset can be a basic lending arrangement irrespective of whether it is a
loan in its legal form.
B4.1.7B
In accordance with paragraph 4.1.3(a), principal is the fair value of the financial
asset at initial recognition. However that principal amount may change over the
life of the financial asset (for example, if there are repayments of principal).
B4.1.8
An entity shall assess whether contractual cash flows are solely payments of
principal and interest on the principal amount outstanding for the currency in
which the financial asset is denominated.
B4.1.9
Leverage is a contractual cash flow characteristic of some financial assets.
Leverage increases the variability of the contractual cash flows with the result
that they do not have the economic characteristics of interest. Stand-alone
option, forward and swap contracts are examples of financial assets that include
such leverage.
Thus, such contracts do not meet the condition in
paragraphs 4.1.2(b) and 4.1.2A(b) and cannot be subsequently measured at
amortised cost or fair value through other comprehensive income.
Consideration for the time value of money
B4.1.9A
Time value of money is the element of interest that provides consideration for
only the passage of time. That is, the time value of money element does not
provide consideration for other risks or costs associated with holding the
financial asset. In order to assess whether the element provides consideration
for only the passage of time, an entity applies judgement and considers relevant
factors such as the currency in which the financial asset is denominated and the
period for which the interest rate is set.
B4.1.9B
However, in some cases, the time value of money element may be modified
(ie imperfect). That would be the case, for example, if a financial asset’s interest
rate is periodically reset but the frequency of that reset does not match the tenor
of the interest rate (for example, the interest rate resets every month to a
one-year rate) or if a financial asset’s interest rate is periodically reset to an
average of particular short- and long-term interest rates. In such cases, an entity
must assess the modification to determine whether the contractual cash flows
represent solely payments of principal and interest on the principal amount
outstanding. In some circumstances, the entity may be able to make that
determination by performing a qualitative assessment of the time value of
money element whereas, in other circumstances, it may be necessary to perform
a quantitative assessment.
B4.1.9C
When assessing a modified time value of money element, the objective is to
determine how different the contractual (undiscounted) cash flows could be
from the (undiscounted) cash flows that would arise if the time value of money
element was not modified (the benchmark cash flows). For example, if the
financial asset under assessment contains a variable interest rate that is reset
every month to a one-year interest rate, the entity would compare that financial
asset to a financial instrument with identical contractual terms and the
identical credit risk except the variable interest rate is reset monthly to a
one-month interest rate. If the modified time value of money element could
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result in contractual (undiscounted) cash flows that are significantly different
from the (undiscounted) benchmark cash flows, the financial asset does not
meet the condition in paragraphs 4.1.2(b) and 4.1.2A(b). To make this
determination, the entity must consider the effect of the modified time value of
money element in each reporting period and cumulatively over the life of the
financial instrument. The reason for the interest rate being set in this way is not
relevant to the analysis. If it is clear, with little or no analysis, whether the
contractual (undiscounted) cash flows on the financial asset under the
assessment could (or could not) be significantly different from the
(undiscounted) benchmark cash flows, an entity need not perform a detailed
assessment.
B4.1.9D
When assessing a modified time value of money element, an entity must
consider factors that could affect future contractual cash flows. For example, if
an entity is assessing a bond with a five-year term and the variable interest rate
is reset every six months to a five-year rate, the entity cannot conclude that the
contractual cash flows are solely payments of principal and interest on the
principal amount outstanding simply because the interest rate curve at the time
of the assessment is such that the difference between a five-year interest rate and
a six-month interest rate is not significant. Instead, the entity must also
consider whether the relationship between the five-year interest rate and the
six-month interest rate could change over the life of the instrument such that
the contractual (undiscounted) cash flows over the life of the instrument could
be significantly different from the (undiscounted) benchmark cash flows.
However, an entity must consider only reasonably possible scenarios instead of
every possible scenario.
If an entity concludes that the contractual
(undiscounted) cash flows could be significantly different from the
(undiscounted) benchmark cash flows, the financial asset does not meet the
condition in paragraphs 4.1.2(b) and 4.1.2A(b) and therefore cannot be measured
at amortised cost or fair value through other comprehensive income.
B4.1.9E
In some jurisdictions, the government or a regulatory authority sets interest
rates. For example, such government regulation of interest rates may be part of
a broad macroeconomic policy or it may be introduced to encourage entities to
invest in a particular sector of the economy. In some of these cases, the objective
of the time value of money element is not to provide consideration for only the
passage of time. However, despite paragraphs B4.1.9A–B4.1.9D, a regulated
interest rate shall be considered a proxy for the time value of money element for
the purpose of applying the condition in paragraphs 4.1.2(b) and 4.1.2A(b) if that
regulated interest rate provides consideration that is broadly consistent with the
passage of time and does not provide exposure to risks or volatility in the
contractual cash flows that are inconsistent with a basic lending arrangement.
Contractual terms that change the timing or amount of contractual
cash flows
B4.1.10
If a financial asset contains a contractual term that could change the timing or
amount of contractual cash flows (for example, if the asset can be prepaid before
maturity or its term can be extended), the entity must determine whether the
contractual cash flows that could arise over the life of the instrument due to
that contractual term are solely payments of principal and interest on the
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principal amount outstanding. To make this determination, the entity must
assess the contractual cash flows that could arise both before, and after, the
change in contractual cash flows. The entity may also need to assess the nature
of any contingent event (ie the trigger) that would change the timing or amount
of the contractual cash flows. While the nature of the contingent event in itself
is not a determinative factor in assessing whether the contractual cash flows are
solely payments of principal and interest, it may be an indicator. For example,
compare a financial instrument with an interest rate that is reset to a higher
rate if the debtor misses a particular number of payments to a financial
instrument with an interest rate that is reset to a higher rate if a specified equity
index reaches a particular level. It is more likely in the former case that the
contractual cash flows over the life of the instrument will be solely payments of
principal and interest on the principal amount outstanding because of the
relationship between missed payments and an increase in credit risk. (See also
paragraph B4.1.18.)
B4.1.11
B4.1.12
The following are examples of contractual terms that result in contractual cash
flows that are solely payments of principal and interest on the principal amount
outstanding:
(a)
a variable interest rate that consists of consideration for the time value of
money, the credit risk associated with the principal amount outstanding
during a particular period of time (the consideration for credit risk may
be determined at initial recognition only, and so may be fixed) and other
basic lending risks and costs, as well as a profit margin;
(b)
a contractual term that permits the issuer (ie the debtor) to prepay a debt
instrument or permits the holder (ie the creditor) to put a debt
instrument back to the issuer before maturity and the prepayment
amount substantially represents unpaid amounts of principal and
interest on the principal amount outstanding, which may include
reasonable additional compensation for the early termination of the
contract; and
(c)
a contractual term that permits the issuer or the holder to extend the
contractual term of a debt instrument (ie an extension option) and the
terms of the extension option result in contractual cash flows during the
extension period that are solely payments of principal and interest on
the principal amount outstanding, which may include reasonable
additional compensation for the extension of the contract.
Despite paragraph B4.1.10, a financial asset that would otherwise meet the
condition in paragraphs 4.1.2(b) and 4.1.2A(b) but does not do so only as a result
of a contractual term that permits (or requires) the issuer to prepay a debt
instrument or permits (or requires) the holder to put a debt instrument back to
the issuer before maturity is eligible to be measured at amortised cost or fair
value through other comprehensive income (subject to meeting the condition in
paragraph 4.1.2(a) or the condition in paragraph 4.1.2A(a)) if:
(a)
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B4.1.13
(b)
the prepayment amount substantially represents the contractual par
amount and accrued (but unpaid) contractual interest, which may
include reasonable additional compensation for the early termination of
the contract; and
(c)
when the entity initially recognises the financial asset, the fair value of
the prepayment feature is insignificant.
