CHAPTER 1. Conceptual Framework for financial Reporting
Status and purpose and status of framework
The framework’s purpose is to assist the IASB in developing and revising the IFRSs that are based on consistent concepts, to help
preparers to develop consistent accounting policies for areas that are not covered by a standard or where there is a choice of
accounting policy and to assist all parties to understand and interpret IFRS.
In the absence of a Standard or an Interpretation that specifically applies to a transaction, management must use its judgment in
developing and applying an accounting policy that results in information that is relevant and reliable. In making that judgment, IAS
8.11 requires management to consider the definitions, recognition criteria and measurement concepts for assets, liabilities, income
and expenses in the framework. This elevation of the importance of the Framework was added in the 2003 revisions to IAS 8.
The Framework is not a Standard and does not override any specific IFRS.
If the IASB decides to issue a new or revised pronouncement that is in conflict with the Framework, the IASB must highlight the fact
and explain the reasons for the departure in the basis for conclusions.
The framework
Scope
The Framework addresses:
- The objective of general-purpose financial reporting;
- Qualitative characteristics of useful financial information;
- Financial statements and the reporting entity;
- The elements of financial statements;
- Recognition and de-recognition;
- Measurement;
- Presentation and disclosure;
- Concepts of capital and capital maintenance.
Chapter 1: the objective of general purpose financial reporting
The primary users of general purpose financial reporting are present and potential investors, lenders and other creditors, who use
that information to make decisions about buying, selling or holding equity or debt instruments, providing or settling loans or other
forms of credit, or exercising rights to vote on, or otherwise influence, management’s actions that affect the use of the entity’s
economic resources.
The primary users need information about the resources of the entity not only to assess an entity's prospects for future net cash
inflows but also how effectively and efficiently management has discharged their responsibilities to use the entity's existing resources
(i.e., stewardship).
The IFRS Framework notes that general purpose financial reports cannot provide all the information that users may need to make
economic decisions. They will need to consider pertinent information from other sources as well.
The IFRS Framework notes that other parties, including prudential and market regulators, may find general purpose financial reports
useful. However, these are not considered a primary user and general purpose financial reports are not primarily directed to
regulators or other parties.
Information about a reporting entity’s economic resources, claims and changes in resources and claims
Economic resources and claims
Information about the nature and amounts of a reporting entity's economic resources and claims assists users to assess that entity's
financial strengths and weaknesses; to assess liquidity and solvency, and its need and ability to obtain financing. Information about the
claims and payment requirements assists users to predict how future cash flows will be distributed among those with a claim on the
reporting entity.
A reporting entity's economic resources and claims are reported in the statement of financial position.
Changes in economic resources and claims
Changes in a reporting entity's economic resources and claims result from that entity's performance and from other events or
transactions such as issuing debt or equity instruments. Users need to be able to distinguish between both of these changes.
Financial performance reflected by accrual accounting
Information about a reporting entity's financial performance during a period, representing changes in economic resources and claims
other than those obtained directly from investors and creditors, is useful in assessing the entity's past and future ability to generate
net cash inflows. Such information may also indicate the extent to which general economic events have changed the entity's ability to
generate future cash inflows.
The changes in an entity's economic resources and claims are presented in the statement of comprehensive income.
Financial performance reflected by past cash flows
Information about a reporting entity's cash flows during the reporting period also assists users to assess the entity's ability to generate
future net cash inflows and to assess management’s stewardship of the entity’s economic resources. This information indicates how
the entity obtains and spends cash, including information about its borrowing and repayment of debt, cash dividends to shareholders,
etc.
The changes in the entity’s cash flows are presented in the statement of cash flows.
Financial performance reflected by past cash flows
Information about changes in an entity's economic resources and claims resulting from events and transactions other than financial
performance, such as the issue of equity instruments or distributions of cash or other assets to shareholders is necessary to complete
the picture of the total change in the entity's economic resources and claims.
The changes in an entity's economic resources and claims not resulting from financial performance is presented in the statement of
changes in equity.
Information about use of the entity’s economic resources
Information about the use of the entity's economic resources also indicates how efficiently and effectively the reporting entity’s
management has used these resources in its stewardship of those resources. Such information is also useful for predicting how
efficiently and effectively management will use the entity’s economic resources in future periods and, hence, what the prospects for
future net cash inflows are.
Qualitative characteristics of useful information
The qualitative characteristics of useful financial reporting identify the types of information are likely to be most useful to users in
making decisions about the reporting entity on the basis of information in its financial report. The qualitative characteristics apply
equally to financial information in general purpose financial reports as well as to financial information provided in other ways.
Financial information is useful when it is relevant and represents faithfully what it purports to represent. The usefulness of financial
information is enhanced if it is comparable, verifiable, timely and understandable.
Fundamental qualitative characteristics
- Relevance: Relevant financial information is capable of making a difference in the decisions made by users. Financial information is
capable of making a difference in decisions if it has predictive value, confirmatory value, or both. The predictive value and
confirmatory value of financial information are interrelated.
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.
- Faithful representation: General purpose financial reports represent economic phenomena in words and numbers. To be useful,
financial information must not only be relevant, it must also represent faithfully the phenomena it purports to represent. Faithful
representation means representation of the substance of an economic phenomenon instead of representation of its legal form only. A
faithful representation seeks to maximise the underlying characteristics of completeness, neutrality and freedom from error.
A neutral depiction is supported by the exercise of prudence. Prudence is the exercise of caution when making judgements under
conditions of uncertainty.
Applying the fundamental qualitative characteristics
Information must be both relevant and faithfully represented if it is to be useful.
Enhancing qualitative characteristics
Comparability, verifiability, timeliness and understandability are qualitative characteristics that enhance the usefulness of information
that is relevant and faithfully represented.
- Comparability: Information about a reporting entity is more useful if it can be compared with a similar information about other
entities and with similar information about the same entity for another period or another date. Comparability enables users to identify
and understand similarities in, and differences among, items.
- Verifiability: Verifiability helps to assure users that information represents faithfully 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.
- Timeliness: Timeliness means that information is available to decision-makers in time to be capable of influencing their decisions.
- Understandability: Classifying, characterising and presenting information clearly and concisely makes it understandable. While some
phenomena are inherently complex and cannot be made easy to understand, to exclude such information would make financial
reports incomplete and potentially misleading. Financial reports are prepared for users who have a reasonable knowledge of business
and economic activities and who review and analyse the information with diligence.
Applying the enhancing qualitative characteristics
Enhancing qualitative characteristics should be maximised to the extent necessary. However, enhancing qualitative characteristics
(either individually or collectively) cannot render information useful if that information is irrelevant or not represented faithfully.
The cost constraint on useful financial reporting
Cost is a pervasive constraint on the information that can be provided by general purpose financial reporting. Reporting such
information imposes costs and those costs should be justified by the benefits of reporting that information. The IASB assesses costs
and benefits in relation to financial reporting generally, and not solely in relation to individual reporting entities. The IASB will consider
whether different sizes of entities and other factors justify different reporting requirements in certain situations.
Financial statements and the reporting entity
Objective and scope of financial statements
The objective of financial statements is to provide information about an entity's assets, liabilities, equity, income and expenses that is
useful to financial statements users in assessing the prospects for future net cash inflows to the entity and in assessing management's
stewardship of the entity's resources.
This information is provided in the statement of financial position and the statement(s) of financial performance as well as in other
statements and notes.
Reporting period
Financial statements are prepared for a specified period of time and provide comparative information and under certain
circumstances forward-looking information.
Perspective adopted in financial statements and going concern assumption
Financial statements provide information about transactions and other events viewed from the perspective of the reporting entity as
a whole and are normally prepared on the assumption that the reporting entity is a going concern and will continue in operation for
the foreseeable future.
The reporting entity
A reporting entity is an entity that is required, or chooses, to prepare financial statements. It can be a single entity or a portion of an
entity or can comprise more than one entity. A reporting entity is not necessarily a legal entity.
Determining the appropriate boundary of a reporting entity is driven by the information needs of the primary users of the reporting
entity’s financial statements.
Consolidated and unconsolidated financial statements
Generally, consolidated financial statements are more likely to provide useful information to users of financial statements than
unconsolidated financial statements.
The framework – the remaining text
Underlying assumption
The IFRS Framework states that the going concern assumption is an underlying assumption. Thus, the financial statements presume
that an entity will continue in operation indefinitely or, if that presumption is not valid, disclosure and a different basis of reporting are
required.
The elements of financial statements
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 financial position (balance sheet) are:
- Assets;
- Liabilities;
- Equity.
The elements directly related to performance (income statement) are:
- Income;
- Expenses.
The cash flow statement reflects both income statement elements and some changes in balance sheet elements.
Definitions of the elements relating to financial position:
- Asset: 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;
- Liability: 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.
- Equity: Equity is the residual interest in the assets of the entity after deducting all its liabilities. Definitions of the elements relating to
performance.
- Income: 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.
- Expense: 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.
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. 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 the IFRS Framework.
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. 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 Framework.
Recognition of the elements of financial statements
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 following criteria for recognition:
1) It is probable that any future economic benefit associated with the item will flow to or from the entity; and
2) The item's cost or value can be measured with reliability. Based on these general criteria:
- 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.
- 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.
- 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).
- Expenses are recognised 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).
Measurement of the elements of financial statements
Measurement involves assigning monetary amounts at which the elements of the financial statements are to be recognised and
reported.
The IFRS Framework acknowledges that a variety of measurement bases are used today to different degrees and in varying
combinations in financial statements, including:
- historical cost;
- current cost;
- net realizable (settlement) value;
- present value (discounted).
Historical cost is the measurement basis most commonly used today, but it is usually combined with other measurement bases. The
IFRS Framework does not include concepts or principles for selecting which measurement basis should be used for particular
elements of financial statements or in particular circumstances. Individual standards and interpretations do provide this guidance,
however.
CHAPTER 2. IAS 8 Accounting Policies : changes in accounting estimates and errors
Overview
IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors is applied in selecting and applying accounting policies,
accounting for changes in estimates and reflecting corrections of prior period errors.
The standard requires compliance with any specific IFRS applying to a transaction, event or condition, and provides guidance on
developing accounting policies for other items that result in relevant and reliable information. Changes in accounting policies and
corrections of errors are generally retrospectively accounted for, whereas changes in accounting estimates are generally accounted
for on a prospective basis.
IAS 8 was reissued in December 2005 and applies to annual periods beginning on or after 1 January 2005.
Key definitions
Accounting policies are the specific principles, bases, conventions, rules and practice applied by an entity in preparing and presenting
financial statements.
A change in accounting estimate is an adjustment of the carrying amount of an asset or liability or related expense, resulting from
reassessing the expected future benefits and obligations associated with that asset or liability.
International Financial Reporting Standards are standards and interpretations adopted by the International Accounting Standards
Board (“IASB”). They comprise:
- International Financial Reporting Standards (“IFRSs”);
- International Accounting Standards (“IASs”);
- Interpretations developed by the International Financial Reporting Interpretations Committee (“IFRIC”) or the former Standing
Interpretations Committee (“SIC”) and approved by the IASB.
Materiality information is material if omitting, misstating or obscuring it could reasonably by expected to influence decisions that the
primary users of general purpose financial statements make on the basis of those financial statements, which provide financial
information about specific reporting entity.
Prior period errors are omissions from and misstatements in, an entity’s financial statements for one or more periods arising from a
failure to use, or misuse of reliable information that was available and could reasonably be expected to have been obtained and taken
into account in preparing those statements. Such errors result from mathematical mistakes, mistakes in applying accounting policies,
oversights or misinterpretations of facts and fraud.
Accounting policies
When a Standard or an Interpretation specifically applies to a transaction, other event or condition, the accounting policy or policies
applied to that item must be determined by applying the Standard or Interpretation and considering any relevant Implementation
Guidance issued by the IASB for the Standard or Interpretation. [IAS 8.7]
In the absence of a Standard or an Interpretation that specifically applies to a transaction, other event or condition, management
must use its judgement in developing and applying an accounting policy that results in information that is relevant and reliable. [IAS
8.10]. In making that judgement, management must refer to, and consider the applicability of, the following sources in descending
order:
- the requirements and guidance in IASB standards and interpretations dealing with similar and related issues;
- and the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the Framework.
[IAS 8.11]
Management may also consider the most recent pronouncements of other standard-setting bodies that use a similar conceptual
framework to develop accounting standards, other accounting literature and accepted industry practices, to the extent that these do
not conflict with the sources in paragraph 11. [IAS 8.12]
Consistency of accounting policies
An entity shall select and apply its accounting policies consistently for similar transactions, other events and conditions, unless a
Standard or an Interpretation specifically requires or permits categorisation of items for which different policies may be appropriate. If
a Standard or an Interpretation requires or permits such categorisation, an appropriate accounting policy shall be selected and applied
consistently to each category. [IAS 8.13]
Changes in accounting policies
An entity is permitted to change an accounting policy only if the change:
- Is required by a standard or interpretation; or
- Results in the financial statements providing reliable and more relevant information about the effects of transactions, other events
or conditions on the entity’s financial position, financial performance or cash flows.
Note that changes in accounting policies do not include applying an accounting policy to a kind of transaction or event that did not
occur previously or were immaterial.
If a change in accounting policy is required by a new IASB standard or interpretation, the change is accounted for as required by that
new pronouncement or, if the new pronouncement does not include specific transition provisions, then the change in accounting
policy is applied retrospectively. [IAS 8.19]
Retrospective application means adjusting the opening balance of each affected component of equity for the earliest prior period
presented and the other comparative amounts disclosed for each prior period presented as if the new accounting policy had always
been applied. [IAS 8.22]
- However, if it is impracticable to determine either the period-specific effects or the cumulative effect of the change for one or more
prior periods presented, the entity shall apply the new accounting policy to the carrying amounts of assets and liabilities as at the
beginning of the earliest period for which retrospective application is practicable, which may be the current period, and shall make a
corresponding adjustment to the opening balance of each affected component of equity for that period. [IAS 8.24]
- Also, if it is impracticable to determine the cumulative effect, at the beginning of the current period, of applying a new accounting
policy to all prior periods, the entity shall adjust the comparative information to apply the new accounting policy prospectively from
the earliest date practicable. [IAS 8.25]
Disclosures relating to changes in accounting policies
Disclosures relating to changes in accounting policy caused by a new standard or interpretation include:
- The title of the standard or interpretation causing the change;
- The nature of the change in accounting policy;
- A description of the transitional provisions, including those that might have an effect on future periods;
- For the current period and each prior period presented, to the extent practicable, the amount of the adjustment: i) for each financial
statement line item affected; ii) for basic and diluted earnings per share (only if the entity is applying IAS 33);
- The amount of the adjustment relating to periods before those presented to the extent practicable;
- If retrospective application is impracticable, an explanation and description of how the change in accounting policy was applied.
Financial statements of subsequent periods need not repeat these disclosures.
If an entity has not applied a new standard or interpretation that has been issued but is not yet effective, the entity must disclose that
fact and any and known or reasonably estimable information relevant to assessing the possible impact that the new pronouncement
will have in the year it is applied. [IAS 8.30]
Changes in accounting estimates
The effect of a change in an accounting estimate shall be recognised prospectively by including it in profit or loss in: [IAS 8.36]
- the period of the change, if the change affects that period only, or
- the period of the change and future periods, if the change affects both.