The following examples illustrate contractual cash flows that are solely
payments of principal and interest on the principal amount outstanding. This
list of examples is not exhaustive.
Instrument
Analysis
The contractual cash flows are solely
payments of principal and interest
Instrument A is a bond with a stated
on the principal amount
maturity date. Payments of principal
outstanding. Linking payments of
and interest on the principal amount
principal and interest on the
outstanding are linked to an inflation
principal amount outstanding to an
index of the currency in which the
unleveraged inflation index resets
instrument is issued. The inflation
the time value of money to a current
link is not leveraged and the principal
level. In other words, the interest
is protected.
rate on the instrument reflects ‘real’
interest. Thus, the interest amounts
are consideration for the time value
of money on the principal amount
outstanding.
Instrument A
However, if the interest payments
were indexed to another variable
such as the debtor’s performance
(eg the debtor’s net income) or an
equity index, the contractual cash
flows are not payments of principal
and interest on the principal amount
outstanding (unless the indexing to
the debtor’s performance results in
an adjustment that only compensates
the holder for changes in the credit
risk of the instrument, such that
contractual cash flows are solely
payments of principal and interest).
That is because the contractual cash
flows reflect a return that is
inconsistent with a basic lending
arrangement (see paragraph B4.1.7A).
continued...
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...continued
Instrument
Analysis
The contractual cash flows are solely
payments of principal and interest
Instrument B is a variable interest
on the principal amount outstanding
rate instrument with a stated
as long as the interest paid over the
maturity date that permits the
life of the instrument reflects
borrower to choose the market
consideration for the time value of
interest rate on an ongoing basis. For
money, for the credit risk associated
example, at each interest rate reset
with the instrument and for other
date, the borrower can choose to pay
basic lending risks and costs, as well
three-month LIBOR for a three-month
as a profit margin (see
term or one-month LIBOR for a
paragraph B4.1.7A). The fact that the
one-month term.
LIBOR interest rate is reset during
the life of the instrument does not in
itself disqualify the instrument.
Instrument B
However, if the borrower is able to
choose to pay a one-month interest
rate that is reset every three months,
the interest rate is reset with a
frequency that does not match the
tenor of the interest rate.
Consequently, the time value of
money element is modified.
Similarly, if an instrument has a
contractual interest rate that is based
on a term that can exceed the
instrument’s remaining life (for
example, if an instrument with a
five-year maturity pays a variable rate
that is reset periodically but always
reflects a five-year maturity), the time
value of money element is modified.
That is because the interest payable
in each period is disconnected from
the interest period.
In such cases, the entity must
qualitatively or quantitatively assess
the contractual cash flows against
those on an instrument that is
identical in all respects except the
tenor of the interest rate matches the
interest period to determine if the
cash flows are solely payments of
principal and interest on the
principal amount outstanding. (But
see paragraph B4.1.9E for guidance
on regulated interest rates.)
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Instrument
Analysis
For example, in assessing a bond
with a five-year term that pays a
variable rate that is reset every
six months but always reflects a
five-year maturity, an entity
considers the contractual cash flows
on an instrument that resets every
six months to a six-month interest
rate but is otherwise identical.
The same analysis would apply if the
borrower is able to choose between
the lender’s various published
interest rates (eg the borrower can
choose between the lender’s
published one-month variable
interest rate and the lender’s
published three-month variable
interest rate).
continued...
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...continued
Instrument
Analysis
Instrument C
The contractual cash flows of both:
Instrument C is a bond with a stated
maturity date and pays a variable
market interest rate. That variable
interest rate is capped.
(a)
an instrument that has a
fixed interest rate and
(b)
an instrument that has a
variable interest rate
are payments of principal and
interest on the principal amount
outstanding as long as the interest
reflects consideration for the time
value of money, for the credit risk
associated with the instrument
during the term of the instrument
and for other basic lending risks and
costs, as well as a profit margin. (See
paragraph B4.1.7A)
Consequently, an instrument that is
a combination of (a) and (b) (eg a
bond with an interest rate cap) can
have cash flows that are solely
payments of principal and interest
on the principal amount
outstanding. Such a contractual
term may reduce cash flow
variability by setting a limit on a
variable interest rate (eg an interest
rate cap or floor) or increase the cash
flow variability because a fixed rate
becomes variable.
Instrument D
Instrument D is a full recourse loan
and is secured by collateral.
The fact that a full recourse loan is
collateralised does not in itself affect
the analysis of whether the
contractual cash flows are solely
payments of principal and interest
on the principal amount
outstanding.
continued...
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...continued
Instrument
Analysis
The holder would analyse the
Instrument E
Instrument E is issued by a regulated
bank and has a stated maturity date.
The instrument pays a fixed interest
rate and all contractual cash flows are
non-discretionary.
However, the issuer is subject to
legislation that permits or requires a
national resolving authority to
impose losses on holders of particular
instruments, including Instrument E,
in particular circumstances. For
example, the national resolving
authority has the power to write
down the par amount of Instrument E
or to convert it into a fixed number of
the issuer’s ordinary shares if the
national resolving authority
determines that the issuer is having
severe financial difficulties, needs
additional regulatory capital or is
‘failing’.
B4.1.14
contractual terms of the financial
instrument to determine whether
they give rise to cash flows that are
solely payments of principal and
interest on the principal amount
outstanding and thus are consistent
with a basic lending arrangement.
That analysis would not consider the
payments that arise only as a result
of the national resolving authority’s
power to impose losses on the
holders of Instrument E. That is
because that power, and the
resulting payments, are not
contractual terms of the financial
instrument.
In contrast, the contractual cash
flows would not be solely payments
of principal and interest on the
principal amount outstanding if the
contractual terms of the financial
instrument permit or require the
issuer or another entity to impose
losses on the holder (eg by writing
down the par amount or by
converting the instrument into a
fixed number of the issuer’s ordinary
shares) as long as those contractual
terms are genuine, even if the
probability is remote that such a loss
will be imposed.
The following examples illustrate contractual cash flows that are not solely
payments of principal and interest on the principal amount outstanding. This
list of examples is not exhaustive.
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Instrument
Analysis
Instrument F
The holder would analyse the
convertible bond in its entirety.
Instrument F is a bond that is
convertible into a fixed number of
equity instruments of the issuer.
Instrument G
Instrument G is a loan that pays an
inverse floating interest rate (ie the
interest rate has an inverse
relationship to market interest rates).
Instrument H
Instrument H is a perpetual
instrument but the issuer may call
the instrument at any point and pay
the holder the par amount plus
accrued interest due.
Instrument H pays a market interest
rate but payment of interest cannot
be made unless the issuer is able to
remain solvent immediately
afterwards.
Deferred interest does not accrue
additional interest.
The contractual cash flows are not
payments of principal and interest on
the principal amount outstanding
because they reflect a return that is
inconsistent with a basic lending
arrangement (see paragraph B4.1.7A);
ie the return is linked to the value of
the equity of the issuer.
The contractual cash flows are not
solely payments of principal and
interest on the principal amount
outstanding.
The interest amounts are not
consideration for the time value of
money on the principal amount
outstanding.
The contractual cash flows are not
payments of principal and interest on
the principal amount outstanding.
That is because the issuer may be
required to defer interest payments
and additional interest does not
accrue on those deferred interest
amounts. As a result, interest
amounts are not consideration for
the time value of money on the
principal amount outstanding.
If interest accrued on the deferred
amounts, the contractual cash flows
could be payments of principal and
interest on the principal amount
outstanding.
continued...
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...continued
Instrument
Analysis
The fact that Instrument H is
perpetual does not in itself mean that
the contractual cash flows are not
payments of principal and interest on
the principal amount outstanding.
In effect, a perpetual instrument has
continuous (multiple) extension
options. Such options may result in
contractual cash flows that are
payments of principal and interest on
the principal amount outstanding if
interest payments are mandatory and
must be paid in perpetuity.
Also, the fact that Instrument H is
callable does not mean that the
contractual cash flows are not
payments of principal and interest on
the principal amount outstanding
unless it is callable at an amount that
does not substantially reflect
payment of outstanding principal
and interest on that principal
amount outstanding. Even if the
callable amount includes an amount
that reasonably compensates the
holder for the early termination of
the instrument, the contractual cash
flows could be payments of principal
and interest on the principal amount
outstanding. (See also
paragraph B4.1.12.)
B4.1.15
In some cases a financial asset may have contractual cash flows that are
described as principal and interest but those cash flows do not represent the
payment of principal and interest on the principal amount outstanding as
described in paragraphs 4.1.2(b), 4.1.2A(b) and 4.1.3 of this Standard.
B4.1.16
This may be the case if the financial asset represents an investment in particular
assets or cash flows and hence the contractual cash flows are not solely
payments of principal and interest on the principal amount outstanding. For
example, if the contractual terms stipulate that the financial asset’s cash flows
increase as more automobiles use a particular toll road, those contractual cash
flows are inconsistent with a basic lending arrangement. As a result, the
instrument would not satisfy the condition in paragraphs 4.1.2(b) and 4.1.2A(b).
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This could be the case when a creditor’s claim is limited to specified assets of the
debtor or the cash flows from specified assets (for example, a ‘non-recourse’
financial asset).
B4.1.17
However, the fact that a financial asset is non-recourse does not in itself
necessarily preclude the financial asset from meeting the condition in
paragraphs 4.1.2(b) and 4.1.2A(b). In such situations, the creditor is required to
assess (‘look through to’) the particular underlying assets or cash flows to
determine whether the contractual cash flows of the financial asset being
classified are payments of principal and interest on the principal amount
outstanding. If the terms of the financial asset give rise to any other cash flows
or limit the cash flows in a manner inconsistent with payments representing
principal and interest, the financial asset does not meet the condition in
paragraphs 4.1.2(b) and 4.1.2A(b). Whether the underlying assets are financial
assets or non-financial assets does not in itself affect this assessment.
B4.1.18
A contractual cash flow characteristic does not affect the classification of the
financial asset if it could have only a de minimis effect on the contractual cash
flows of the financial asset. To make this determination, an entity must
consider the possible effect of the contractual cash flow characteristic in each
reporting period and cumulatively over the life of the financial instrument. In
addition, if a contractual cash flow characteristic could have an effect on the
contractual cash flows that is more than de minimis (either in a single reporting
period or cumulatively) but that cash flow characteristic is not genuine, it does
not affect the classification of a financial asset. A cash flow characteristic is not
genuine if it affects the instrument’s contractual cash flows only on the
occurrence of an event that is extremely rare, highly abnormal and very unlikely
to occur.
B4.1.19
In almost every lending transaction the creditor’s instrument is ranked relative
to the instruments of the debtor’s other creditors. An instrument that is
subordinated to other instruments may have contractual cash flows that are
payments of principal and interest on the principal amount outstanding if the
debtor’s non-payment is a breach of contract and the holder has a contractual
right to unpaid amounts of principal and interest on the principal amount
outstanding even in the event of the debtor’s bankruptcy. For example, a trade
receivable that ranks its creditor as a general creditor would qualify as having
payments of principal and interest on the principal amount outstanding. This is
the case even if the debtor issued loans that are collateralised, which in the
event of bankruptcy would give that loan holder priority over the claims of the
general creditor in respect of the collateral but does not affect the contractual
right of the general creditor to unpaid principal and other amounts due.
Contractually linked instruments
B4.1.20
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In some types of transactions, an issuer may prioritise payments to the holders
of financial assets using multiple contractually linked instruments that create
concentrations of credit risk (tranches). Each tranche has a subordination
ranking that specifies the order in which any cash flows generated by the issuer
are allocated to the tranche. In such situations, the holders of a tranche have
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the right to payments of principal and interest on the principal amount
outstanding only if the issuer generates sufficient cash flows to satisfy
higher-ranking tranches.
B4.1.21
In such transactions, a tranche has cash flow characteristics that are payments
of principal and interest on the principal amount outstanding only if:
(a)
the contractual terms of the tranche being assessed for classification
(without looking through to the underlying pool of financial
instruments) give rise to cash flows that are solely payments of principal
and interest on the principal amount outstanding (eg the interest rate on
the tranche is not linked to a commodity index);
(b)
the underlying pool of financial instruments has the cash flow
characteristics set out in paragraphs B4.1.23 and B4.1.24; and
(c)
the exposure to credit risk in the underlying pool of financial
instruments inherent in the tranche is equal to or lower than the
exposure to credit risk of the underlying pool of financial instruments
(for example, the credit rating of the tranche being assessed for
classification is equal to or higher than the credit rating that would
apply to a single tranche that funded the underlying pool of financial
instruments).
B4.1.22
An entity must look through until it can identify the underlying pool of
instruments that are creating (instead of passing through) the cash flows. This is
the underlying pool of financial instruments.
B4.1.23
The underlying pool must contain one or more instruments that have
contractual cash flows that are solely payments of principal and interest on the
principal amount outstanding.
B4.1.24
The underlying pool of instruments may also include instruments that:
B4.1.25
(a)
reduce the cash flow variability of the instruments in paragraph B4.1.23
and, when combined with the instruments in paragraph B4.1.23, result
in cash flows that are solely payments of principal and interest on the
principal amount outstanding (eg an interest rate cap or floor or a
contract that reduces the credit risk on some or all of the instruments in
paragraph B4.1.23); or
(b)
align the cash flows of the tranches with the cash flows of the pool of
underlying instruments in paragraph B4.1.23 to address differences in
and only in:
(i)
whether the interest rate is fixed or floating;
(ii)
the currency in which the cash flows are denominated, including
inflation in that currency; or
(iii)
the timing of the cash flows.
If any instrument in the pool does not meet the conditions in either
paragraph B4.1.23 or paragraph B4.1.24, the condition in paragraph B4.1.21(b) is
not met. In performing this assessment, a detailed instrument-by-instrument
analysis of the pool may not be necessary. However, an entity must use
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judgement and perform sufficient analysis to determine whether the
instruments in the pool meet the conditions in paragraphs B4.1.23–B4.1.24. (See
also paragraph B4.1.18 for guidance on contractual cash flow characteristics
that have only a de minimis effect.)
B4.1.26
If the holder cannot assess the conditions in paragraph B4.1.21 at initial
recognition, the tranche must be measured at fair value through profit or loss.
If the underlying pool of instruments can change after initial recognition in
such a way that the pool may not meet the conditions in
paragraphs B4.1.23–B4.1.24, the tranche does not meet the conditions in
paragraph B4.1.21 and must be measured at fair value through profit or loss.
However, if the underlying pool includes instruments that are collateralised by
assets that do not meet the conditions in paragraphs B4.1.23–B4.1.24, the ability
to take possession of such assets shall be disregarded for the purposes of
applying this paragraph unless the entity acquired the tranche with the
intention of controlling the collateral.