However, to the extent that a change in an accounting estimate gives rise to changes in assets and liabilities, or relates to an item of
equity, it is recognised by adjusting the carrying amount of the related asset, liability, or equity item in the period of the change. [IAS
8.37]
Disclosures relating to changes in accounting policies Disclose:
- The nature and amount of a change in an accounting estimate that has an effect in the current period or is expected to have an
effect in future periods;
- If the amount of the effect in future periods is not disclosed because estimating it is impracticable, an entity shall disclose that fact.
Errors
The general principal in IAS 8 is that an entity must correct all material prior period errors retrospectively in the first set of financial
statements authorized for issue after their discovery by:
- Restating the comparative amounts for the prior period(s) presented in which the error occurred; or
- If the error occurred before the earliest prior period presented, restating the opening balances of assets, liabilities and equity for the
earliest prior period presented.
However, if it is impracticable to determine the period-specific effects of an error on comparative information for one or more prior
periods presented, the entity must restate the opening balances of assets, liabilities and equity for the earliest period for which
retrospective restatement is practicable (which may be the current period).
Further, it is impracticable to determine the cumulative effect, at the beginning of the current period, of an error on all prior periods,
the entity must restate the comparative information to correct the error prospectively from the earliest date practicable.
Disclosures relating to prior period errors Disclosures relating to prior period errors include:
- The nature of the prior period error;
- For each prior period presented, to the extent practicable, the amount of the correction: i) for each financial statement line item
affected; and ii) for basic and diluted earnings per share (only if the entity is applying IAS 33);
- The amount of the correction at the beginning of the earliest prior period presented;
- If retrospective restatement is impracticable, an explanation and description of how the error has been corrected.
Financial statements of subsequent periods need not repeat these disclosures.
CHAPTER 3. IAS 1 – Presentation of financial statements
Overview
IAS 1 Presentation of Financial Statements sets out the overall requirements for financial statements, including how they should be
structured, the minimum requirements for their content and overriding concepts such as going concern, the accrual basis of
accounting and the current/non-current distinction. The standard requires a complete set of financial statements to comprise a
statement of financial position, a statement of profit or loss and other comprehensive income, a statement of changes in equity and a
statement of cash flows.
IAS 1 was reissued in September 2007 and applies to annual periods beginning on or after 1 January 2009.
The objective of IAS 1 (2007) is to prescribe the basis for presentation of general purpose financial statements, to ensure
comparability both with the entity's financial statements of previous periods and with the financial statements of other entities. IAS 1
sets out the overall requirements for the presentation of financial statements, guidelines for their structure and minimum
requirements for their content. [IAS 1.1] Standards for recognising, measuring, and disclosing specific transactions are addressed in
other Standards and Interpretations. [IAS 1.3]
Scope
IAS 1 applies to all general purpose financial statements that are prepared and presented in accordance with International Financial
Reporting Standards (IFRSs). [IAS 1.2]
General purpose financial statements are those intended to serve users who are not in a position to require financial reports tailored
to their particular information needs. [IAS 1.7]
Objective of financial statements
The objective of general purpose financial statements is to provide information about the financial position, financial performance and
cash flows of an entity that is useful to a wide range of users in making economic decisions. To meet that objective, financial
statements provide information about an entity’s:
- Assets;
- Liabilities;
- Equity;
- Income and expenses, including gains and losses;
- Contributions by and distributions to owners (in their capacity as owners);
- Cash flows.
This information, along with other information in the notes, assists users of financial statements in predicting the entity’s future cash
flows and, in particular, their timing and certainty.
General topics of financial statements
Components of financial statements A complete set of financial statements includes:
- A statement of financial position (balance sheet) at the end of the period;
- A statement of profit or loss and other comprehensive income for the period (presented as a single statement, or by presenting the
profit or loss section in a separate statement of profit or loss, immediately followed by a statement presenting comprehensive income
beginning with profit or loss);
- A statement of changes in equity for the period;
- A statement of cash flows for the period;
- Notes, comprising a summary of significant accounting policies and other explanatory notes;
- Comparative information prescribed by the standard.
An entity may use titles for the statements other than those stated above. All financial statements are required to be presented with
equal prominence. [IAS 1.10]
When an entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements,
or when it reclassifies items in its financial statements, it must also present a statement of financial position (balance sheet) as at the
beginning of the earliest comparative period.
Reports that are presented outside of the financial statements – including financial reviews by management, environmental reports,
and value added statements – are outside the scope of IFRSs. [IAS 1.14]
Fair presentation and compliance with IFRSs
The financial statements must "present fairly" the financial position, financial performance and cash flows of an entity. Fair
presentation requires the faithful representation of the effects of transactions, other events, and conditions in accordance with the
definitions and recognition criteria for assets, liabilities, income and expenses set out in the Framework. The application of IFRSs, with
additional disclosure when necessary, is presumed to result in financial statements that achieve a fair presentation. [IAS 1.15]
IAS 1 requires an entity whose financial statements comply with IFRSs to make an explicit and unreserved statement of such
compliance in the notes. Financial statements cannot be described as complying with IFRSs unless they comply with all the
requirements of IFRSs (which includes International Financial Reporting Standards, International Accounting Standards, IFRIC
Interpretations and SIC Interpretations). [IAS 1.16]
Inappropriate accounting policies are not rectified either by disclosure of the accounting policies used or by notes or explanatory
material. [IAS 1.18]
IAS 1 acknowledges that, in extremely rare circumstances, management may conclude that compliance with an IFRS requirement
would be so misleading that it would conflict with the objective of financial statements set out in the Framework. In such a case, the
entity is required to depart from the IFRS requirement, with detailed disclosure of the nature, reasons, and impact of the departure.
[IAS 1.19-21]
Going concern
The Conceptual Framework notes that financial statements are normally prepared assuming the entity is a going concern and will
continue in operation for the foreseeable future. [Conceptual Framework, paragraph 4.1]
IAS 1 requires management to make an assessment of an entity's ability to continue as a going concern. If management has significant
concerns about the entity's ability to continue as a going concern, the uncertainties must be disclosed. If management concludes that
the entity is not a going concern, the financial statements should not be prepared on a going concern basis, in which case IAS 1
requires a series of disclosures. [IAS 1.25]
Accrual basis of accounting
IAS 1 requires that an entity prepare its financial statements, except for cash flow information, using the accrual basis of accounting.
[IAS 1.27]
Consistency of presentation
The presentation and classification of items in the financial statements shall be retained from one period to the next unless a change
is justified either by a change in circumstances or a requirement of a new IFRS. [IAS 1.45]
Materiality and aggregation
Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary
users of general purpose financial statements make on the basis of those financial statements, which provide financial information
about a specific reporting entity. [IAS 1.7]
Each material class of similar items must be presented separately in the financial statements. Dissimilar items may be aggregated only
if they are individually immaterial. [IAS 1.29]
However, information should not be obscured by aggregating or by providing immaterial information, materiality considerations apply
to the all parts of the financial statements, and even when a standard requires a specific disclosure, materiality considerations do
apply. [IAS 1.30A-31]
Offsetting
Assets and liabilities, and income and expenses, may not be offset unless required or permitted by an IFRS. [IAS 1.32]
Comparative information
IAS 1 requires that comparative information to be disclosed in respect of the previous period for all amounts reported in the financial
statements, both on the face of the financial statements and in the notes, unless another Standard requires otherwise. Comparative
information is provided for narrative and descriptive where it is relevant to understanding the financial statements of the current
period. [IAS 1.38]
An entity is required to present at least two of each of the following primary financial statements:
- Statement of financial position;
- Statement of profit or loss and other comprehensive income;
- Separate statements of profit or loss (where presented);
- Statement of cash flows;
- Statement of changes in equity;
- Related notes for each of the above items.
Where comparative amounts are changed or reclassified, various disclosures are required.
Structure and content of financial statements in general IAS 1 requires an entity to clearly identify:
- The financial statements, which must be distinguished from other information in a published document;
- Each financial statement and the notes to the financial statements.
In addition, the following information must be displayed prominently and repeated as necessary:
- The name of the reporting entity and any change in the name;
- Whether the financial statements are a group of entities or an individual entity;
- Information about the reporting period;
- The presentation currency;
- The level of rounding used (e.g. thousands, millions).
Reporting period
There is a presumption that financial statements will be prepared at least annually. If the annual reporting period changes and
financial statements are prepared for a different period, the entity must disclose the reason for the change and state that amounts
are not entirely comparable. [IAS 1.36]
Statement of financial position (balance sheet)
Current and non current classification
An entity must normally present a classified statement of financial position, separating current and non-current assets and liabilities,
unless presentation based on liquidity provides information that is reliable. [IAS 1.60] In either case, if an asset (liability) category
combines amounts that will be received (settled) after 12 months with assets (liabilities) that will be received (settled) within 12
months, note disclosure is required that separates the longer-term amounts from the 12-month amounts. [IAS 1.61]
Current assets are assets that are:
- Expected to be realized in the entity’s normal operating cycle;
- Held primarily for the purpose of trading;
- Expected to be realized within 12 months after the reporting period;
- Cash and cash equivalents (unless restriced).
All other assets are non-current. Current liabilities are those:
- Expected to be settled within the entity’s normal operating cycle; 23
- Held for purpose of trading;
- Due to be settled within 12 months;
- For which the entity does not have the right at the end of the reporting period to defer settlement beyond 12 months. Other
liabilities are non-current.
When a long-term debt is expected to be refinanced under an existing loan facility, and the entity has the discretion to do so, the debt
is classified as non-current, even if the liability would otherwise be due within 12 months. [IAS 1.73]
If a liability has become payable on demand because an entity has breached an undertaking under a long-term loan agreement on or
before the reporting date, the liability is current, even if the lender has agreed, after the reporting date and before the authorisation
of the financial statements for issue, not to demand payment as a consequence of the breach. [IAS 1.74] However, the liability is
classified as non-current if the lender agreed by the reporting date to provide a period of grace ending at least 12 months after the
end of the reporting period, within which the entity can rectify the breach and during which the lender cannot demand immediate
repayment. [IAS 1.75]
Settlement by the issue of equity instruments does not impact classification. [IAS 1.76B]
Line items
The line items to be included on the face of the statement of financial position are:
a) Property, plant and equipment;
b) Investment property;
c) Intangible assets;
d) Financial assets (excluding amounts shown under e, h, i);
e) Investments accounted for using equity method;
f) Biological assets;
g) Inventories;
h) Trade and other receivables;
i) Cash & cash equivalents;
j) Assets held for sale;
k) Trade and other payables;
l) Provisions;
m) Financial liabilities (excluding amounts shown under k and l);
n) Current tax liabilities and current tax assets;
o) Deferred tax liabilities and deferred tax assets;
p) Liabilities included in disposal groups;
q) Non-controlling interests, presented within equity;
r) Issued capital and reserves attributable to owners of the parent.
Additional line items, headings and subtotals may be needed to fairly present the entity's financial position. [IAS 1.55]
When an entity presents subtotals, those subtotals shall be comprised of line items made up of amounts recognised and measured in
accordance with IFRS; be presented and labelled in a clear and understandable manner; be consistent from period to period; and not
be displayed with more prominence than the required subtotals and totals. [IAS 1.55A]
Further sub-classification of line items presented are made in the statement or in the notes, for example:
- Classes of property, plant and equipment;
- Disaggregation of receivables;
- Disaggregation of inventories in accordance with IAS 2;
- Disaggregation of provisions into employee benefits and other items;
- Classes of equity and reserves.
Line items
IAS 1 does not prescribe the format of the statement of financial position. Assets can be presented current then non-current, or vice
versa, and liabilities and equity can be presented current then non- current then equity, or vice versa. A net asset presentation (assets
minus liabilities) is allowed. The long-term financing approach used in UK and elsewhere – fixed assets + current assets - short term
payables = long-term debt plus equity – is also acceptable.
Share capital and reserves
Regarding issued share capital and reserves, the following disclosure are required:
- numbers of shares authorised, issued and fully paid, and issued but not fully paid;
- par value (or that shares do not have a par value);
- a reconciliation of the number of shares outstanding at the beginning and the end of the period;
- description of rights, preferences, and restrictions;
- treasury shares, including shares held by subsidiaries and associates;
- shares reserved for issuance under options and contracts;
- a description of the nature and purpose of each reserve within equity.
Additional disclosures are required in respect of entities without share capital and where an entity has reclassified puttable financial
instruments. [IAS 1.80-80A]
Statement of profit or loss and other comprehensive income
Concepts of profit or loss and comprehensive income
Profit or loss is defined as "the total of income less expenses, excluding the components of other comprehensive income". Other
comprehensive income is defined as comprising "items of income and expense (including reclassification adjustments) that are not
recognised in profit or loss as required or permitted by other IFRSs". Total comprehensive income is defined as "the change in equity
during a period resulting from transactions and other events, other than those changes resulting from transactions with owners in
their capacity as owners". [IAS 1.7]
Comprehensive income for the period = profit or loss + other comprehensive income
All items of income and expense recognised in a period must be included in profit or loss unless a Standard or an Interpretation
requires otherwise. [IAS 1.88] Some IFRSs require or permit that some components to be excluded from profit or loss and instead to
be included in other comprehensive income.
Example of items recognized outside of profit or loss:
- Changes in revaluation surplus where the revaluation method is used under IAS 16 Property, Plant and Equipment and IAS 38
Intangible Assets
- Remeasurements of a net defined benefit liability or asset recognised in accordance with IAS 19 Employee Benefits (2011)
- Exchange differences from translating functional currencies into presentation currency in accordance with IAS 21 The Effects of
Changes in Foreign Exchange Rates
- Gains and losses on remeasuring available-for-sale financial assets in accordance with IAS 39 Financial Instruments: Recognition and
Measurement
- The effective portion of gains and losses on hedging instruments in a cash flow hedge under IAS 39 or IFRS 9 Financial Instruments
- Gains and losses on remeasuring an investment in equity instruments where the entity has elected to present them in other
comprehensive income in accordance with IFRS 9
- The effects of changes in the credit risk of a financial liability designated as at fair value through profit and loss under IFRS 9.
In addition, IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors requires the correction of errors and the effect of
changes in accounting policies to be recognised outside profit or loss for the current period. [IAS 1.89]
Choice in presentation and basic requirements An entity has a choice of presenting:
- a single statement of profit or loss and other comprehensive income, with profit or loss and other comprehensive income presented
in two sections, or
- two statements:
a) a separate statement of profit or loss;
b) a statement of comprehensive income, immediately following the statement of profit or loss and beginning with profit or loss.
The statements must present:
- profit or loss;
- total other comprehensive income for the period;
- comprehensive income for the period;
- an allocation of profit or loss and comprehensive income for the period between non-controlling interests and owner of the parent.
Profit or loss section or statement
The following minimum line items must be presented in the profit or loss section (or separate statement of profit or loss, if
presented): [IAS 1.82-82A]
- Revenue;
- gains and losses from the derecognition of financial assets measured at amortised cost;
- finance costs;
- share of the profit or loss of associates and joint ventures accounted for using the equity method;
- certain gains or losses associated with the reclassification of financial assets
- tax expenses;
- a single amount for the total of discontinued items.