Option to designate a financial asset or financial liability
as at fair value through profit or loss (Sections 4.1
and 4.2)
B4.1.27
Subject to the conditions in paragraphs 4.1.5 and 4.2.2, this Standard allows an
entity to designate a financial asset, a financial liability, or a group of financial
instruments (financial assets, financial liabilities or both) as at fair value
through profit or loss provided that doing so results in more relevant
information.
B4.1.28
The decision of an entity to designate a financial asset or financial liability as at
fair value through profit or loss is similar to an accounting policy choice
(although, unlike an accounting policy choice, it is not required to be applied
consistently to all similar transactions). When an entity has such a choice,
paragraph 14(b) of IAS 8 requires the chosen policy to result in the financial
statements providing reliable and more relevant information about the effects of
transactions, other events and conditions on the entity’s financial position,
financial performance or cash flows. For example, in the case of designation of a
financial liability as at fair value through profit or loss, paragraph 4.2.2 sets out
the two circumstances when the requirement for more relevant information
will be met. Accordingly, to choose such designation in accordance with
paragraph 4.2.2, the entity needs to demonstrate that it falls within one (or both)
of these two circumstances.
Designation eliminates or significantly reduces an accounting
mismatch
B4.1.29
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Measurement of a financial asset or financial liability and classification of
recognised changes in its value are determined by the item’s classification and
whether the item is part of a designated hedging relationship. Those
requirements can create a measurement or recognition inconsistency
(sometimes referred to as an ‘accounting mismatch’) when, for example, in the
absence of designation as at fair value through profit or loss, a financial asset
would be classified as subsequently measured at fair value through profit or loss
and a liability the entity considers related would be subsequently measured at
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amortised cost (with changes in fair value not recognised).
In such
circumstances, an entity may conclude that its financial statements would
provide more relevant information if both the asset and the liability were
measured as at fair value through profit or loss.
B4.1.30
B4.1.31
The following examples show when this condition could be met. In all cases, an
entity may use this condition to designate financial assets or financial liabilities
as at fair value through profit or loss only if it meets the principle in
paragraph 4.1.5 or 4.2.2(a):
(a)
an entity has liabilities under insurance contracts whose measurement
incorporates current information (as permitted by paragraph 24 of
IFRS 4) and financial assets that it considers to be related and that would
otherwise be measured at either fair value through other comprehensive
income or amortised cost.
(b)
an entity has financial assets, financial liabilities or both that share a
risk, such as interest rate risk, and that gives rise to opposite changes in
fair value that tend to offset each other. However, only some of the
instruments would be measured at fair value through profit or loss (for
example, those that are derivatives, or are classified as held for trading).
It may also be the case that the requirements for hedge accounting are
not met because, for example, the requirements for hedge effectiveness
in paragraph 6.4.1 are not met.
(c)
an entity has financial assets, financial liabilities or both that share a
risk, such as interest rate risk, that gives rise to opposite changes in fair
value that tend to offset each other and none of the financial assets or
financial liabilities qualifies for designation as a hedging instrument
because they are not measured at fair value through profit or loss.
Furthermore, in the absence of hedge accounting there is a significant
inconsistency in the recognition of gains and losses. For example, the
entity has financed a specified group of loans by issuing traded bonds
whose changes in fair value tend to offset each other. If, in addition, the
entity regularly buys and sells the bonds but rarely, if ever, buys and sells
the loans, reporting both the loans and the bonds at fair value through
profit or loss eliminates the inconsistency in the timing of the
recognition of the gains and losses that would otherwise result from
measuring them both at amortised cost and recognising a gain or loss
each time a bond is repurchased.
In cases such as those described in the preceding paragraph, to designate, at
initial recognition, the financial assets and financial liabilities not otherwise so
measured as at fair value through profit or loss may eliminate or significantly
reduce the measurement or recognition inconsistency and produce more
relevant information. For practical purposes, the entity need not enter into all
of the assets and liabilities giving rise to the measurement or recognition
inconsistency at exactly the same time. A reasonable delay is permitted
provided that each transaction is designated as at fair value through profit or
loss at its initial recognition and, at that time, any remaining transactions are
expected to occur.
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B4.1.32
It would not be acceptable to designate only some of the financial assets and
financial liabilities giving rise to the inconsistency as at fair value through profit
or loss if to do so would not eliminate or significantly reduce the inconsistency
and would therefore not result in more relevant information. However, it would
be acceptable to designate only some of a number of similar financial assets or
similar financial liabilities if doing so achieves a significant reduction (and
possibly a greater reduction than other allowable designations) in the
inconsistency. For example, assume an entity has a number of similar financial
liabilities that sum to CU100 and a number of similar financial assets that sum
to CU50 but are measured on a different basis. The entity may significantly
reduce the measurement inconsistency by designating at initial recognition all
of the assets but only some of the liabilities (for example, individual liabilities
with a combined total of CU45) as at fair value through profit or loss. However,
because designation as at fair value through profit or loss can be applied only to
the whole of a financial instrument, the entity in this example must designate
one or more liabilities in their entirety. It could not designate either a
component of a liability (eg changes in value attributable to only one risk, such
as changes in a benchmark interest rate) or a proportion (ie percentage) of a
liability.
A group of financial liabilities or financial assets and financial
liabilities is managed and its performance is evaluated on a fair
value basis
B4.1.33
An entity may manage
liabilities or financial
measuring that group
relevant information.
manages and evaluates
instruments.
B4.1.34
For example, an entity may use this condition to designate financial liabilities as
at fair value through profit or loss if it meets the principle in paragraph 4.2.2(b)
and the entity has financial assets and financial liabilities that share one or
more risks and those risks are managed and evaluated on a fair value basis in
accordance with a documented policy of asset and liability management. An
example could be an entity that has issued ‘structured products’ containing
multiple embedded derivatives and manages the resulting risks on a fair value
basis using a mix of derivative and non-derivative financial instruments.
B4.1.35
As noted above, this condition relies on the way the entity manages and
evaluates performance of the group of financial instruments under
consideration. Accordingly, (subject to the requirement of designation at initial
recognition) an entity that designates financial liabilities as at fair value through
profit or loss on the basis of this condition shall so designate all eligible
financial liabilities that are managed and evaluated together.
B4.1.36
Documentation of the entity’s strategy need not be extensive but should be
sufficient to demonstrate compliance with paragraph 4.2.2(b).
Such
documentation is not required for each individual item, but may be on a
portfolio basis. For example, if the performance management system for a
department—as approved by the entity’s key management personnel—clearly
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and evaluate the performance of a group of financial
assets and financial liabilities in such a way that
at fair value through profit or loss results in more
The focus in this instance is on the way the entity
performance, instead of on the nature of its financial
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demonstrates that its performance is evaluated on this basis, no further
documentation is required to demonstrate compliance with paragraph 4.2.2(b).
Embedded derivatives (Section 4.3)
B4.3.1
When an entity becomes a party to a hybrid contract with a host that is not an
asset within the scope of this Standard, paragraph 4.3.3 requires the entity to
identify any embedded derivative, assess whether it is required to be separated
from the host contract and, for those that are required to be separated, measure
the derivatives at fair value at initial recognition and subsequently at fair value
through profit or loss.
B4.3.2
If a host contract has no stated or predetermined maturity and represents a
residual interest in the net assets of an entity, then its economic characteristics
and risks are those of an equity instrument, and an embedded derivative would
need to possess equity characteristics related to the same entity to be regarded as
closely related. If the host contract is not an equity instrument and meets the
definition of a financial instrument, then its economic characteristics and risks
are those of a debt instrument.
B4.3.3
An embedded non-option derivative (such as an embedded forward or swap) is
separated from its host contract on the basis of its stated or implied substantive
terms, so as to result in it having a fair value of zero at initial recognition. An
embedded option-based derivative (such as an embedded put, call, cap, floor or
swaption) is separated from its host contract on the basis of the stated terms of
the option feature. The initial carrying amount of the host instrument is the
residual amount after separating the embedded derivative.
B4.3.4
Generally, multiple embedded derivatives in a single hybrid contract are treated
as a single compound embedded derivative. However, embedded derivatives
that are classified as equity (see IAS 32 Financial Instruments: Presentation) are
accounted for separately from those classified as assets or liabilities. In addition,
if a hybrid contract has more than one embedded derivative and those
derivatives relate to different risk exposures and are readily separable and
independent of each other, they are accounted for separately from each other.
B4.3.5
The economic characteristics and risks of an embedded derivative are not closely
related to the host contract (paragraph 4.3.3(a)) in the following examples. In
these examples, assuming the conditions in paragraph 4.3.3(b) and (c) are met,
an entity accounts for the embedded derivative separately from the host
contract.
(a)
A put option embedded in an instrument that enables the holder to
require the issuer to reacquire the instrument for an amount of cash or
other assets that varies on the basis of the change in an equity or
commodity price or index is not closely related to a host debt
instrument.
(b)
An option or automatic provision to extend the remaining term to
maturity of a debt instrument is not closely related to the host debt
instrument unless there is a concurrent adjustment to the approximate
current market rate of interest at the time of the extension. If an entity
issues a debt instrument and the holder of that debt instrument writes a
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call option on the debt instrument to a third party, the issuer regards the
call option as extending the term to maturity of the debt instrument
provided the issuer can be required to participate in or facilitate the
remarketing of the debt instrument as a result of the call option being
exercised.
(c)
Equity-indexed interest or principal payments embedded in a host debt
instrument or insurance contract—by which the amount of interest or
principal is indexed to the value of equity instruments—are not closely
related to the host instrument because the risks inherent in the host and
the embedded derivative are dissimilar.
(d)
Commodity-indexed interest or principal payments embedded in a host
debt instrument or insurance contract—by which the amount of interest
or principal is indexed to the price of a commodity (such as gold)—are
not closely related to the host instrument because the risks inherent in
the host and the embedded derivative are dissimilar.
(e)
A call, put, or prepayment option embedded in a host debt contract or
host insurance contract is not closely related to the host contract unless:
(i)
the option’s exercise price is approximately equal on each
exercise date to the amortised cost of the host debt instrument or
the carrying amount of the host insurance contract; or
(ii)
the exercise price of a prepayment option reimburses the lender
for an amount up to the approximate present value of lost
interest for the remaining term of the host contract. Lost interest
is the product of the principal amount prepaid multiplied by the
interest rate differential. The interest rate differential is the
excess of the effective interest rate of the host contract over the
effective interest rate the entity would receive at the prepayment
date if it reinvested the principal amount prepaid in a similar
contract for the remaining term of the host contract.
The assessment of whether the call or put option is closely related to the
host debt contract is made before separating the equity element of a
convertible debt instrument in accordance with IAS 32.
(f)
B4.3.6
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Credit derivatives that are embedded in a host debt instrument and
allow one party (the ‘beneficiary’) to transfer the credit risk of a
particular reference asset, which it may not own, to another party (the
‘guarantor’) are not closely related to the host debt instrument. Such
credit derivatives allow the guarantor to assume the credit risk
associated with the reference asset without directly owning it.
An example of a hybrid contract is a financial instrument that gives the holder a
right to put the financial instrument back to the issuer in exchange for an
amount of cash or other financial assets that varies on the basis of the change in
an equity or commodity index that may increase or decrease (a ‘puttable
instrument’). Unless the issuer on initial recognition designates the puttable
instrument as a financial liability at fair value through profit or loss, it is
required to separate an embedded derivative (ie the indexed principal payment)
under paragraph 4.3.3 because the host contract is a debt instrument under
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paragraph B4.3.2 and the indexed principal payment is not closely related to a
host debt instrument under paragraph B4.3.5(a). Because the principal payment
can increase and decrease, the embedded derivative is a non-option derivative
whose value is indexed to the underlying variable.
B4.3.7
In the case of a puttable instrument that can be put back at any time for cash
equal to a proportionate share of the net asset value of an entity (such as units of
an open-ended mutual fund or some unit-linked investment products), the effect
of separating an embedded derivative and accounting for each component is to
measure the hybrid contract at the redemption amount that is payable at the
end of the reporting period if the holder exercised its right to put the
instrument back to the issuer.
B4.3.8
The economic characteristics and risks of an embedded derivative are closely
related to the economic characteristics and risks of the host contract in the
following examples. In these examples, an entity does not account for the
embedded derivative separately from the host contract.
(a)
An embedded derivative in which the underlying is an interest rate or
interest rate index that can change the amount of interest that would
otherwise be paid or received on an interest-bearing host debt contract or
insurance contract is closely related to the host contract unless the
hybrid contract can be settled in such a way that the holder would not
recover substantially all of its recognised investment or the embedded
derivative could at least double the holder’s initial rate of return on the
host contract and could result in a rate of return that is at least twice
what the market return would be for a contract with the same terms as
the host contract.
(b)
An embedded floor or cap on the interest rate on a debt contract or
insurance contract is closely related to the host contract, provided the
cap is at or above the market rate of interest and the floor is at or below
the market rate of interest when the contract is issued, and the cap or
floor is not leveraged in relation to the host contract. Similarly,
provisions included in a contract to purchase or sell an asset (eg a
commodity) that establish a cap and a floor on the price to be paid or
received for the asset are closely related to the host contract if both the
cap and floor were out of the money at inception and are not leveraged.
(c)
An embedded foreign currency derivative that provides a stream of
principal or interest payments that are denominated in a foreign
currency and is embedded in a host debt instrument (for example, a dual
currency bond) is closely related to the host debt instrument. Such a
derivative is not separated from the host instrument because IAS 21 The
Effects of Changes in Foreign Exchange Rates requires foreign currency gains
and losses on monetary items to be recognised in profit or loss.
(d)
An embedded foreign currency derivative in a host contract that is an
insurance contract or not a financial instrument (such as a contract for
the purchase or sale of a non-financial item where the price is
denominated in a foreign currency) is closely related to the host contract
provided it is not leveraged, does not contain an option feature, and
requires payments denominated in one of the following currencies:
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(i)
the functional currency of any substantial party to that contract;
(ii)
the currency in which the price of the related good or service that
is acquired or delivered is routinely denominated in commercial
transactions around the world (such as the US dollar for crude oil
transactions); or
(iii)
a currency that is commonly used in contracts to purchase or sell
non-financial items in the economic environment in which the
transaction takes place (eg a relatively stable and liquid currency
that is commonly used in local business transactions or external
trade).
(e)
An embedded prepayment option in an interest-only or principal-only
strip is closely related to the host contract provided the host contract
(i) initially resulted from separating the right to receive contractual cash
flows of a financial instrument that, in and of itself, did not contain an
embedded derivative, and (ii) does not contain any terms not present in
the original host debt contract.
(f)
An embedded derivative in a host lease contract is closely related to the
host contract if the embedded derivative is (i) an inflation-related index
such as an index of lease payments to a consumer price index (provided
that the lease is not leveraged and the index relates to inflation in the
entity’s own economic environment), (ii) variable lease payments based
on related sales or (iii) variable lease payments based on variable interest
rates.