Expenses recognised in profit or loss should be analysed either by nature (raw materials, staffing costs, depreciation, etc.) or by
function (cost of sales, selling, administrative, etc). [IAS 1.99] If an entity categorises by function, then additional information on the
nature of expenses – at a minimum depreciation, amortisation and employee benefits expense – must be disclosed. [IAS 1.104]
Other comprehensive income section
The other comprehensive income section is required to present line items which are classified by their nature, and grouped between
those items that will or will not be reclassified to profit and loss in subsequent periods. [IAS 1.82A]
An entity's share of OCI of equity-accounted associates and joint ventures is presented in aggregate as single line items based on
whether or not it will subsequently be reclassified to profit or loss. [IAS 1.82A]
When an entity presents subtotals, those subtotals shall be comprised of line items made up of amounts recognised and measured in
accordance with IFRS; be presented and labelled in a clear and understandable manner; be consistent from period to period; not be
displayed with more prominence than the required subtotals and totals; and reconciled with the subtotals or totals required in IFRS.
[IAS 1.85A-85B]
Other requirements
Additional line items may be needed to fairly present the entity's results of operations. [IAS 1.85]
Items cannot be presented as 'extraordinary items' in the financial statements or in the notes. [IAS 1.87]
Certain items must be disclosed separately either in the statement of comprehensive income or in the notes, if material, including:
- write-downs of inventories to net realisable value or of property, plant and equipment to recoverable amount, as well as reversals of
such write-downs
- restructurings of the activities of an entity and reversals of any provisions for the costs of restructuring disposals of items of
property, plant and equipment disposals of investments
- discontinuing operations, litigation settlements other reversals of provisions
Statement of cash flows
Refer to IAS 7.
Statement of changes in equity
IAS 1 requires an entity to present a separate statement of changes in equity. The statement must show: [IAS 1.106]
- total comprehensive income for the period, showing separately amounts attributable to owners of the parent and to non-controlling
interests
- the effects of any retrospective application of accounting policies or restatements made in accordance with IAS 8, separately for
each component of other comprehensive income
- reconciliations between the carrying amounts at the beginning and the end of the period for each component of equity, separately
disclosing:
a) profit or loss;
b) other comprehensive income;
c) transactions with owners, showing separately contributions by and distributions to owners and changes in ownership interests in
subsidiaries that do not result in a loss of control.
The following amounts may also be presented on the face of the statement of changes in equity or they may be presented in the
notes:
Amounts of dividends recognized as distributions; the related amount per share.
Notes to the financial statements
General The notes must:
- present information about the basis of preparation of the financial statements and the specific accounting policies used;
- disclose any information required by IFRSs that is not presented elsewhere in the financial statements and
- provide additional information that is not presented elsewhere in the financial statements but is relevant to an understanding of any
of them.
Notes are presented in a systematic manner and cross-referenced from the face of the financial statements to the relevant note. [IAS
1.113]
IAS 1.114 suggests that the notes should normally be presented in the following order:
- a statement of compliance with IFRSs;
- a summary of significant accounting policies applied, including:
a) the measurement basis (or bases) used in preparing the financial statements
b) the other accounting policies used that are relevant to an understanding of the financial statements
- supporting information for items presented on the face of the statement of financial position (balance sheet), statement(s) of profit
or loss and other comprehensive income, statement of changes in equity and statement of cash flows, in the order in which each
statement and each line item is presented
- other disclosures, including:
a) contingent liabilities and unrecognized contractual commitments;
b) non-financial disclosures, such as the entity’s risk management objectives and policies.
Other disclosures
Judgments and key assumptions
An entity must disclose, in the summary of 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 that have the most significant
effect on the amounts recognised in the financial statements. [IAS 1.122]
An entity must also disclose, in the notes, information about the key assumptions concerning the future, and other key sources of
estimation uncertainty at the end of the reporting period, that have a significant risk of causing a material adjustment to the carrying
amounts of assets and liabilities within the next financial year. [IAS 1.125] These disclosures do not involve disclosing budgets or
forecasts. [IAS 1.130]
Dividends
In addition to the distributions information in the statement of changes in equity (see above), the following must be disclosed in the
notes: [IAS 1.137]
- the amount of dividends proposed or declared before the financial statements were authorised for issue but which were not
recognised as a distribution to owners during the period, and the related amount per share
- the amount of any cumulative preference dividends not recognized.
Capital disclosure
An entity discloses information about its objectives, policies and processes for managing capital. [IAS 1.134] To comply with this, the
disclosures include: [IAS 1.135]
- qualitative information about the entity's objectives, policies and processes for managing capital;
- description of capital it manages;
- nature of external capital requirements, if any
- how it is meeting its objectives
- quantitative data about what the entity regards as capital
- changes from one period to another
- whether the entity has complied with any external capital requirements and
- if it has not complied, the consequences of such non-compliance
CHAPTER 4. IAS 7 – Cash flows statements
Overview
IAS 7 Statement of Cash Flows requires an entity to present a statement of cash flows as an integral part of its primary financial
statements. Cash flows are classified and presented into operating activities (either using the 'direct' or 'indirect' method), investing
activities or financing activities, with the latter two categories generally presented on a gross basis.
IAS 7 was reissued in December 1992, retitled in September 2007, and is operative for financial statements covering periods beginning
on or after 1 January 1994.
The objective of IAS 7 is to require the presentation of information about the historical changes in cash and cash equivalents of an
entity by means of a statement of cash flows, which classifies cash flows during the period according to operating, investing, and
financing activities.
All entities that prepare financial statements in conformity with IFRSs are required to present a statement of cash flows. [IAS 7.1]
The statement of cash flows analyses changes in cash and cash equivalents during a period. Cash and cash equivalents comprise cash
on hand and demand deposits, together with short-term, highly liquid investments that are readily convertible to a known amount of
cash, and that are subject to an insignificant risk of changes in value. Guidance notes indicate that an investment normally meets the
definition of a cash equivalent when it has a maturity of three months or less from the date of acquisition. Equity investments are
normally excluded, unless they are in substance a cash equivalent (e.g. preferred shares acquired within three months of their
specified redemption date). Bank overdrafts which are repayable on demand and which form an integral part of an entity's cash
management are also included as a component of cash and cash equivalents. [IAS 7.7-8]
Presentation of the statement of cash flows
Cash flows must be analysed between operating, investing and financing activities. [IAS 7.10]
Key principles specified by IAS 7 for the preparation of a statement of cash flows are as follows:
- operating activities are the main revenue-producing activities of the entity that are not investing or financing activities, so operating
cash flows include cash received from customers and cash paid to suppliers and employees [IAS 7.14]
- investing activities are the acquisition and disposal of long-term assets and other investments that are not considered to be cash
equivalents [IAS 7.6]
- financing activities are activities that alter the equity capital and borrowing structure of the entity [IAS 7.6]
- interest and dividends received and paid may be classified as operating, investing, or financing cash flows, provided that they are
classified consistently from period to period [IAS 7.31]
- cash flows arising from taxes on income are normally classified as operating, unless they can be specifically identified with financing
or investing activities [IAS 7.35]
- for operating cash flows, the direct method of presentation is encouraged, but the indirect method is acceptable [IAS 7.18]
- The direct method shows each major class of gross cash receipts and gross cash payments. 30
- The indirect method adjusts accrual basis net profit or loss for the effects of non-cash transactions.
- the exchange rate used for translation of transactions denominated in a foreign currency should be the rate in effect at the date of
the cash flows [IAS 7.25]
- cash flows of foreign subsidiaries should be translated at the exchange rates prevailing when the cash flows took place [IAS 7.26]
- as regards the cash flows of associates, joint ventures, and subsidiaries, where the equity or cost method is used, the statement of
cash flows should report only cash flows between the investor and the investee; where proportionate consolidation is used, the cash
flow statement should include the venturer's share of the cash flows of the investee [IAS 7.37]
- aggregate cash flows relating to acquisitions and disposals of subsidiaries and other business units should be presented separately
and classified as investing activities, with specified additional disclosures. [IAS 7.39] The aggregate cash paid or received as
consideration should be reported net of cash and cash equivalents acquired or disposed of [IAS 7.42]
- cash flows from investing and financing activities should be reported gross by major class of cash receipts and major class of cash
payments except for the following cases, which may be reported on a net basis: [IAS 7.22-24]
a) cash receipts and payments on behalf of customers (for example, receipt and repayment of demand deposits by banks, and receipts
collected on behalf of and paid over to the owner of a property)
b) cash receipts and payments for items in which the turnover is quick, the amounts are large, and the maturities are short, generally
less than three months (for example, charges and collections from credit card customers, and purchase and sale of investments)
c) cash receipts and payments relating to deposits by financial institutions
d) cash advances and loans made to customers and repayments thereof
- investing and financing transactions which do not require the use of cash should be excluded from the statement of cash flows, but
they should be separately disclosed elsewhere in the financial statements [IAS 7.43]
- entities shall provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing
activities [IAS 7.44A-44E]
- the components of cash and cash equivalents should be disclosed, and a reconciliation presented to amounts reported in the
statement of financial position [IAS 7.45]
- the amount of cash and cash equivalents held by the entity that is not available for use by the group should be disclosed, together
with a commentary by management [IAS 7.48]
CHAPTER 5. IAS 16 – Property plant and equipment
Overview
IAS 16 Property, plant and equipment outlines the accounting treatment for most types of property, plant and equipment. This
category is initially measured at its cost, subsequently measured either using a cost or revaluation model and depreciated so that its
depreciable amount is allocated on a systemic basis over its useful life.
IAS 16 was reissued in December 2003 and applies to annual periods beginning on or after 1 January 2005
Objective and scope of IAS 16
The objective of IAS 16 is to prescribe the accounting treatment for property, plant and equipment. The principal issues are the
recognition of assets, the determination of their carrying amounts and the depreciation charges and impairment losses to be
recognized in relation to them.
IAS 16 applies to the accounting for property, plant and equipment, except where another standard requires or permits differing
accounting treatments, for example:
- Assets classified as held for sale in accordance with IFRS 5 Non-current assets held for sale and discontinued operations;
- Biological assets related to agriculture activity accounted for under IAS 41 Agriculture;
- Exploration and evaluation assets recognized in accordance with IFRS 6 Exploration for and evaluation of mineral resources;
- Mineral rights and mineral reserves such as oil, natural gas and similar non-regenerative resources.
The standard does not apply to property, plant and equipment used to develop or maintain the last three categories of assets.
The cost model in IAS 16 also applies to investment property accounted for using the cost model under IAS 40 Investment property.
The standard does apply to bearer plants but id does not apply to the produce on bearer plants.
Recognition
Items of property, plant and equipment should be recognized as assets when it is probable thati:
- It probable that the future economic benefits associated with the asset will flow to the entity; and
- The cost of the asset can be measured reliably.
This recognition principle is applied to all property, plant, and equipment costs at the time they are incurred. These costs include costs
incurred initially to acquire or construct an item of property, plant and equipment and costs incurred subsequently to add to, replace
part of, or service it.
IAS 16 does not prescribe the unit of measure for recognition – what constitutes an item of property, plant, and equipment. [IAS 16.9]
Note, however, that if the cost model is used (see below) each part of an item of property, plant, and equipment with a cost that is
significant in relation to the total cost of the item must be depreciated separately. [IAS 16.43]
IAS 16 recognises that parts of some items of property, plant, and equipment may require replacement at regular intervals. The
carrying amount of an item of property, plant, and equipment will include the cost of replacing the part of such an item when that
cost is incurred if the recognition criteria (future benefits and measurement reliability) are met. The carrying amount of those parts
that are replaced is derecognised in accordance with the derecognition provisions of IAS 16.67-72. [IAS 16.13]
Also, continued operation of an item of property, plant, and equipment (for example, an aircraft) may require regular major
inspections for faults regardless of whether parts of the item are replaced. When each major inspection is performed, its cost is
recognised in the carrying amount of the item of property, plant, and equipment as a replacement if the recognition criteria are
satisfied. If necessary, the estimated cost of a future similar inspection may be used as an indication of what the cost of the existing
inspection component was when the item was acquired or constructed. [IAS 16.14]
Measurement
Initial measurement
An item of property, plant and equipment should initially be recorded at cost. [IAS 16.15] Cost includes all costs necessary to bring the
asset to working condition for its intended use. This would include not only its original purchase price but also costs of site
preparation, delivery and handling, installation, related professional fees for architects and engineers, and the estimated cost of
dismantling and removing the asset and restoring the site (see IAS 37 Provisions, Contingent Liabilities and Contingent Assets). [IAS
16.16-17]
Proceeds from selling items produced while bringing an item of property, plant and equipment to the location and condition
necessary for it to be capable of operating in the manner intended by management are not deducted from the cost of the item of
property, plant and equipment but recognised in profit or loss. [IAS 16.20A]
If payment for an item of property, plant, and equipment is deferred, interest at a market rate must be recognised or imputed. [IAS
16.23]
If an asset is acquired in exchange for another asset (whether similar or dissimilar in nature), the cost will be measured at the fair
value unless (a) the exchange transaction lacks commercial substance or (b) the fair value of neither the asset received nor the asset
given up is reliably measurable. If the acquired item is not measured at fair value, its cost is measured at the carrying amount of the
asset given up. [IAS 16.24]
Measurement subsequent to initial recognition IAS 16 permits two accounting models:
- Cost model. The asset is carried at cost less accumulated depreciation and impairment;
- Revaluation model. The asset is carried at a revalued amount, being its fair value at the date of revaluation less subsequent
depreciation and impairment, provided that fair value can be measured reliably.
The revaluation model
Under the revaluation model, revaluations should be carried out regularly, so that the carrying amount of an asset does not differ
materially from its fair value at the balance sheet date.
If an item is revalued, the entire class of assets to which that asset belongs should be revalued.
Revalued assets are depreciated in the same way as under the cost model (see below).
If a revaluation results in an increase in value, it should be credited to other comprehensive income and accumulated in equity under
the heading "revaluation surplus" unless it represents the reversal of a revaluation decrease of the same asset previously recognised
as an expense, in which case it should be recognised in profit or loss. [IAS 16.39]
A decrease arising as a result of a revaluation should be recognised as an expense to the extent that it exceeds any amount previously
credited to the revaluation surplus relating to the same asset. [IAS 16.40]
When a revalued asset is disposed of, any revaluation surplus may be transferred directly to retained earnings, or it may be left in
equity under the heading revaluation surplus. The transfer to retained earnings should not be made through profit or loss. [IAS 16.41]
Depreciation (cost and revaluation models)
For all depreciable assets:
The depreciable amount (cost less residual value) should be allocated on a systematic basis over the asset's useful life [IAS 16.50].
The residual value and the useful life of an asset should be reviewed at least at each financial year- end and, if expectations differ from
previous estimates, any change is accounted for prospectively as a change in estimate under IAS 8. [IAS 16.51]
The depreciation method used should reflect the pattern in which the asset's economic benefits are consumed by the entity [IAS
16.60]; a depreciation method that is based on revenue that is generated by an activity that includes the use of an asset is not
appropriate. [IAS 16.62A]
The depreciation method should be reviewed at least annually and, if the pattern of consumption of benefits has changed, the
depreciation method should be changed prospectively as a change in estimate under IAS 8. [IAS 16.61] Expected future reductions in
selling prices could be indicative of a higher rate of consumption of the future economic benefits embodied in an asset. [IAS 16.56]
Depreciation should be charged to profit or loss, unless it is included in the carrying amount of another asset [IAS 16.48].