(g)
A unit-linking feature embedded in a host financial instrument or host
insurance contract is closely related to the host instrument or host
contract if the unit-denominated payments are measured at current unit
values that reflect the fair values of the assets of the fund. A unit-linking
feature is a contractual term that requires payments denominated in
units of an internal or external investment fund.
(h)
A derivative embedded in an insurance contract is closely related to the
host insurance contract if the embedded derivative and host insurance
contract are so interdependent that an entity cannot measure the
embedded derivative separately (ie without considering the host
contract).
Instruments containing embedded derivatives
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As noted in paragraph B4.3.1, when an entity becomes a party to a hybrid
contract with a host that is not an asset within the scope of this Standard and
with one or more embedded derivatives, paragraph 4.3.3 requires the entity to
identify any such embedded derivative, assess whether it is required to be
separated from the host contract and, for those that are required to be
separated, measure the derivatives at fair value at initial recognition and
subsequently. These requirements can be more complex, or result in less
reliable measures, than measuring the entire instrument at fair value through
profit or loss. For that reason this Standard permits the entire hybrid contract to
be designated as at fair value through profit or loss.
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B4.3.10
Such designation may be used whether paragraph 4.3.3 requires the embedded
derivatives to be separated from the host contract or prohibits such separation.
However, paragraph 4.3.5 would not justify designating the hybrid contract as at
fair value through profit or loss in the cases set out in paragraph 4.3.5(a) and (b)
because doing so would not reduce complexity or increase reliability.
Reassessment of embedded derivatives
B4.3.11
In accordance with paragraph 4.3.3, an entity shall assess whether an embedded
derivative is required to be separated from the host contract and accounted for
as a derivative when the entity first becomes a party to the contract. Subsequent
reassessment is prohibited unless there is a change in the terms of the contract
that significantly modifies the cash flows that otherwise would be required
under the contract, in which case reassessment is required. An entity
determines whether a modification to cash flows is significant by considering
the extent to which the expected future cash flows associated with the
embedded derivative, the host contract or both have changed and whether the
change is significant relative to the previously expected cash flows on the
contract.
B4.3.12
Paragraph B4.3.11 does not apply to embedded derivatives in contracts acquired
in:
(a)
a business combination (as defined in IFRS 3 Business Combinations);
(b)
a combination of entities or businesses under common control as
described in paragraphs B1–B4 of IFRS 3; or
(c)
the formation of a joint venture as defined in IFRS 11 Joint Arrangements
or their possible reassessment at the date of acquisition.3
Reclassification of financial assets (Section 4.4)
Reclassification of financial assets
B4.4.1
Paragraph 4.4.1 requires an entity to reclassify financial assets if the entity
changes its business model for managing those financial assets. Such changes
are expected to be very infrequent. Such changes are determined by the entity’s
senior management as a result of external or internal changes and must be
significant to the entity’s operations and demonstrable to external parties.
Accordingly, a change in an entity’s business model will occur only when an
entity either begins or ceases to perform an activity that is significant to its
operations; for example, when the entity has acquired, disposed of or
terminated a business line. Examples of a change in business model include the
following:
(a)
3
An entity has a portfolio of commercial loans that it holds to sell in the
short term. The entity acquires a company that manages commercial
loans and has a business model that holds the loans in order to collect
the contractual cash flows. The portfolio of commercial loans is no
IFRS 3 addresses the acquisition of contracts with embedded derivatives in a business combination.
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longer for sale, and the portfolio is now managed together with the
acquired commercial loans and all are held to collect the contractual
cash flows.
(b)
A financial services firm decides to shut down its retail mortgage
business. That business no longer accepts new business and the financial
services firm is actively marketing its mortgage loan portfolio for sale.
B4.4.2
A change in the objective of the entity’s business model must be effected before
the reclassification date. For example, if a financial services firm decides on
15 February to shut down its retail mortgage business and hence must reclassify
all affected financial assets on 1 April (ie the first day of the entity’s next
reporting period), the entity must not accept new retail mortgage business or
otherwise engage in activities consistent with its former business model after
15 February.
B4.4.3
The following are not changes in business model:
(a)
a change in intention related to particular financial assets (even in
circumstances of significant changes in market conditions).
(b)
the temporary disappearance of a particular market for financial assets.
(c)
a transfer of financial assets between parts of the entity with different
business models.
Measurement (Chapter 5)
Initial measurement (Section 5.1)
B5.1.1
The fair value of a financial instrument at initial recognition is normally the
transaction price (ie the fair value of the consideration given or received, see also
paragraph B5.1.2A and IFRS 13). However, if part of the consideration given or
received is for something other than the financial instrument, an entity shall
measure the fair value of the financial instrument. For example, the fair value
of a long-term loan or receivable that carries no interest can be measured as the
present value of all future cash receipts discounted using the prevailing market
rate(s) of interest for a similar instrument (similar as to currency, term, type of
interest rate and other factors) with a similar credit rating. Any additional
amount lent is an expense or a reduction of income unless it qualifies for
recognition as some other type of asset.
B5.1.2
If an entity originates a loan that bears an off-market interest rate (eg 5 per cent
when the market rate for similar loans is 8 per cent), and receives an upfront fee
as compensation, the entity recognises the loan at its fair value, ie net of the fee
it receives.
B5.1.2A
The best evidence of the fair value of a financial instrument at initial
recognition is normally the transaction price (ie the fair value of the
consideration given or received, see also IFRS 13). If an entity determines that
the fair value at initial recognition differs from the transaction price as
mentioned in paragraph 5.1.1A, the entity shall account for that instrument at
that date as follows:
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(a)
at the measurement required by paragraph 5.1.1 if that fair value is
evidenced by a quoted price in an active market for an identical asset or
liability (ie a Level 1 input) or based on a valuation technique that uses
only data from observable markets. An entity shall recognise the
difference between the fair value at initial recognition and the
transaction price as a gain or loss.
(b)
in all other cases, at the measurement required by paragraph 5.1.1,
adjusted to defer the difference between the fair value at initial
recognition and the transaction price. After initial recognition, the
entity shall recognise that deferred difference as a gain or loss only to the
extent that it arises from a change in a factor (including time) that
market participants would take into account when pricing the asset or
liability.
Subsequent measurement (Sections 5.2 and 5.3)
B5.2.1
If a financial instrument that was previously recognised as a financial asset is
measured at fair value through profit or loss and its fair value decreases below
zero, it is a financial liability measured in accordance with paragraph 4.2.1.
However, hybrid contracts with hosts that are assets within the scope of this
Standard are always measured in accordance with paragraph 4.3.2.
B5.2.2
The following example illustrates the accounting for transaction costs on the
initial and subsequent measurement of a financial asset measured at fair value
with changes through other comprehensive income in accordance with either
paragraph 5.7.5 or 4.1.2A. An entity acquires a financial asset for CU100 plus a
purchase commission of CU2. Initially, the entity recognises the asset at CU102.
The reporting period ends one day later, when the quoted market price of the
asset is CU100. If the asset were sold, a commission of CU3 would be paid. On
that date, the entity measures the asset at CU100 (without regard to the possible
commission on sale) and recognises a loss of CU2 in other comprehensive
income. If the financial asset is measured at fair value through other
comprehensive income in accordance with paragraph 4.1.2A, the transaction
costs are amortised to profit or loss using the effective interest method.
B5.2.2A
The subsequent measurement of a financial asset or financial liability and the
subsequent recognition of gains and losses described in paragraph B5.1.2A shall
be consistent with the requirements of this Standard.
Investments in equity instruments and contracts on those
investments
B5.2.3
All investments in equity instruments and contracts on those instruments must
be measured at fair value. However, in limited circumstances, cost may be an
appropriate estimate of fair value. That may be the case if insufficient more
recent information is available to measure fair value, or if there is a wide range
of possible fair value measurements and cost represents the best estimate of fair
value within that range.
B5.2.4
Indicators that cost might not be representative of fair value include:
(a)
a significant change in the performance of the investee compared with
budgets, plans or milestones.
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(b)
changes in expectation that the investee’s technical product milestones
will be achieved.
(c)
a significant change in the market for the investee’s equity or its
products or potential products.
(d)
a significant change in the global economy or the economic
environment in which the investee operates.
(e)
a significant change in the performance of comparable entities, or in the
valuations implied by the overall market.
(f)
internal matters of the investee such as fraud, commercial disputes,
litigation, changes in management or strategy.
(g)
evidence from external transactions in the investee’s equity, either by
the investee (such as a fresh issue of equity), or by transfers of equity
instruments between third parties.
B5.2.5
The list in paragraph B5.2.4 is not exhaustive. An entity shall use all
information about the performance and operations of the investee that becomes
available after the date of initial recognition. To the extent that any such
relevant factors exist, they may indicate that cost might not be representative of
fair value. In such cases, the entity must measure fair value.
B5.2.6
Cost is never the best estimate of fair value for investments in quoted equity
instruments (or contracts on quoted equity instruments).
Amortised cost measurement (Section 5.4)
Effective interest method
B5.4.1
In applying the effective interest method, an entity identifies fees that are an
integral part of the effective interest rate of a financial instrument. The
description of fees for financial services may not be indicative of the nature and
substance of the services provided. Fees that are an integral part of the effective
interest rate of a financial instrument are treated as an adjustment to the
effective interest rate, unless the financial instrument is measured at fair value,
with the change in fair value being recognised in profit or loss. In those cases,
the fees are recognised as revenue or expense when the instrument is initially
recognised.
B5.4.2
Fees that are an integral part of the effective interest rate of a financial
instrument include:
(a)
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origination fees received by the entity relating to the creation or
acquisition of a financial asset. Such fees may include compensation for
activities such as evaluating the borrower’s financial condition,
evaluating and recording guarantees, collateral and other security
arrangements, negotiating the terms of the instrument, preparing and
processing documents and closing the transaction. These fees are an
integral part of generating an involvement with the resulting financial
instrument.
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B5.4.3
(b)
commitment fees received by the entity to originate a loan when the
loan commitment is not measured in accordance with paragraph 4.2.1(a)
and it is probable that the entity will enter into a specific lending
arrangement. These fees are regarded as compensation for an ongoing
involvement with the acquisition of a financial instrument. If the
commitment expires without the entity making the loan, the fee is
recognised as revenue on expiry.
(c)
origination fees paid on issuing financial liabilities measured at
amortised cost. These fees are an integral part of generating an
involvement with a financial liability. An entity distinguishes fees and
costs that are an integral part of the effective interest rate for the
financial liability from origination fees and transaction costs relating to
the right to provide services, such as investment management services.
Fees that are not an integral part of the effective interest rate of a financial
instrument and are accounted for in accordance with IFRS 15 include:
(a)
fees charged for servicing a loan;
(b)
commitment fees to originate a loan when the loan commitment is not
measured in accordance with paragraph 4.2.1(a) and it is unlikely that a
specific lending arrangement will be entered into; and
(c)
loan syndication fees received by an entity that arranges a loan and
retains no part of the loan package for itself (or retains a part at the same
effective interest rate for comparable risk as other participants).
B5.4.4
When applying the effective interest method, an entity generally amortises any
fees, points paid or received, transaction costs and other premiums or discounts
that are included in the calculation of the effective interest rate over the
expected life of the financial instrument. However, a shorter period is used if
this is the period to which the fees, points paid or received, transaction costs,
premiums or discounts relate. This will be the case when the variable to which
the fees, points paid or received, transaction costs, premiums or discounts relate
is repriced to market rates before the expected maturity of the financial
instrument. In such a case, the appropriate amortisation period is the period to
the next such repricing date. For example, if a premium or discount on a
floating-rate financial instrument reflects the interest that has accrued on that
financial instrument since the interest was last paid, or changes in the market
rates since the floating interest rate was reset to the market rates, it will be
amortised to the next date when the floating interest is reset to market rates.
This is because the premium or discount relates to the period to the next
interest reset date because, at that date, the variable to which the premium or
discount relates (ie interest rates) is reset to the market rates. If, however, the
premium or discount results from a change in the credit spread over the floating
rate specified in the financial instrument, or other variables that are not reset to
the market rates, it is amortised over the expected life of the financial
instrument.
B5.4.5
For floating-rate financial assets and floating-rate financial liabilities, periodic
re-estimation of cash flows to reflect the movements in the market rates of
interest alters the effective interest rate. If a floating-rate financial asset or a
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floating-rate financial liability is recognised initially at an amount equal to the
principal receivable or payable on maturity, re-estimating the future interest
payments normally has no significant effect on the carrying amount of the asset
or the liability.
B5.4.6
If an entity revises its estimates of payments or receipts (excluding modifications
in accordance with paragraph 5.4.3 and changes in estimates of expected credit
losses), it shall adjust the gross carrying amount of the financial asset or
amortised cost of a financial liability (or group of financial instruments) to
reflect actual and revised estimated contractual cash flows. The entity
recalculates the gross carrying amount of the financial asset or amortised cost of
the financial liability as the present value of the estimated future contractual
cash flows that are discounted at the financial instrument’s original effective
interest rate (or credit-adjusted effective interest rate for purchased or originated
credit-impaired financial assets) or, when applicable, the revised effective
interest rate calculated in accordance with paragraph 6.5.10. The adjustment is
recognised in profit or loss as income or expense.
B5.4.7
In some cases a financial asset is considered credit-impaired at initial
recognition because the credit risk is very high, and in the case of a purchase it
is acquired at a deep discount. An entity is required to include the initial
expected credit losses in the estimated cash flows when calculating the
credit-adjusted effective interest rate for financial assets that are considered to
be purchased or originated credit-impaired at initial recognition. However, this
does not mean that a credit-adjusted effective interest rate should be applied
solely because the financial asset has high credit risk at initial recognition.
Transaction costs
B5.4.8
Transaction costs include fees and commission paid to agents (including
employees acting as selling agents), advisers, brokers and dealers, levies by
regulatory agencies and security exchanges, and transfer taxes and duties.
Transaction costs do not include debt premiums or discounts, financing costs or
internal administrative or holding costs.
Write-off
B5.4.9
Write-offs can relate to a financial asset in its entirety or to a portion of it. For
example, an entity plans to enforce the collateral on a financial asset and
expects to recover no more than 30 per cent of the financial asset from the
collateral. If the entity has no reasonable prospects of recovering any further
cash flows from the financial asset, it should write off the remaining 70 per cent
of the financial asset.
Impairment (Section 5.5)
Collective and individual assessment basis
B5.5.1
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In order to meet the objective of recognising lifetime expected credit losses for
significant increases in credit risk since initial recognition, it may be necessary
to perform the assessment of significant increases in credit risk on a collective
basis by considering information that is indicative of significant increases in
credit risk on, for example, a group or sub-group of financial instruments. This
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is to ensure that an entity meets the objective of recognising lifetime expected
credit losses when there are significant increases in credit risk, even if evidence
of such significant increases in credit risk at the individual instrument level is
not yet available.