Depreciation begins when the asset is available for use and continues until the asset is derecognised, even if it is idle. [IAS 16.55]
Recoverability of the carrying amount
IAS 16 Property, plant and equipment requires impairment testing and, if necessary, recognition for property, plant and equipment.
An item of property, plant and equipment shall not be carried at more than recoverable amount. Recoverable amount is higher of an
asset’s fair value less costs to sell and its value in use.
Any claim for compensation from third parties for impairment is included in profit or loss when the claim becomes receivable.
Derecognition (retirements and disposal)
IAS 16 Property, Plant and Equipment requires impairment testing and, if necessary, recognition for property, plant, and equipment.
An item of property, plant, or equipment shall not be carried at more than recoverable amount. Recoverable amount is the higher of
an asset's fair value less costs to sell and its value in use.
Any claim for compensation from third parties for impairment is included in profit or loss when the claim becomes receivable. [IAS
16.65]
Disclosure
Information about each class of property, plant and equipment For each class of property, plant and equipment, disclose:
-Basis for measuring carrying amount;
- Depreciation method(s) used;
- Useful lives or depreciation rates;
- Gross carrying amount and accumulated depreciation and impairment losses;
- Reconciliation of the carrying amount at the beginning and the end of the period, showing:
a) Additions;
b) Disposals;
c) Acquisitions through business combinations;
d) Revaluation increases or decreases;
e) Impairment losses;
f) Reversals of impairment losses;
g) Depreciation;
h) Net foreign exchange differences on translation
i) Other movement.
Additional disclosures
The following disclosures are also required:
- Restrictions on title and items pledge as security for liabilities;
- Expenditures to construct property, plant and equipment during the period;
- Contractual commitments to acquire property, plant and equipment;
- Compensation from third parties for items of property, plant and equipment that were impaired, lost or given up that is included in
profit or loss.
IAS 16 also encourages, but does not require, a number of additional disclosures.
Revalued property, plant and equipment
If property, plant, and equipment is stated at revalued amounts, certain additional disclosures are required:
- The effective date of the revaluation;
- Whether an independent valuer was involved;
- For each revalued class of property, the carrying amount that would have been recognized had the assets been carried under the
cost model;
- The revaluation surplus, including changes during the period and any restrictions on the distribution of the balance to shareholders.
CHAPTER 6. IAS 38 – Intangible Assets
Overview
IAS 38 Intangible Assets outlines the accounting requirements for intangible assets, which are non- monetary assets which are without
physical substance and identifiable (either being separable or arising from contractual or other legal rights). Intangible assets meeting
the relevant recognition criteria are initially measured at cost, subsequently measured at cost or using the revaluation model, and
amortised on a systematic basis over their useful lives (unless the asset has an indefinite useful life, in which case it is not amortised).
IAS 38 was revised in March 2004 and applies to intangible assets acquired in business combinations occurring on or after 31 March
2004, or otherwise to other intangible assets for annual periods beginning on or after 31 March 2004.
The objective of IAS 38 is to prescribe the accounting treatment for intangible assets that are not dealt with specifically in another
IFRS. The Standard requires an entity to recognize an intangible asset if and only if, certain criteria are met. The Standard also specifies
how to measure the carrying amount of intangible assets and requires certain disclosures regarding intangible assets.
IAS 38 applies to all intangible assets other than:
- Financial assets;
- Exploration and evaluation assets;
- Expenditure on the development and extraction of minerals, oil, natural gas and similar resources;
- Intangible assets arising from insurance contracts issued by insurance companies; Intangible assets covered by another IFRS, such as
- intangibles held for sale, deferred tax assets, lease assets, assets arising from employee benefits and goodwill.
Key definitions
Intangible asset: an identifiable non-monetary asset without physical substance. An asset is a resource that is controlled by the entity
as a result of past events (for example, purchase or self- creation) and from which future economic benefits (inflows of cash or other
assets) are expected. [IAS 38.8] Thus, the three critical attributes of an intangible asset are:
- Identifiability;
- Control (power to obtain benefits from the asset)
- Future economic benefits (such as revenues or reduced future costs).
Identifiability
An intangible asset is identifiable when it:
- Is separable (capable of being separated and sold, transferred, licensed, rented, or exchanged, either individually or together with a
related contract) or
- 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.
Examples of intangible assets are:
i) Patented technology, computer software, database and trade secrets;
ii) Trademarks, trade dress, newspaper mastheads, internet domanins;
iii) Video and audiovisual material (e.g. motion pictures, television programmes);
iv) Customer lists;
v) Mortgage servicing rights;
vi) Licensing, royalty and standstill agreements;
vii) Import quotas;
viii) Franchise agreements;
ix) Customer and supplier relationships (including customer lists);
x) Marketing rights.
Intangibles can be acquired:
a) By separate purchase;
b) As part of a business combination;
c) By a government grant;
d) By exchange of assets;
e) By self-creation (internal generation).
Recognition
IAS 38 requires an entity to recognize an intangible asset, whether purchased or self-created (at cost) if, and only if:
i) It is probable that the future economic benefits that are attributable to the asset will flow to the entity; and
ii) The cost of the asset can be measured reliably.
This requirement applies whether an intangible asset is acquired externally or generated internally. IAS 38 includes additional
recognition criteria for internally generated intangible assets.
The probability of future economic benefits must be based on reasonable and supportable assumptions about conditions that will
exist over the life of the asset. The probability recognition criterion is always considered to be satisfied for intangibles assets that are
acquired separately or in a business combination.
If an intangible item does not meet both the definition of and the criteria for recognition as an intangible assets, IAS 38 requires the
expenditures on this item to be recognized as an expense when it is incurred.
There is a presumption that the fair value (and therefore the cost) of an intangible asset acquired in a business combination can be
measured reliably. [IAS 38.35] An expenditure (included in the cost of acquisition) on an intangible item that does not meet both the
definition of and recognition criteria for an intangible asset should form part of the amount attributed to the goodwill recognised at
the acquisition date.
The Standard also prohibits an entity from subsequently reinstating as an intangible asset, at a later date, an expenditure that was
originally charged to expense. [IAS 38.71]
Initial recognition of research and development costs:
i) Charge all research cost to expense;
ii) Development costs are capitalized only after technical and commercial feasibility of the asset for sale or use have been established.
This means that the entity must intend and be able to complete the intangible asset and either use it or sell it and be able to
demonstrate how the asset will generate future economic benefits.
If an entity cannot distinguish the research phase of an internal project to create an intangible asset from the development phase, the
entity treats the expenditure for that project as if it were incurred in the research phase only.
Initial recognition: in process research and development acquired in a business combination. A research and development project
acquired in a business combination is recognised as an asset at cost, even if a component is research. Subsequent expenditure on that
project is accounted for as any other research and development cost (expensed except to the extent that the expenditure satisfies the
criteria in IAS 38 for recognising such expenditure as an intangible asset). [IAS 38.34]
Initial recognition: internally generated brands, mastheads, titles, lists. These items that are internally generated should not be
recognised as assets. [IAS 38.63]
Initial recognition of computer software:
- Purchased: capitalize;
- Operating system for hardware: include in hardware cost;
- Internally developed: charge to expense until technology feasibility, probable future benefits, intent and ability to use or sell the
software, resources to complete the software and ability to measure cost;
- Amortization: over useful life based on pattern of benefits (straight-line is the default).
Initial recognition of certain other defined types of costs. The following items must be charged to expense when incurred:
i) Internally generated goodwill;
ii) Start-up, pre-operating costs;
iii) Training cost;
iv) Advertising and promotional cost, including mail order catalogues;
v) Relocation costs.
For this purpose, 'when incurred' means when the entity receives the related goods or services. If the entity has made a prepayment
for the above items, that prepayment is recognised as an asset until the entity receives the related goods or services. [IAS 38.70]
Measurement
Initial measurement
Intangible assets are initially measured at cost.
Measurement subsequent to acquisition: cost model and revaluation models allowed
An entity must choose either the cost model or the revaluation model for each class of intangible assets.
- Cost model. After initial recognition intangible assets should be carried at cost less accumulated amortization and impairment losses.
- Revaluation model. Intangible assets may be carried at a revalued amount (based on fair value) less any subsequent amortization
and impairment losses only if fair value can be determined by reference to an active market. Such active markets are expected to be
uncommon for intangible assets. Examples where they might exist:
i) Production quotas;
ii) Fishing licenses;
iii) Taxi licenses.
Under the revaluation model, revaluation increases are recognized in other comprehensive income and accumulated in the
“revaluation surplus” within equity except to the extent that they reverse a revaluation decrease previously recognized in profit and
loss. If the revalued intangible has a finite life and is, therefore, being amortized the revalued amount is amortized.
Classification of intangible assets based on useful life Intangible assets are classified as:
- Indefinite life: no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the entity
- Finite life: a limited period of benefit to the entity.
Measurement subsequent to acquisition: intangible assets with finite lives
The cost less residual value of an intangible asset with a finite useful life should be amortised on a systematic basis over that life: [IAS
38.97]:
- The amortization method should reflect the pattern of benefits;
- If the pattern cannot be determined reliably, amortize by the straight-line method;
-The amortization charge is recognized in profit or loss unless another IFRS requires that it be included in the cost of another asset;
- The amortization period should be reviewed at least annyally.
Expected future reductions in selling prices could be indicative of a higher rate of consumption of the future economic benefits
embodied in an asset. [IAS 18.92]
The standard contains a rebuttable presumption that a revenue-based amortisation method for intangible assets is inappropriate.
However, there are limited circumstances when the presumption can be overcome:
- The intangible asset is expressed as a measure of revenue; and
- it can be demonstrated that revenue and the consumption of economic benefits of the intangible asset are highly correlated. [IAS
38.98A]
The asset should also be assessed for impairment in accordance with IAS 36.
Measurement subsequent to acquisition: intangible assets with indefinite useful lives An intangible asset with an indefinite useful life
should not be amortized.
Its useful life should be reviewed each reporting period to determine whether events and circumstances continue to support an
indefinite useful life assessment for that asset. If they do not, the change in the useful life assessment from indefinite to finite should
be accounted for as a change in an accounting estimate. [IAS 38.109]
The asset should also be assessed for impairment in accordance with IAS 36.
Subsequent expenditure
Due to the nature of intangible assets, subsequent expenditure will only rarely meet the criteria for being recognised in the carrying
amount of an asset. [IAS 38.20] Subsequent expenditure on brands, mastheads, publishing titles, customer lists and similar items must
always be recognised in profit or loss as incurred. [IAS 38.63]
Disclosure
For each class of intangible asset, disclose:
i) Useful life or amortization rate;
ii) Amortization method;
iii) Gross carrying amount;
iv) Accumulated amortization and impairment losses;
v) Line items in the income statement in which amortization is included;
vi) Reconciliation of the carrying amount at the beginning and the end of the period showing:
a) Additions;
b) Assets held for sale;
c) Retirements and other disposals;
d) Revaluations;
e) Impairments;
f) Reversals of impairments;
g) Amortization;
h) Foreign exchange differences;
i) Other changes.
vii) Basis for determining that an intangible has an indefinite life;
viii) Description and carrying amount of individually material intangible assets;
ix) Certain special disclosures about intangible assets acquired by way of government grants;
x) Information about intangible assets whose title is restricted;
xi) Contractual commitments to acquire intangible assets.
CHAPTER 7. IAS 36 – Impairment of Assets
Overview
IAS 36 Impairment of Assets seeks to ensure that an entity's assets are not carried at more than their recoverable amount (i.e. the
higher of fair value less costs of disposal and value in use). With the exception of goodwill and certain intangible assets for which an
annual impairment test is required, entities are required to conduct impairment tests where there is an indication of impairment of an
asset, and the test may be conducted for a 'cash-generating unit' where an asset does not generate cash inflows that are largely
independent of those from other assets.
IAS 36 was reissued in March 2004 and applies to goodwill and intangible assets acquired in business combinations for which the
agreement date is on or after 31 March 2004, and for all other assets prospectively from the beginning of the first annual period
beginning on or after 31 March 2004.
To ensure that assets are carried at no more than their recoverable amount, and to define how recoverable amount is determined.
Scope
IAS 36 applies to all assets except:
- Inventories;
- Assets arising from construction contracts;
- Deferred tax assets;
- Assets arising from employee benefits;
- Financial assets;
- Investment property carried at fair value;
- Agricultural assets carried at fair value;
- Insurance contracts assets;
- Non-current assets held for sale.
Therefore, IAS 36 applies:
- Land;
- Buildings;
- Machinery and equipment;
- Investment property carried at cost;
- Intangible assets;
- Goodwill;
- Investments in subsidiaries, associates and joint ventures carried at cost;
- Assets carried at revalued under IAS 16 and IAS 38.
Key definitions
- Impairment loss: the amount by which the carrying amount of an asset or cash generating unit exceeds its recoverable amount.
- Carrying amount: the amount at which an asset is recognized in the balance sheet after deducting accumulated depreciation and
accumulated impairment losses.
Recoverable amount: the higher of an asset’s fair value less costs of disposal.
Fair value: 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.
Value in use: the present value of the future cash flows expected to be derived from an asset or cash generating unit.
Impairment test
Identifying an asset that may be impaired
At the end of each reporting period, an entity is required to assess whether there is any indication that an asset may be impaired (i.e.
its carrying amount may be higher than its recoverable amount). IAS 36 has a list of external and internal indicators of impairment. If
there is an indication that an asset may be impaired, then the asset's recoverable amount must be calculated. [IAS 36.9]
The recoverable amounts of the following types of intangible assets are measured annually whether or not there is any indication that
it may be impaired. In some cases, the most recent detailed calculation of recoverable amount made in a preceding period may be
used in the impairment test for that asset in the current period: [IAS 36.10]
- An intangible asset with an indefinite useful life;
- An intangible asset not yet available for use;
- Goodwill acquired in a business combination.
Indications of impairment External sources
- Market value declines;
- Negative changes in technology, markets, economy or laws;
- Increases in market interest rates;
- Net assets of the company higher than market capitalization.
Internal sources
- Obsolescence or physical damage;
- Asset is idle, part of a restructuring or held for disposal;
- Worse economic performance than expected;
- For investments in subsidiaries, joint ventures or associates, the carrying amount is higher than the carrying amount of the investee’s
assets, or a dividend exceeds the total comprehensive income of the investee.
These list are not intended to be exhaustive. Further, an indication that an asset may be impaired may indicate that the asset’s useful
life, depreciation method, or residual value may need to be reviewed and adjusted.
Determining recoverable amount
If fair value less costs of disposal or value in use is more than carrying amount, it is not necessary to calculate the other amount. The
asset is not impaired. [IAS 36.19]
If fair value less costs of disposal cannot be determined, then recoverable amount is value in use. [IAS 36.20]
For assets to be disposed of, recoverable amount is fair value less costs of disposal. [IAS 36.21]
Fair value less costs of disposal
Fair value is determined in accordance with IFRS 13 Fair value measurement.
Costs of disposal are the direct added costs only (not existing costs or overhead). [IAS 36.28]
Value in use
The calculation of value in use should reflect the following elements:
- An estimate of the future cash flows the entity expects to derive from the asset;
- Expectations about possible variations in the amount or timing of those future cash flows;
- The time value of money, represented by the current market risk-free rate of interest;
- The price for bearing the uncertainty inherent in the asset;
- Other factors, such as illiquidity, that market participants would reflect in pricing the future cash flows the entity expects to derive
from the asset.
Cash flow projections should be based on reasonable and supportable assumptions, the most recent budgets and forecasts, and
extrapolation for periods beyond budgeted projections. [IAS 36.33] IAS 36 presumes that budgets and forecasts should not go beyond
five years; for periods after five years, extrapolate from the earlier budgets. [IAS 36.35] Management should assess the
reasonableness of its assumptions by examining the causes of differences between past cash flow projections and actual cash flows.
[IAS 36.34]
Cash flow projections should relate to the asset in its current condition – future restructurings to which the entity is not committed
and expenditures to improve or enhance the asset's performance should not be anticipated. [IAS 36.44]
Estimates of future cash flows should not include cash inflows or outflows from financing activities, or income tax receipts or
payments. [IAS 36.50]
Discount rate
In measuring value in use, the discount rate used should be the pre-tax rate that reflects current market assessments of the time
value of money and the risks specific to the asset. [IAS 36.55]
The discount rate should not reflect risks for which future cash flows have been adjusted and should equal the rate of return that
investors would require if they were to choose an investment that would generate cash flows equivalent to those expected from the
asset. [IAS 36.56]
For impairment of an individual asset or portfolio of assets, the discount rate is the rate the entity would pay in a current market
transaction to borrow money to buy that specific asset or portfolio.
If a market-determined asset-specific rate is not available, a surrogate must be used that reflects the time value of money over the
asset's life as well as country risk, currency risk, price risk, and cash flow risk. The following would normally be considered: [IAS 36.57]
- The entity’s own weight average cost of capital;
- The entity’s incremental borrowing rate;
- Other market borrowing rate.
Recognition of an impairment loss
An impairment loss is recognised whenever recoverable amount is below carrying amount. [IAS 36.59]
The impairment loss is recognised as an expense (unless it relates to a revalued asset where the impairment loss is treated as a
revaluation decrease). [IAS 36.60]
Adjust depreciation for future periods. [IAS 36.63]
Cash-generating unit
Recoverable amount should be determined for the individual asset, if possible. [IAS 36.66]
If it is not possible to determine the recoverable amount (i.e. the higher of fair value less costs of disposal and value in use) for the
individual asset, then determine recoverable amount for the asset's cash-generating unit (CGU). [IAS 36.66] The CGU is 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. [IAS 36.6]
Impairment of goodwill
Goodwill should be tested for impairment annually. [IAS 36.96]
To test for impairment, goodwill must be allocated to each of the acquirer's cash-generating units, or groups of cash-generating units,
that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the acquiree
are assigned to those units or groups of units. Each unit or group of units to which the goodwill is so allocated shall: [IAS 36.80]
- Represent the lowest level within the entity at which the goodwill is monitored for internal management purpose; and
- Not be larger than an operating segment determined in accordance with IFRS 8 Operating segments.
A cash-generating unit to which goodwill has been allocated shall be tested for impairment at least annually by comparing the carrying
amount of the unit, including the goodwill, with the recoverable amount of the unit: [IAS 36.90]
- If the recoverable amount of the unit exceeds the carrying amount of the unit, the unit and the goodwill allocated to that unit is not
impaired
- If the carrying amount of the unit exceeds the recoverable amount of the unit, the entity must recognise an impairment loss.
The impairment loss is allocated to reduce the carrying amount of the assets of the unit (group of units) in the following order: [IAS
36.104]
- first, reduce the carrying amount of any goodwill allocated to the cash-generating unit (group of units); and
- then, reduce the carrying amounts of the other assets of the unit (group of units) pro rata on the basis.
The carrying amount of an asset should not be reduced below the highest of: [IAS 36.105]
- its fair value less costs of disposal (if measurable);
- its value in use (if measurable);
- zero. If the preceding rule is applied, further allocation of the impairment loss is made pro rata to the other assets of the unit (group
of units).
Reversal of an impairment loss
Same approach as for the identification of impaired assets: assess at each balance sheet date whether there is an indication that an
impairment loss may have decreased. If so, calculate recoverable amount. [IAS 36.110]
No reversal for unwinding of discount. [IAS 36.116]
The increased carrying amount due to reversal should not be more than what the depreciated historical cost would have been if the
impairment had not been recognised. [IAS 36.117] Reversal of an impairment loss is recognised in the profit or loss unless it relates to
a revalued asset [IAS 36.119]
Adjust depreciation for future periods. [IAS 36.121]
Reversal of an impairment loss for goodwill is prohibited. [IAS 36.124]
Disclosure
Disclosure by class of assets:
- impairment losses recognised in profit or loss
- impairment losses reversed in profit or loss
- which line item(s) of the statement of comprehensive income
- impairment losses on revalued assets recognised in other comprehensive income
- impairment losses on revalued assets reversed in other comprehensive income
Disclosure by reportable segment:
- impairment losses recognized;
- impairment losses reversed.
Other disclosures:
If an individual impairment loss (reversal) is material disclose:
- events and circumstances resulting in the impairment loss;
- amount of the loss or reversal
- individual asset: nature and segment to which it relates
- cash generating unit: description, amount of impairment loss (reversal) by class of assets and segment
- if recoverable amount is fair value less costs of disposal, the level of the fair value hierarchy (from IFRS 13 Fair Value Measurement)
within which the fair value measurement is categorised, the valuation techniques used to measure fair value less costs of disposal and
the key assumptions used in the measurement of fair value measurements categorised within 'Level 2' and 'Level 3' of the fair value
hierarchy
- if recoverable amount has been determined on the basis of value in use, or on the basis of fair value less costs of disposal using a
present value technique, disclose the discount rate.
If impairment losses rocognised (reversed) are material in aggregate to the financial stataments as a whole, disclose;
- main classes of assets affected;
- main events and circumstances.
Disclose detailed information about the estimates used to measure recoverable amounts of cash generating containing goodwill or
intangible assets with indefinite useful life.
CHAPTER 8. IFRS 16 – Leases
Overview
IFRS 16 specifies how an IFRS reporter will recognise, measure, present and disclose leases. The standard provides a single lessee
accounting model, requiring lessees to recognise assets and liabilities for all leases unless the lease term is 12 months or less or the
underlying asset has a low value. Lessors continue to classify leases as operating or finance, with IFRS 16’s approach to lessor
accounting substantially unchanged from its predecessor, IAS 17.
IFRS 16 was issued in January 2016 and applies to annual reporting periods beginning on or after 1 January 2019.
IFRS 16 establishes principles for the recognition, measurement, presentation and disclosure of leases, with the objective of ensuring
that lessees and lessors provide relevant information that faithfully represents those transactions. [IFRS 16:1]
Scope
IFRS 16 Leases applies to all leases, including subleases, except for: [IFRS 16:3]
- leases to explore for or use minerals, oil, natural gas and similar non-regenerative resources;
- leases of biological assets held by a lessee (see IAS 41 Agriculture);
- service concession arrangements (see IFRIC 12 Service Concession Arrangements);
- licences of intellectual property granted by a lessor (see IFRS 15 Revenue from Contracts with Customers); and
- rights held by a lessee under licensing agreements for items such as films, videos, plays, manuscripts, patents and copyrights within
the scope of IAS 38 Intangible Assets
A lessee can elect to apply IFRS 16 to leases of intangible assets, other than those items listed above. [IFRS 16:4]
Key definitions
Interest rate implicit in the lease: The interest rate that yields a present value of (a) the lease payments and (b) the unguaranteed
residual value equal to the sum of (i) the fair value of the underlying asset and (ii) any initial direct costs of the lessor.
Lease term: The non-cancellable period for which a lessee has the right to use an underlying asset, plus: a) periods covered by an
extension option if exercise of that option by the lessee is reasonably certain; and b) periods covered by a termination option if the
lessee is reasonably certain not to exercise that option
Lessee’s incremental borrowing rate: The rate of interest that a lessee would have to pay to borrow over a similar term, and with a
similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment.
Recognition exemptions
Instead of applying the recognition requirements of IFRS 16 described below, a lessee may elect to account for lease payments as an
expense on a straight-line basis over the lease term or another systematic basis for the following two types of leases:
- leases with a lease term of 12 months or less and containing no purchase options – this election is made by class of underlying asset;
and
- leases where the underlying asset has a low value when new (such as personal computers or small items of office furniture) – this
election can be made on a lease-by-lease basis.
Identifying a lease
A contract is, or contains, a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for
consideration. [IFRS 16:9]
Control is conveyed where the customer has both the right to direct the identified asset’s use and to obtain substantially all the
economic benefits from that use. [IFRS 16:B9]
An asset is typically identified by being explicitly specified in a contract, but an asset can also be identified by being implicitly specified
at the time it is made available for use by the customer.
However, where a supplier has a substantive right of substitution throughout the period of use, a customer does not have a right to
use an identified asset. A supplier’s right of substitution is only considered substantive if the supplier has both the practical ability to
substitute alternative assets throughout the period of use and they would economically benefit from substitution. [IFRS 16:B13- 14]
A capacity portion of an asset is still an identified asset if it is physically distinct (e.g. a floor of a building). A capacity or other portion
of an asset that is not physically distinct (e.g. a capacity portion of a fibre optic cable) is not an identified asset, unless it represents
substantially all the capacity such that the customer obtains substantially all the economic benefits from using the asset. [IFRS 16:B20]
Separating components of a contract
For a contract that contains a lease component and additional lease and non-lease components, such as the lease of an asset and the
provision of a maintenance service, lessees shall allocate the consideration payable on the basis of the relative stand-alone prices,
which shall be estimated if observable prices are not readily available.
As a practical expedient, a lessee may elect, by class of underlying asset, not to separate non-lease components from lease
components and instead account for all components as a lease. [IFRS 16:13- 15]
Lessors shall allocate consideration in accordance with IFRS 15 Revenue from Contracts with Customers.
Accounting by lessees
Upon lease commencement a lessee recognises a right-of-use asset and a lease liability. [IFRS 16:22]
The right-of-use asset is initially measured at the amount of the lease liability plus any initial direct costs incurred by the lessee.
Adjustments may also be required for lease incentives, payments at or prior to commencement and restoration obligations or similar.
[IFRS 16:24]
After lease commencement, a lessee shall measure the right-of-use asset using a cost model, unless: [IFRS 16:29, 34, 35]
- the right-of-use asset is an investment property and the lessee fair values its investment property under IAS 40; or
- the right-of-use asset relates to a class of PPE to which the lessee applies IAS 16’s revaluation model, in which case all right-of-use
assets relating to that class of PPE can be revalued.
Under the cost model a right-of-use asset is measured at cost less accumulated depreciation and accumulated impairment. [IFRS
16:30(a)]
The lease liability is initially measured at the present value of the lease payments payable over the lease term, discounted at the rate
implicit in the lease if that can be readily determined. If that rate cannot be readily determined, the lessee shall use their incremental
borrowing rate. [IFRS 16:26]
Variable lease payments that depend on an index or a rate are included in the initial measurement of the lease liability and are initially
measured using the index or rate as at the commencement date. Amounts expected to be payable by the lessee under residual value
guarantees are also included. [IFRS 16:27(b),(c)]
Variable lease payments that are not included in the measurement of the lease liability are recognised in profit or loss in the period in
which the event or condition that triggers payment occurs, unless the costs are included in the carrying amount of another asset
under another Standard. [IFRS 16:38(b)
The lease liability is subsequently remeasured to reflect changes in: [IFRS 16:36]
- the lease term (using a revised discount rate);
- the assessment of a purchase option (using a revised discount rate);
- the amounts expected to be payable under residual value guarantees (using an unchanged discount rate); or
- future lease payments resulting from a change in an index or a rate used to determine those payments (using an unchanged discount
rate).
The remeasurements are treated as adjustments to the right-of-use asset. [IFRS 16:39]
Lease modifications may also prompt remeasurement of the lease liability unless they are to be treated as separate leases. [IFRS
16:36(c)]
Accounting by lessor
Lessors shall classify each lease as an operating lease or a finance lease. [IFRS 16:61]
A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership of an underlying
asset. Otherwise a lease is classified as an operating lease. [IFRS 16:62]
Examples of situations that individually or in combination would normally lead to a lease being classified as a finance lease are: [IFRS
16:63]
- the lease transfers ownership of the asset to the lessee by the end of the lease term 50
- the lessee has the option to purchase the asset at a price which is expected to be sufficiently lower than fair value at the date the
option becomes exercisable that, at the inception of the lease, it is reasonably certain that the option will be exercised
- the lease term is for the major part of the economic life of the asset, even if title is not transferred
- at the inception of the lease, the present value of the minimum lease payments amounts to at least substantially all of the fair value
of the leased asset
- the leased assets are of a specialised nature such that only the lessee can use them without major modifications being made
Upon lease commencement, a lessor shall recognise assets held under a finance lease as a receivable at an amount equal to the net
investment in the lease. [IFRS 16:67]
A lessor recognises finance income over the lease term of a finance lease, based on a pattern reflecting a constant periodic rate of
return on the net investment. [IFRS 16:75]
At the commencement date, a manufacturer or dealer lessor recognises selling profit or loss in accordance with its policy for outright
sales to which IFRS 15 applies. [IFRS 16:71c)]
A lessor recognises operating lease payments as income on a straight-line basis or, if more representative of the pattern in which
benefit from use of the underlying asset is diminished, another systematic basis. [IFRS 16:81]
Sale and leaseback transactions
To determine whether the transfer of an asset is accounted for as a sale an entity applies the requirements of IFRS 15 for determining
when a performance obligation is satisfied. [IFRS 16:99]
If an asset transfer satisfies IFRS 15’s requirements to be accounted for as a sale the seller measures the right-of-use asset at the
proportion of the previous carrying amount that relates to the right of use retained. Accordingly, the seller only recognises the
amount of gain or loss that relates to the rights transferred to the buyer. [IFRS 16:100a)]
If the fair value of the sale consideration does not equal the asset’s fair value, or if the lease payments are not market rates, the sales
proceeds are adjusted to fair value, either by accounting for prepayments or additional financing. [IFRS 16:101]
Disclosure
The objective of IFRS 16’s disclosures is for information to be provided in the notes that, together with information provided in the
statement of financial position, statement of profit or loss and statement of cash flows, gives a basis for users to assess the effect that
leases have. Paragraphs 52 to 60 of IFRS 16 set out detailed requirements for lessees to meet this objective and paragraphs 90 to 97
set out the detailed requirements for lessors. [IFRS 16:51, 89]
CHAPTER 9. IFRS 15 – Revenue from Contracts with Customers
Overview
IFRS 15 specifies how and when an IFRS reporter will recognise revenue as well as requiring such entities to provide users of financial
statements with more informative, relevant disclosures. The standard provides a single, principles based five-step model to be applied
to all contracts with customers.
IFRS 15 was issued in May 2014 and applies to an annual reporting period beginning on or after 1 January 2018. On 12 April 2016,
clarifying amendments were issued that have the same effective date as the standard itself.
The objective of IFRS 15 is to establish the principles that an entity shall apply to report useful information to users of financial
statements about the nature, amount, timing, and uncertainty of revenue and cash flows arising from a contract with a customer.
[IFRS 15:1] Application of the standard is mandatory for annual reporting periods starting from 1 January 2018 onwards. Earlier
application is permitted.