B5.5.2
Lifetime expected credit losses are generally expected to be recognised before a
financial instrument becomes past due. Typically, credit risk increases
significantly before a financial instrument becomes past due or other lagging
borrower-specific factors (for example, a modification or restructuring) are
observed. Consequently when reasonable and supportable information that is
more forward-looking than past due information is available without undue cost
or effort, it must be used to assess changes in credit risk.
B5.5.3
However, depending on the nature of the financial instruments and the credit
risk information available for particular groups of financial instruments, an
entity may not be able to identify significant changes in credit risk for individual
financial instruments before the financial instrument becomes past due. This
may be the case for financial instruments such as retail loans for which there is
little or no updated credit risk information that is routinely obtained and
monitored on an individual instrument until a customer breaches the
contractual terms. If changes in the credit risk for individual financial
instruments are not captured before they become past due, a loss allowance
based only on credit information at an individual financial instrument level
would not faithfully represent the changes in credit risk since initial
recognition.
B5.5.4
In some circumstances an entity does not have reasonable and supportable
information that is available without undue cost or effort to measure lifetime
expected credit losses on an individual instrument basis. In that case, lifetime
expected credit losses shall be recognised on a collective basis that considers
comprehensive credit risk information.
This comprehensive credit risk
information must incorporate not only past due information but also all
relevant credit information, including forward-looking macroeconomic
information, in order to approximate the result of recognising lifetime expected
credit losses when there has been a significant increase in credit risk since initial
recognition on an individual instrument level.
B5.5.5
For the purpose of determining significant increases in credit risk and
recognising a loss allowance on a collective basis, an entity can group financial
instruments on the basis of shared credit risk characteristics with the objective
of facilitating an analysis that is designed to enable significant increases in
credit risk to be identified on a timely basis. The entity should not obscure this
information by grouping financial instruments with different risk
characteristics. Examples of shared credit risk characteristics may include, but
are not limited to, the:
(a)
instrument type;
(b)
credit risk ratings;
(c)
collateral type;
(d)
date of initial recognition;
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B5.5.6
(e)
remaining term to maturity;
(f)
industry;
(g)
geographical location of the borrower; and
(h)
the value of collateral relative to the financial asset if it has an impact on
the probability of a default occurring (for example, non-recourse loans in
some jurisdictions or loan-to-value ratios).
Paragraph 5.5.4 requires that lifetime expected credit losses are recognised on
all financial instruments for which there has been significant increases in credit
risk since initial recognition. In order to meet this objective, if an entity is not
able to group financial instruments for which the credit risk is considered to
have increased significantly since initial recognition based on shared credit risk
characteristics, the entity should recognise lifetime expected credit losses on a
portion of the financial assets for which credit risk is deemed to have increased
significantly. The aggregation of financial instruments to assess whether there
are changes in credit risk on a collective basis may change over time as new
information becomes available on groups of, or individual, financial
instruments.
Timing of recognising lifetime expected credit losses
B5.5.7
The assessment of whether lifetime expected credit losses should be recognised
is based on significant increases in the likelihood or risk of a default occurring
since initial recognition (irrespective of whether a financial instrument has been
repriced to reflect an increase in credit risk) instead of on evidence of a financial
asset being credit-impaired at the reporting date or an actual default occurring.
Generally, there will be a significant increase in credit risk before a financial
asset becomes credit-impaired or an actual default occurs.
B5.5.8
For loan commitments, an entity considers changes in the risk of a default
occurring on the loan to which a loan commitment relates. For financial
guarantee contracts, an entity considers the changes in the risk that the
specified debtor will default on the contract.
B5.5.9
The significance of a change in the credit risk since initial recognition depends
on the risk of a default occurring as at initial recognition. Thus, a given change,
in absolute terms, in the risk of a default occurring will be more significant for a
financial instrument with a lower initial risk of a default occurring compared to
a financial instrument with a higher initial risk of a default occurring.
B5.5.10
The risk of a default occurring on financial instruments that have comparable
credit risk is higher the longer the expected life of the instrument; for example,
the risk of a default occurring on an AAA-rated bond with an expected life of
10 years is higher than that on an AAA-rated bond with an expected life of
five years.
B5.5.11
Because of the relationship between the expected life and the risk of a default
occurring, the change in credit risk cannot be assessed simply by comparing the
change in the absolute risk of a default occurring over time. For example, if the
risk of a default occurring for a financial instrument with an expected life of
10 years at initial recognition is identical to the risk of a default occurring on
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that financial instrument when its expected life in a subsequent period is only
five years, that may indicate an increase in credit risk. This is because the risk of
a default occurring over the expected life usually decreases as time passes if the
credit risk is unchanged and the financial instrument is closer to maturity.
However, for financial instruments that only have significant payment
obligations close to the maturity of the financial instrument the risk of a default
occurring may not necessarily decrease as time passes. In such a case, an entity
should also consider other qualitative factors that would demonstrate whether
credit risk has increased significantly since initial recognition.
B5.5.12
An entity may apply various approaches when assessing whether the credit risk
on a financial instrument has increased significantly since initial recognition or
when measuring expected credit losses. An entity may apply different
approaches for different financial instruments. An approach that does not
include an explicit probability of default as an input per se, such as a credit loss
rate approach, can be consistent with the requirements in this Standard,
provided that an entity is able to separate the changes in the risk of a default
occurring from changes in other drivers of expected credit losses, such as
collateral, and considers the following when making the assessment:
(a)
the change in the risk of a default occurring since initial recognition;
(b)
the expected life of the financial instrument; and
(c)
reasonable and supportable information that is available without undue
cost or effort that may affect credit risk.
B5.5.13
The methods used to determine whether credit risk has increased significantly
on a financial instrument since initial recognition should consider the
characteristics of the financial instrument (or group of financial instruments)
and the default patterns in the past for comparable financial instruments.
Despite the requirement in paragraph 5.5.9, for financial instruments for which
default patterns are not concentrated at a specific point during the expected life
of the financial instrument, changes in the risk of a default occurring over the
next 12 months may be a reasonable approximation of the changes in the
lifetime risk of a default occurring. In such cases, an entity may use changes in
the risk of a default occurring over the next 12 months to determine whether
credit risk has increased significantly since initial recognition, unless
circumstances indicate that a lifetime assessment is necessary.
B5.5.14
However, for some financial instruments, or in some circumstances, it may not
be appropriate to use changes in the risk of a default occurring over the next
12 months to determine whether lifetime expected credit losses should be
recognised. For example, the change in the risk of a default occurring in the
next 12 months may not be a suitable basis for determining whether credit risk
has increased on a financial instrument with a maturity of more than
12 months when:
(a)
the financial instrument only has significant payment obligations
beyond the next 12 months;
(b)
changes in relevant macroeconomic or other credit-related factors occur
that are not adequately reflected in the risk of a default occurring in the
next 12 months; or
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(c)
changes in credit-related factors only have an impact on the credit risk of
the financial instrument (or have a more pronounced effect) beyond
12 months.
Determining whether credit risk has increased significantly since
initial recognition
B5.5.15
When determining whether the recognition of lifetime expected credit losses is
required, an entity shall consider reasonable and supportable information that
is available without undue cost or effort and that may affect the credit risk on a
financial instrument in accordance with paragraph 5.5.17(c). An entity need not
undertake an exhaustive search for information when determining whether
credit risk has increased significantly since initial recognition.
B5.5.16
Credit risk analysis is a multifactor and holistic analysis; whether a specific
factor is relevant, and its weight compared to other factors, will depend on the
type of product, characteristics of the financial instruments and the borrower as
well as the geographical region. An entity shall consider reasonable and
supportable information that is available without undue cost or effort and that
is relevant for the particular financial instrument being as