Scope
IFRS 15 Revenue from Contracts with Customers applies to all contracts with customers except for: leases within the scope of IAS 17
Leases; financial instruments and other contractual rights or obligations within the scope of IFRS 9 Financial Instruments, IFRS 10
Consolidated Financial Statements, IFRS 11 Joint Arrangements, IAS 27 Separate Financial Statements and IAS 28 Investments in
Associates and Joint Ventures; insurance contracts within the scope of IFRS 4 Insurance Contracts; and non-monetary exchanges
between entities in the same line of business to facilitate sales to customers or potential customers. [IFRS 15:5]
A contract with a customer may be partially within the scope of IFRS 15 and partially within the scope of another standard. In that
scenario: [IFRS 15:7]
- if other standards specify how to separate and/or initially measure one or more parts of the contract, then those separation and
measurement requirements are applied first. The transaction price is then reduced by the amounts that are initially measured under
other standards;
- if no other standard provides guidance on how to separate and/or initially measure one or more parts of the contract, then IFRS 15
will be applied.
Key definitions
Contract: An agreement between two or more parties that creates enforceable rights and obligations
Customer: A party that has contracted with an entity to obtain goods or services that are an output of the entity’s ordinary activities in
exchange for consideration.
Income: Increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of
liabilities that result in an increase in equity, other than those relating to contributions from equity participants.
Performance obligation: A promise in a contract with a customer to transfer to the customer either: i) a good or service (or a bundle of
goods or services) that is distinct; or; a series of distinct goods or services that are substantially the same and that have the same
pattern of transfer to the customer
Revenue: Income arising in the course of an entity’s ordinary activities.
Transaction price: The amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods
or services to a customer, excluding amounts collected on behalf of third parties.
Accounting requirements for revenue
The five-step model framework
The core principle of IFRS 15 is that an entity will recognise revenue to depict the transfer of promised goods or services to customers
in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This
core principle is delivered in a five-step model framework: [IFRS 15:IN7]
- Identify the contract(s) with a customer
- Identify the performance obligations in the contract
- Determine the transaction price
- Allocate the transaction price to the performance obligations in the contract
- Recognise revenue when (or as) the entity satisfies a performance obligation.
Application of this guidance will depend on the facts and circumstances present in a contract with a customer and will require the
exercise of judgment.
Step 1: identify the contract with customer
A contract with a customer will be within the scope of IFRS 15 if all the following conditions are met: [IFRS 15:9]
- the contract has been approved by the parties to the contract;
- each party’s rights in relation to the goods or services to be transferred can be identified;
- the payment terms for the goods or services to be transferred can be identified;
- the contract has commercial substance; and
- it is probable that the consideration to which the entity is entitled to in exchange for the goods or services will be collected.
If a contract with a customer does not yet meet all of the above criteria, the entity will continue to re- assess the contract going
forward to determine whether it subsequently meets the above criteria. From that point, the entity will apply IFRS 15 to the contract.
[IFRS 15:14]
The standard provides detailed guidance on how to account for approved contract modifications. If certain conditions are met, a
contract modification will be accounted for as a separate contract with the customer. If not, it will be accounted for by modifying the
accounting for the current contract with the customer. Whether the latter type of modification is accounted for prospectively or
retrospectively depends on whether the remaining goods or services to be delivered after the modification are distinct from those
delivered prior to the modification. Further details on accounting for contract modifications can be found in the Standard. [IFRS 15:1821].
Step 2: Identify the performance obligations in the contract
At the inception of the contract, the entity should assess the goods or services that have been promised to the customer, and identify
as a performance obligation: [IFRS 15.22]
- a good or service (or bundle of goods or services) that is distinct; or
- a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer.
A series of distinct goods or services is transferred to the customer in the same pattern if both of the following criteria are met: [IFRS
15:23]
- each distinct good or service in the series that the entity promises to transfer consecutively to the customer would be a performance
obligation that is satisfied over time (see below); and
- a single method of measuring progress would be used to measure the entity’s progress towards complete satisfaction of the
performance obligation to transfer each distinct good or service in the series to the customer.
A good or service is distinct if both of the following criteria are met:
- the customer can benefit from the good or services on its own or in conjunction with other readily available resources; and
- the entity’s promise to transfer the good or service to the customer is separately idenitifable from other promises in the contract.
Factors for consideration as to whether a promise to transfer goods or services to the customer is not separately identifiable include,
but are not limited to: [IFRS 15:29]
- the entity does provide a significant service of integrating the goods or services with other goods or services promised in the
contract;
- the goods or services significantly modify or customise other goods or services promised in the contract;
- the goods or services are highly interrelated or highly interdependent.
Step 3: Determine the transaction price
The transaction price is the amount to which an entity expects to be entitled in exchange for the transfer of goods and services. When
making this determination, an entity will consider past customary business practices. [IFRS 15:47]
Where a contract contains elements of variable consideration, the entity will estimate the amount of variable consideration to which
it will be entitled under the contract. [IFRS 15:50] Variable consideration can arise, for example, as a result of discounts, rebates,
refunds, credits, price concessions, incentives, performance bonuses, penalties or other similar items. Variable consideration is also
present if an entity’s right to consideration is contingent on the occurrence of a future event. [IFRS 15:51]
The standard deals with the uncertainty relating to variable consideration by limiting the amount of variable consideration that can be
recognised. Specifically, variable consideration is only included in the transaction price if, and to the extent that, it is highly probable
that its inclusion will not result in a significant revenue reversal in the future when the uncertainty has been subsequently resolved.
[IFRS 15:56]
However, a different, more restrictive approach is applied in respect of sales or usage-based royalty revenue arising from licences of
intellectual property. Such revenue is recognised only when the underlying sales or usage occur. [IFRS 15:B63]
Step 4: Allocate the transaction price to the performance obligations in the contracts
Where a contract has multiple performance obligations, an entity will allocate the transaction price to the performance obligations in
the contract by reference to their relative standalone selling prices. [IFRS 15:74] If a standalone selling price is not directly observable,
the entity will need to estimate it. IFRS 15 suggests various methods that might be used, including: [IFRS 15:79]
- Adjusted market assessment approach
- Expected cost plus a margin approach
- Residual approach (only permissible in limited circumstances)
Any overall discount compared to the aggregate of standalone selling prices is allocated between performance obligations on a
relative standalone selling price basis. In certain circumstances, it may be appropriate to allocate such a discount to some but not all
of the performance obligations. [IFRS 15:81]
Where consideration is paid in advance or in arrears, the entity will need to consider whether the contract includes a significant
financing arrangement and, if so, adjust for the time value of money. [IFRS 15:60] A practical expedient is available where the interval
between transfer of the promised goods or services and payment by the customer is expected to be less than 12 months. [IFRS 15:63]
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation
Revenue is recognised as control is passed, either over time or at a point in time. [IFRS 15:32]
Control of an asset is defined as the ability to direct the use of and obtain substantially all of the remaining benefits from the asset.
This includes the ability to prevent others from directing the use of and obtaining the benefits from the asset. The benefits related to
the asset are the potential cash flows that may be obtained directly or indirectly. These include, but are not limited to: [IFRS 15:31-33]
- using the asset to produce goods or provide services;
- using the asset to enhance the value of other assets;
- using the asset to settle liabilities or to reduce expenses;
- selling or exchanging the asset;
- pledging the asset to secure a loan; and
- holding the asset.
An entity recognises revenue over time if one of the following criteria is met: [IFRS 15:35]
- the customer simultaneously receives and consumes all of the benefits provided by the entity as the entity performs;
- the entity’s performance creates or enhances an asset that the customer controls as the asset is created; or
- the entity’s performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to
payment for performance completed to date.
If an entity does not satisfy its performance obligation over time, it satisfies it at a point in time. Revenue will therefore be recognised
when control is passed at a certain point in time. Factors that may indicate the point in time at which control passes include, but are
not limited to: [IFRS 15:38]
- the entity has a present right to payment for the asset;
- the customer has legal title to the asset;
- the entity has transferred physical possession of the asset;
- the customer has the significant risks and rewards related to the ownership of the asset; and
- the customer has accepted the asset.
Contract costs
The incremental costs of obtaining a contract must be recognised as an asset if the entity expects to recover those costs. However,
those incremental costs are limited to the costs that the entity would not have incurred if the contract had not been successfully
obtained (e.g. ‘success fees’ paid to agents). A practical expedient is available, allowing the incremental costs of obtaining a contract
to be expensed if the associated amortisation period would be 12 months or less. [IFRS 15:91-94]
Costs incurred to fulfil a contract are recognised as an asset if and only if all of the following criteria are met: [IFRS 15:95]
- the costs relate directly to a contract (or a specific anticipated contract);
- the costs generate or enhance resources of the entity that will be used in satisfying performance obligations in the future; and
- the costs are expected to be recovered.
These include costs such as direct labour, direct materials, and the allocation of overheads that relate directly to the contract. [IFRS
15:97]
The asset recognised in respect of the costs to obtain or fulfil a contract is amortised on a systematic basis that is consistent with the
pattern of transfer of the goods or services to which the asset relates. [IFRS 15:99]
Further useful implementation guidance in relation to applying IFRS 15 These topics include:
- Performance obligations satisfied over time
- Methods for measuring progress towards complete satisfaction of a performance obligation
- Sale with a right of return
- Warranties
- Principal versus agent considerations
- Customer options for additional goods or services
- Customers’ unexercised rights
- Non-refundable upfront fees
- Licensing
- Repurchase arrangements
- Consignment arrangements
- Bill-and-hold arrangements
- Customer acceptance
- Disclosures of disaggregation of revenue
These topics should be considered carefully when applying IFRS 15.
Presentation in financial statements
Contracts with customers will be presented in an entity’s statement of financial position as a contract liability, a contract asset, or a
receivable, depending on the relationship between the entity’s performance and the customer’s payment. [IFRS 15:105]
A contract liability is presented in the statement of financial position where a customer has paid an amount of consideration prior to
the entity performing by transferring the related good or service to the customer. [IFRS 15:106]
Where the entity has performed by transferring a good or service to the customer and the customer has not yet paid the related
consideration, a contract asset or a receivable is presented in the statement of financial position, depending on the nature of the
entity’s right to consideration. A contract asset is recognised when the entity’s right to consideration is conditional on something
other than the passage of time, for example future performance of the entity. A receivable is recognised when the entity’s right to
consideration is unconditional except for the passage of time.
Contract assets and receivables shall be accounted for in accordance with IFRS 9. Any impairment relating to contracts with customers
should be measured, presented and disclosed in accordance with IFRS 9. Any difference between the initial recognition of a receivable
and the corresponding amount of revenue recognised should also be presented as an expense, for example, an impairment loss. [IFRS
15:107-108]
Disclosure
The disclosure objective stated in IFRS 15 is for an entity to disclose sufficient information to enable users of financial statements to
understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Therefore,
an entity should disclose qualitative and quantitative information about all of the following: [IFRS 15:110]
- its contracts with customers;
- the significant judgments, and changes in the judgments, made in applying the guidance to those contracts; and
- any assets recognised from the costs to obtain or fulfil a contract with a customer.
Entities will need to consider the level of detail necessary to satisfy the disclosure objective and how much emphasis to place on each
of the requirements. An entity should aggregate or disaggregate disclosures to ensure that useful information is not obscured. [IFRS
15:111]
In order to achieve the disclosure objective stated above, the Standard introduces a number of new disclosure requirements. Further
detail about these specific requirements can be found at IFRS 15:113-129.
CHAPTER10. IAS37–ProvisionsContingentliabilitiesand contingent assets
Overview
IAS 37 Provisions, Contingent Liabilities and Contingent Assets outlines the accounting for provisions (liabilities of uncertain timing or
amount), together with contingent assets (possible assets) and contingent liabilities (possible obligations and present obligations that
are not probable or not reliably measurable). Provisions are measured at the best estimate (including risks and uncertainties) of the
expenditure required to settle the present obligation, and reflects the present value of expenditures required to settle the obligation
where the time value of money is material.
IAS 37 was issued in September 1998 and is operative for periods beginning on or after 1 July 1999.
The objective of IAS 37 is to ensure that appropriate recognition criteria and measurement bases are applied to provisions, contingent
liabilities and contingent assets and that sufficient information is disclosed in the notes to the financial statements to enable users to
understand their nature, timing and amount. The key principle established by the Standard is that a provision should be recognised
only when there is a liability i.e. a present obligation resulting from past events. The Standard thus aims to ensure that only genuine
obligations are dealt with in the financial statements – planned future expenditure, even where authorised by the board of directors
or equivalent governing body, is excluded from recognition.
Scope
IAS 37 excludes obligations and contingencies arising from: [IAS 37.1-6]
- financial instruments that are in the scope of IAS 39 Financial Instruments: Recognition and Measurement (or IFRS 9 Financial
Instruments)
- non-onerous executory contracts
- insurance contracts (see IFRS 4 Insurance Contracts), but IAS 37 does apply to other provisions, contingent liabilities and contingent
assets of an insurer
- items covered by another IFRS. For example, IAS 11 Construction Contracts applies to obligations arising under such contracts; IAS 12
Income Taxes applies to obligations for current or deferred income taxes; IAS 17 Leases applies to lease obligations; and IAS 19
Employee Benefits applies to pension and other employee benefit obligations.
Keydefinitions
Provision: a liability of uncertain timing or amount
Liability: i) a possible obligation depending on whether some uncertain future event occurs, or; ii) a present obligation but payment is
not probable or the amount cannot be measured reliably
Contingent asset: i) a possible asset that arises from past events, and; ii) 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.
Recognition of a provision: an entity must recognize a provision if, and only if: i) a present obligation (legal or constructive) has arisen
as a result of a past event (the obligating event); ii) payment is probable ('more likely than not'), and; iii) the amount can be estimated
reliably
An obligating event is an event that creates a legal or constructive obligation and, therefore, results in an entity having no realistic
alternative but to settle the obligation. [IAS 37.10]
A constructive obligation arises if past practice creates a valid expectation on the part of a third party, for example, a retail store that
has a long-standing policy of allowing customers to return merchandise within, say, a 30-day period. [IAS 37.10]
A possible obligation (a contingent liability) is disclosed but not accrued. However, disclosure is not required if payment is remote. [IAS
37.86]
Measurement of provisions
The amount recognised as a provision should be the best estimate of the expenditure required to settle the present obligation at the
balance sheet date, that is, the amount that an entity would rationally pay to settle the obligation at the balance sheet date or to
transfer it to a third party. [IAS 37.36] This means:
- Provisions for one-off events (restructuring, environmental clean-up, settlement of a lawsuit) are measured at the most likely
amount. [IAS 37.40]
- Provisions for large populations of events (warranties, customer refunds) are measured at a probability-weighted expected value.
[IAS 37.39]
- Both measurements are at discounted present value using a pre-tax discount rate that reflects the current market assessments of
the time value of money and the risks specific to the liability. [IAS 37.45 and 37.47]
In reaching its best estimate, the entity should take into account the risks and uncertainties that surround the underlying events. [IAS
37.42]
If some or all of the expenditure required to settle a provision is expected to be reimbursed by another party, the reimbursement
should be recognised as a separate asset, and not as a reduction of the required provision, when, and only when, it is virtually certain
that reimbursement will be received if the entity settles the obligation. The amount recognised should not exceed the amount of the
provision. [IAS 37.53]
In measuring a provision consider future events as follows:
- forecast reasonable changes in applying existing technology [IAS 37.49]
- ignore possible gains on sale of assets [IAS 37.51]
- consider changes in legislation only if virtually certain to be enacted [IAS 37.50]
Restructuring
A restructuring is:
- Sale or termination of a line of business;
- Closure of business locations;
- Changes in management structure;
- Fundamental reorganizations.
Contingent liabilities
Since there is common ground as regards liabilities that are uncertain, IAS 37 also deals with contingencies. It requires that entities
should not recognise contingent liabilities – but should disclose them, unless the possibility of an outflow of economic resources is
remote. [IAS 37.86]
Contingent assets
Contingent assets should not be recognised – but should be disclosed where an inflow of economic benefits is probable. When the
realisation of income is virtually certain, then the related asset is not a contingent asset and its recognition is appropriate. [IAS 37.3135]
CHAPTER11. IFRS9–Financia lInstruments
Overview
IFRS 9 Financial Instruments issued on 24 July 2014 is the IASB's replacement of IAS 39 Financial Instruments: Recognition and
Measurement. The Standard includes requirements for recognition and measurement, impairment, derecognition and general hedge
accounting. The IASB completed its project to replace IAS 39 in phases, adding to the standard as it completed each phase.
The version of IFRS 9 issued in 2014 supersedes all previous versions and is mandatorily effective for periods beginning on or after 1
January 2018 with early adoption permitted (subject to local endorsement requirements). For a limited period, previous versions of
IFRS 9 may be adopted early if not already done so provided the relevant date of initial application is before 1 February 2015.
IFRS 9 does not replace the requirements for portfolio fair value hedge accounting for interest rate risk (often referred to as the
‘macro hedge accounting’ requirements) since this phase of the project was separated from the IFRS 9 project due to the longer term
nature of the macro hedging project which is currently at the discussion paper phase of the due process. In April 2014, the IASB
published a Discussion Paper Accounting for Dynamic Risk management: a Portfolio Revaluation Approach to Macro Hedging.
Consequently, the exception in IAS 39 for a fair value hedge of an interest rate exposure of a portfolio of financial assets or financial
liabilities continues to apply.
General IFRS9
Initial measurement of financial instruments
All financial instruments are initially measured at 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. [IFRS 9, paragraph 5.1.1]
Recognition exemptions
IFRS 9 divides all financial assets that are currently in the scope of IAS 39 into two classifications - those measured at amortised cost
and those measured at fair value.
Where assets are measured at fair value, gains and losses are either recognised entirely in profit or loss (fair value through profit or
loss, FVTPL), or recognised in other comprehensive income (fair value through other comprehensive income, FVTOCI).
For debt instruments the FVTOCI classification is mandatory for certain assets unless the fair value option is elected. Whilst for equity
investments, the FVTOCI classification is an election. Furthermore, the requirements for reclassifying gains or losses recognised in
other comprehensive income are different for debt instruments and equity investments.
The classification of a financial asset is made at the time it is initially recognised, namely when the entity becomes a party to the
contractual provisions of the instrument. [IFRS 9, paragraph 4.1.1] If certain conditions are met, the classification of an asset may
subsequently need to be reclassified.
Debt instruments
A debt instrument that meets the following two conditions must be measured at amortised cost (net of any write down for
impairment) unless the asset is designated at FVTPL under the fair value option (see below):
- Business model test: The objective of the entity's business model is to hold the financial asset to collect the contractual cash flows
(rather than to sell the instrument prior to its contractual maturity to realise its fair value changes).
- Cash flow characteristics test: 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.
Assessing the cash flow characteristics also includes an analysis of changes in the timing or in the amount of payments. It is necessary
to assess whether the cash flows before and after the change represent only repayments of the nominal amount and an interest rate
based on them
The right of termination may for example be in accordance with the cash flow condition if, in the case of termination, the only
outstanding payments consist of principal and interest on the principal amount and an appropriate compensation payment where
applicable. In October 2017, the IASB clarified that the compensation payments can also have a negative sign
A debt instrument that meets the following two conditions must be measured at FVTOCI unless the asset is designated at FVTPL under
the fair value option (see below)
- Business model test: The financial asset is held within a business model whose objective is achieved by both collecting contractual
cash flows and selling financial assets.
-Cash flow characteristics test: 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.
All other debt instruments must be measured at fair value through profit or loss (FVTPL). [IFRS 9, paragraph 4.1.4]
Fair value option
Even if an instrument meets the two requirements to be measured at amortised cost or FVTOCI, IFRS 9 contains an option to
designate, at initial recognition, a financial asset as measured at FVTPL 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. [IFRS 9, paragraph 4.1.5]
Equity instruments
All equity investments in scope of IFRS 9 are to be measured at fair value in the statement of financial position, with value changes
recognised in profit or loss, except for those equity investments for which the entity has elected to present value changes in 'other
comprehensive income'. There is no 'cost exception' for unquoted equities.
Other comprehensive income option
If an equity investment is not held for trading, an entity can make an irrevocable election at initial recognition to measure it at FVTOCI
with only dividend income recognised in profit or loss. [IFRS 9, paragraph 5.7.5]
Measurement guidance
Despite the fair value requirement for all equity investments, IFRS 9 contains guidance on when cost may be the best estimate of fair
value and also when it might not be representative of fair value
Subsequent measurement of financial liabilities
IFRS 9 doesn't change the basic accounting model for financial liabilities under IAS 39. Two measurement categories continue to exist:
FVTPL and amortised cost. Financial liabilities held for trading are measured at FVTPL, and all other financial liabilities are measured at
amortised cost unless the fair value option is applied. [IFRS 9, paragraph 4.2.1]
Fair value option
IFRS 9 contains an option to designate a financial liability as measured at FVTPL if [IFRS 9, paragraph 4.2.2]:
- 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, or
- the liability is part or a group of financial liabilities or financial assets and financial liabilities that 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.
A financial liability which does not meet any of these criteria may still be designated as measured at FVTPL when it contains one or
more embedded derivatives that sufficiently modify the cash flows of the liability and are not clearly closely related. [IFRS 9, paragraph
4.3.5]
IFRS 9 requires gains and losses on financial liabilities designated as at FVTPL to be split into the amount of change in fair value
attributable to changes in credit risk of the liability, presented in other comprehensive income, and the remaining amount presented
in profit or loss. The new guidance allows the recognition of the full amount of change in the fair value in profit or loss only if the
presentation of changes in the liability's credit risk in other comprehensive income would create or enlarge an accounting mismatch in
profit or loss. That determination is made at initial recognition and is not reassessed. [IFRS 9, paragraphs 5.7.7-5.7.8]
Amounts presented in other comprehensive income shall not be subsequently transferred to profit or loss, the entity may only
transfer the cumulative gain or loss within equity.
Derecognition of financial assets
The basic premise for the derecognition model in IFRS 9 (carried over from IAS 39) is to determine whether the asset under
consideration for derecognition is: [IFRS 9, paragraph 3.2.2]
- an asset in its entirety or
- specifically identified cash flows from an asset (or a group of similar financial assets) or
- a fully proportionate (pro rata) share of the cash flows from an asset (or a group of similar financial assets). Or
- a fully proportionate (pro rata) share of specifically identified cash flows from a financial asset (or a group of similar financial assets)
Once the asset under consideration for derecognition has been determined, an assessment is made as to whether the asset has been
transferred, and if so, whether the transfer of that asset is subsequently eligible for derecognition.
An asset is transferred if either the entity has transferred the contractual rights to receive the cash flows, or the entity has retained
the contractual rights to receive the cash flows from the asset, but has assumed a contractual obligation to pass those cash flows on
under an arrangement that meets the following three conditions: [IFRS 9, paragraphs 3.2.4-3.2.5]
- the entity has no obligation to pay amounts to the eventual recipient unless it collects equivalent amounts on the original asset
- the entity is prohibited from selling or pledging the original asset (other than as security to the eventual recipient),
- the entity has an obligation to remit those cash flows without material delay.
Once an entity has determined that the asset has been transferred, it then determines whether or not it has transferred substantially
all of the risks and rewards of ownership of the asset. If substantially all the risks and rewards have been transferred, the asset is
derecognised. If substantially all the risks and rewards have been retained, derecognition of the asset is precluded. [IFRS 9, paragraphs
3.2.6(a)- (b)]
If the entity has neither retained nor transferred substantially all of the risks and rewards of the asset, then the entity must assess
whether it has relinquished control of the asset or not. If the entity does not control the asset then derecognition is appropriate;
however if the entity has retained control of the asset, then the entity continues to recognise the asset to the extent to which it has a
continuing involvement in the asset. [IFRS 9, paragraph 3.2.6(c)]
These various derecognition steps are summarised in the decision tree in paragraph B3.2.1
Derecognition of financial liabilities
A financial liability should be removed from the balance sheet when, and only when, it is extinguished, that is, when the obligation
specified in the contract is either discharged or cancelled or expires. [IFRS 9, paragraph 3.3.1] Where there has been an exchange
between an existing borrower and lender of debt instruments with substantially different terms, or there has been a substantial
modification of the terms of an existing financial liability, this transaction is accounted for as an extinguishment of the original
financial liability and the recognition of a new financial liability. A gain or loss from extinguishment of the original financial liability is
recognised in profit or loss. [IFRS 9, paragraphs 3.3.2-3.3.3]
Derivatives
All derivatives in scope of IFRS 9, including those linked to unquoted equity investments, are measured at fair value. Value changes are
recognised in profit or loss unless the entity has elected to apply hedge accounting by designating the derivative as a hedging
instrument in an eligible hedging relationship.
Embedded derivatives
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. 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. [IFRS 9, paragraph 4.3.1]
The embedded derivative concept that existed in IAS 39 has been included in IFRS 9 to apply only to hosts that are not financial assets
within the scope of the Standard. Consequently, embedded derivatives that under IAS 39 would have been separately accounted for
at FVTPL because they were not closely related to the host financial asset will no longer be separated. Instead, the contractual cash
flows of the financial asset are assessed in their entirety, and the asset as a whole is measured at FVTPL if the contractual cash flow
characteristics test is not passed (see above).
The embedded derivative guidance that existed in IAS 39 is included in IFRS 9 to help preparers identify when an embedded derivative
is closely related to a financial liability host contract or a host contract not within the scope of the Standard (e.g. leasing contracts,
insurance contracts, contracts for the purchase or sale of a non-financial items).
Reclassification
For financial assets, reclassification is required between FVTPL, FVTOCI and amortised cost, if and only if the entity's business model
objective for its financial assets changes so its previous model assessment would no longer apply. [IFRS 9, paragraph 4.4.1]
If reclassification is appropriate, it must be done prospectively from the reclassification date which is defined as the first day of the
first reporting period following the change in business model. An entity does not restate any previously recognised gains, losses, or
interest.
IFRS 9 does not allow reclassification:
- for equity investments measured at FVTOCI, or
- where the fair value option has been exercised in any circumstance for a financial assets or financial liability.
Hedge accounting
The hedge accounting requirements in IFRS 9 are optional. If certain eligibility and qualification criteria are met, hedge accounting
allows an entity to reflect risk management activities in the financial statements by matching gains or losses on financial hedging
instruments with losses or gains on the risk exposures they hedge.
The hedge accounting model in IFRS 9 is not designed to accommodate hedging of open, dynamic portfolios. As a result, for a fair
value hedge of interest rate risk of a portfolio of financial assets or liabilities an entity can apply the hedge accounting requirements in
IAS 39 instead of those in IFRS 9. [IFRS 9 paragraph 6.1.3]
In addition when an entity first applies IFRS 9, it may choose as its accounting policy choice to continue to apply the hedge accounting
requirements of IAS 39 instead of the requirements of Chapter 6 of IFRS 9 [IFRS 9 paragraph 7.2.21]
Qualifying criteria for hedge accounting
A hedging relationship qualifies for hedge accounting only if all of the following criteria are met:
- the hedging relationship consists only of eligible hedging instruments and eligible hedged items.
- 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.
- the hedging relationship meets all of the hedge effectiveness requirements (see below) [IFRS 9 paragraph 6.4.1]
Hedging instruments
Only contracts with a party external to the reporting entity may be designated as hedging instruments. [IFRS 9 paragraph 6.2.3]
A hedging instrument may be a derivative (except for some written options) or non-derivative financial instrument measured at FVTPL
unless it is a financial liability designated as at FVTPL for which changes due to credit risk are presented in OCI. For a hedge of foreign
currency risk, the foreign currency risk component of a non-derivative financial instrument, except equity investments designated as
FVTOCI, may be designated as the hedging instrument. [IFRS 9 paragraphs 6.2.1-6.2.2]
IFRS 9 allows a proportion (e.g. 60%) but not a time portion (eg the first 6 years of cash flows of a 10 year instrument) of a hedging
instrument to be designated as the hedging instrument. IFRS 9 also allows only the intrinsic value of an option, or the spot element of
a forward to be designated as the hedging instrument. An entity may also exclude the foreign currency basis spread from a designated
hedging instrument. [IFRS 9 paragraph 6.2.4]
IFRS 9 allows combinations of derivatives and non-derivatives to be designated as the hedging instrument. [IFRS 9 paragraph 6.2.5]
Combinations of purchased and written options do not qualify if they amount to a net written option at the date of designation. [IFRS
9 paragraph 6.2.6]
Hedged item
A hedged item can be a recognised asset or liability, an unrecognised firm commitment, a highly probable forecast transaction or a net
investment in a foreign operation and must be reliably measurable. [IFRS 9 paragraphs 6.3.1-6.3.3]
An aggregated exposure that is a combination of an eligible hedged item as described above and a derivative may be designated as a
hedged item. [IFRS 9 paragraph 6.3.4]
The hedged item must generally be with a party external to the reporting entity, however, as an exception the foreign currency risk of
an intragroup monetary item 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 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. [IFRS 9 paragraphs 6.3.5 -6.3.6]
An entity may designate an item in its entirety or a component of an item as the hedged item. The component may be a risk
component that is separately identifiable and reliably measurable; one or more selected contractual cash flows; or components of a
nominal amount. [IFRS 9 paragraph 6.3.7]
A group of items (including net positions is an eligible hedged item only if:
- it consists of items individually, eligible hedged items;
- the items in the group are managed together on a group basis for risk management purposes; and
- 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:
a) it is a hedge of foreign currency risk; and
b) 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 [IFRS 9 paragraph 6.6.1]
For 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 are presented in a separate line from those affected by the hedged items. [IFRS
9 paragraph 6.6.4]
Accounting for qualifying hedging relationships There are three types of hedging relationships:
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 (or OCI in the case
of an equity instrument designated as at FVTOCI). [IFRS 9 paragraphs 6.5.2(a) and 6.5.3]
For a fair value hedge, the gain or loss on the hedging instrument is recognised in profit or loss (or OCI, if hedging an equity
instrument at FVTOCI and the hedging gain or loss on the hedged item adjusts the carrying amount of the hedged item and is
recognised in profit or loss. However, if the hedged item is an equity instrument at FVTOCI, those amounts remain in OCI. When a
hedged item is an unrecognised firm commitment the cumulative hedging gain or loss is recognised as an asset or a liability with a
corresponding gain or loss recognised in profit or loss. [IFRS 9 paragraph 6.5.8]
If the hedged item is a debt instrument measured at amortised cost or FVTOCI any hedge adjustment is amortised to profit or loss
based on a recalculated effective interest rate. 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. [IFRS 9 paragraph 6.5.10]
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. [IFRS 9 paragraph 6.5.2(b)]
For a cash flow hedge the cash flow hedge reserve in equity is adjusted to the lower of the following (in absolute amounts):
- the cumulative gain or loss on the hedging instrument from inception of the hedge; and
- the cumulative change in fair value of the hedged item from inception of the hedge.
The portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognised in OCI and any
remaining gain or loss is hedge ineffectiveness that is recognised in profit or loss.
If a hedged forecast transaction subsequently results in the recognition of a non-financial item or becomes a firm commitment for
which fair value hedge accounting is applied, the amount that has been accumulated in the cash flow hedge reserve is removed and
included directly in the initial cost or other carrying amount of the asset or the liability. In other cases the amount that has been
accumulated in the cash flow hedge reserve is reclassified to profit or loss in the same period(s) as the hedged cash flows affect profit
or loss. [IFRS 9 paragraph 6.5.11]
When an entity discontinues hedge accounting for a cash flow hedge, if the hedged future cash flows are still expected to occur, the
amount that has been accumulated in the cash flow hedge reserve remains there until the future cash flows occur; if the hedged
future cash flows are no longer expected to occur, that amount is immediately reclassified to profit or loss [IFRS 9 paragraph 6.5.12]
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. [IFRS 9
paragraph 6.5.4]
Hedge of a net investment in a foreign operation (as defined in IAS 21), including a hedge of a monetary item that is accounted for as
part of the net investment, is accounted for similarly to cash flow hedges:
- the portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognised in OCI; and
- the ineffective portion is recognised in profit or loss. [IFRS 9 paragraph 6.5.13]
The cumulative gain or loss on the hedging instrument relating to the effective portion of the hedge is reclassified to profit or loss on
the disposal or partial disposal of the foreign operation. [IFRS 9 paragraph 6.5.14]
Hedge effectiveness requirements
In order to qualify for hedge accounting, the hedge relationship must meet the following effectiveness criteria at the beginning of
each hedged period:
- there is an economic relationship between the hedged item and the hedging instrument;
- the effect of credit risk does not dominate the value changes that result from that economic relationship; and
- the hedge ratio of the hedging relationship is the same as that actually used in the economic hedge [IFRS 9 paragraph 6.4.1(c)]
Rebalancing and discontinuation
If a hedging relationship ceases to meet the hedge effectiveness requirement relating to the hedge ratio but the risk management
objective for that designated hedging relationship remains the same, an entity adjusts the hedge ratio of the hedging relationship (i.e.
rebalances the hedge) so that it meets the qualifying criteria again. [IFRS 9 paragraph 6.5.5]
An entity discontinues hedge accounting prospectively only when the hedging relationship (or a part of a hedging relationship) ceases
to meet the qualifying criteria (after any rebalancing). This includes instances when the hedging instrument expires or is sold,
terminated or exercised. 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). [IFRS 9 paragraph 6.5.6]
Time value options
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, it recognises some or all of the change in the time value in OCI which is later removed or
reclassified from equity as a single amount or on an amortised basis (depending on the nature of the hedged item) and ultimately
recognised in profit or loss. [IFRS 9 paragraph 6.5.15] This reduces profit or loss volatility compared to recognising the change in value
of time value directly in profit or loss.
Forward points and foreign currency basis spreads
When an entity separates the forward points and the spot element of a forward contract and designates as the hedging instrument
only the change in the value of the spot element, or when an entity excludes the foreign currency basis spread from a hedge the
entity may recognise the change in value of the excluded portion in OCI to be later removed or reclassified from equity as a single
amount or on an amortised basis (depending on the nature of the hedged item) and ultimately recognised in profit or loss. [IFRS 9
paragraph 6.5.16] This reduces profit or loss volatility compared to recognising the change in value of forward points or currency basis
spreads directly in profit or loss.
Credit exposure designated at FVTPL
If an entity uses a credit derivative measured at FVTPL to manage the credit risk of a financial instrument (credit exposure) it may
designate all or a proportion of that financial instrument as measured at FVTPL if:
- the name of the credit exposure matches the reference entity of the credit derivative (‘name matching’); and
- 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 IFRS 9 (for example, it can apply to loan commitments that are outside the scope of IFRS 9). The entity may designate that financial
instrument at, or subsequent to, initial recognition, or while it is unrecognised and shall document the designation concurrently. [IFRS
9 paragraph 6.7.1]
If designated after initial recognition, any difference in the previous carrying amount and fair value is recognised immediately in profit
or loss [IFRS 9 paragraph 6.7.2]
An entity discontinues measuring the financial instrument that gave rise to the credit risk at FVTPL if the qualifying criteria are no
longer met and the instrument is not otherwise required to be measured at FVTPL. The fair value at discontinuation becomes its new
carrying amount. [IFRS 9 paragraphs 6.7.3 and 6.7.4]
Impairment
The impairment model in IFRS 9 is based on the premise of providing for expected losses.
Scope
IFRS 9 requires that the same impairment model apply to all of the following:
- Financial assets measured at amortised cost;
- Financial assets mandatorily measured at FVTOCI;
- Loan commitments when there is a present obligation to extend credit (except where these are measured at FVTPL);
- Financial guarantee contracts to which IFRS 9 is applied (except those measured at FVTPL);
- Lease receivables within the scope of IAS 17 Leases; and
- Contract assets within the scope of IFRS 15 Revenue from Contracts with Customers (i.e. rights to consideration following transfer of
goods or services).
General approach
With the exception of purchased or originated credit impaired financial assets (see below), expected credit losses are required to be
measured through a loss allowance at an amount equal to:
- the 12-month expected credit losses (expected credit losses that result from those default events on the financial instrument that
are possible within 12 months after the reporting date); or
- full lifetime expected credit losses (expected credit losses that result from all possible default events over the life of the financial
instrument).
A loss allowance for full lifetime expected credit losses is required for a financial instrument if the credit risk of that financial
instrument has increased significantly since initial recognition, as well as to contract assets or trade receivables that do not constitute
a financing transaction in accordance with IFRS 15. [IFRS 9 paragraphs 5.5.3 and 5.5.15]
Additionally, entities can elect an accounting policy to recognise full lifetime expected losses for all contract assets and/or all trade
receivables that do constitute a financing transaction in accordance with IFRS 15. The same election is also separately permitted for
lease receivables. [IFRS 9 paragraph 5.5.16]
For all other financial instruments, expected credit losses are measured at an amount equal to the 12- month expected credit losses.
[IFRS 9 paragraph 5.5.5]
Significant increase in credit risk
With the exception of purchased or originated credit-impaired financial assets (see below), the loss allowance for financial
instruments is measured at an amount equal to lifetime expected losses if the credit risk of a financial instrument has increased
significantly since initial recognition, unless the credit risk of the financial instrument is low at the reporting date in which case it can
be assumed that credit risk on the financial instrument has not increased significantly since initial recognition. [IFRS 9 paragraphs 5.5.3
and 5.5.10]
The Standard considers credit risk low if there is a low risk of default, the borrower has a strong capacity to meet its contractual cash
flow obligations in the near term and adverse changes in economic and business conditions in the longer term may, but will not
necessarily, reduce the ability of the borrower to fulfil its contractual cash flow obligations. The Standard suggests that ‘investment
grade’ rating might be an indicator for a low credit risk. [IFRS 9 paragraphs B5.5.22 – B5.5.24]
The assessment of whether there has been a significant increase in credit risk is based on an increase in the probability of a default
occurring since initial recognition. Under the Standard, an entity may use various approaches to assess whether credit risk has
increased significantly (provided that the approach is consistent with the requirements). An approach can be consistent with the
requirements even if it does not include an explicit probability of default occurring as an input. The application guidance provides a list
of factors that may assist an entity in making the assessment. Also, whilst in principle the assessment of whether a loss allowance
should be based on lifetime expected credit losses is to be made on an individual basis, some factors or indicators might not be
available at an instrument level. In this case, the entity should perform the assessment on appropriate groups or portions of a
portfolio of financial instruments.
The requirements also contain a rebuttable presumption that the credit risk has increased significantly when contractual payments
are more than 30 days past due. IFRS 9 also requires that (other than for purchased or originated credit impaired financial
instruments) if a significant increase in credit risk that had taken place since initial recognition and has reversed by a subsequent
reporting period (i.e., cumulatively credit risk is not significantly higher than at initial recognition) then the expected credit losses on
the financial instrument revert to being measured based on an amount equal to the 12-month expected credit losses. [IFRS 9
paragraph 5.5.11]
Purchased or originated credit-impaired financial assets
Purchased or originated credit-impaired financial assets are treated differently because the asset is credit-impaired at initial
recognition. For these assets, an entity would recognise changes in lifetime expected losses since initial recognition as a loss allowance
with any changes recognised in profit or loss. Under the requirements, any favourable changes for such assets are an impairment gain
even if the resulting expected cash flows of a financial asset exceed the estimated cash flows on initial recognition. [IFRS 9 paragraphs
5.5.13 – 5.5.14]
Credit-impaired financial asset
Under IFRS 9 a financial asset is credit-impaired when one or more events that have occurred and have a significant impact on the
expected future cash flows of the financial asset. It includes observable data that has come to the attention of the holder of a financial
asset about the following events:
- significant financial difficulty of the issuer or borrower;
- a breach of contract, such as a default or past-due event;
- the lenders for economic or contractual reasons relating to the borrower’s financial difficulty granted the borrower a concession that
would not otherwise be considered;
- it becoming probable that the borrower will enter bankruptcy or other financial reorganisation;
- the disappearance of an active market for the financial asset because of financial difficulties; or
- the purchase or origination of a financial asset at a deep discount that reflects incurred credit losses.
Basis for estimating expected credit losses
Any measurement of expected credit losses under IFRS 9 shall reflect an unbiased and probability- weighted amount that is
determined by evaluating the range of possible outcomes as well as incorporating the time value of money. Also, the entity should
consider reasonable and supportable information about past events, current conditions and reasonable and supportable forecasts of
future economic conditions when measuring expected credit losses. [IFRS 9 paragraph 5.5.17]
The Standard defines expected credit losses as the weighted average of credit losses with the respective risks of a default occurring as
the weightings. [IFRS 9 Appendix A] Whilst an entity does not need to consider every possible scenario, it must consider the risk or
probability that a credit loss occurs by considering the possibility that a credit loss occurs and the possibility that no credit loss occurs,
even if the probability of a credit loss occurring is low. [IFRS 9 paragraph 5.5.18]
In particular, for lifetime expected losses, an entity is required to estimate the risk of a default occurring on the financial instrument
during its expected life. 12-month expected credit losses represent the lifetime cash shortfalls that will result if a default occurs in the
12 months after the reporting date, weighted by the probability of that default occurring.
An entity is required to incorporate reasonable and supportable information (i.e., that which is reasonably available at the reporting
date). Information is reasonably available if obtaining it does not involve undue cost or effort (with information available for financial
reporting purposes qualifying as such).
For applying the model to a loan commitment an entity will consider the risk of a default occurring under the loan to be advanced,
whilst application of the model for financial guarantee contracts an entity considers the risk of a default occurring of the specified
debtor. [IFRS 9 paragraphs B5.5.31 and B5.5.32]
An entity may use practical expedients when estimating expected credit losses if they are consistent with the principles in the
Standard (for example, expected credit losses on trade receivables may be calculated using a provision matrix where a fixed provision
rate applies depending on the number of days that a trade receivable is outstanding). [IFRS 9 paragraph B5.5.35]
To reflect time value, expected losses should be discounted to the reporting date using the effective interest rate of the asset (or an
approximation thereof) that was determined at initial recognition. A “credit-adjusted effective interest” rate should be used for
expected credit losses of purchased or originated credit-impaired financial assets. In contrast to the “effective interest rate”
(calculated using expected cash flows that ignore expected credit losses), the credit-adjusted effective interest rate reflects expected
credit losses of the financial asset. [IFRS 9 paragraphs B5.5.44-45]
Expected credit losses of undrawn loan commitments should be discounted by using the effective interest rate (or an approximation
thereof) that will be applied when recognising the financial asset resulting from the commitment. If the effective interest rate of a
loan commitment cannot be determined, the discount rate should reflect the current market assessment of time value of money and
the risks that are specific to the cash flows but only if, and to the extent that, such risks are not taken into account by adjusting the
discount rate. This approach shall also be used to discount expected credit losses of financial guarantee contracts. [IFRS 9 paragraphs
B5.5.47]
CHAPTER12. IFRS10–Consolidated financial statements
Overview
IFRS 10 Consolidated Financial Statements outlines the requirements for the preparation and presentation of consolidated financial
statements, requiring entities to consolidate entities it controls. Control requires exposure or rights to variable returns and the ability
to affect those returns through power over an investee.
IFRS 10 was issued in May 2011 and applies to annual periods beginning on or after 1 January 2013.
The objective of IFRS 10 is to establish principles for the presentation and preparation of consolidated financial statements when an
entity controls one or more other entities. [IFRS 10:1]
The Standard: [IFRS 10:1]
- requires a parent entity (an entity that controls one or more other entities) to present consolidated financial statements
- defines the principle of control, and establishes control as the basis for consolidation
- set out how to apply the principle of control to identify whether an investor controls an investee and therefore must consolidate the
investee
- sets out the accounting requirements for the preparation of consolidated financial statements
- defines an investment entity and sets out an exception to consolidating particular subsidiaries of an investment entity
Key definitions
Consolidated financial statements: The financial statements of a group in which the assets, liabilities, equity, income, expenses and
cash flows of the parent and its subsidiaries are presented as those of a single economic entity.
Control of an investee: An investor controls an investee when the investor is exposed, or has rights, to variable returns from its
involvement with the investee and has the ability to affect those returns through its power over the investee.
Investment entity: an entity that: i) obtains funds from one or more investors for the purpose of providing those investor(s) with
investment management services; ii) commits to its investor(s) that its business purpose is to invest funds solely for returns from
capital appreciation, investment income, or both, and; iii) measures and evaluates the performance of substantially all of its
investments on a fair value basis.
Parent: An entity that controls one or more entities.
Power: Existing rights that give the current ability to direct the relevant activities.
Protective rights: Rights designed to protect the interest of the party holding those rights without giving that party power over the
entity to which those rights relate.
Relevant activities: Activities of the investee that significantly affect the investee's returns.
Control
An investor determines whether it is a parent by assessing whether it controls one or more investees. An investor considers all
relevant facts and circumstances when assessing whether it controls an investee. An investor controls an investee when it is exposed,
or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power
over the investee. [IFRS 10:5-6; IFRS 10:8]
An investor controls an investee if and only if the investor has all of the following elements: [IFRS 10:7]
- power over the investee, i.e. the investor has existing rights that give it the ability to direct the relevant activities (the activities that
significantly affect the investee's returns)
- exposure, or rights, to variable returns from its involvement with the investee
- the ability to use its power over the investee to affect the amount of the investor's returns.
Power arises from rights. Such rights can be straightforward (e.g. through voting rights) or be complex (e.g. embedded in contractual
arrangements). An investor that holds only protective rights cannot have power over an investee and so cannot control an investee
[IFRS 10:11, IFRS 10:14].
An investor must be exposed, or have rights, to variable returns from its involvement with an investee to control the investee. Such
returns must have the potential to vary as a result of the investee's performance and can be positive, negative, or both. [IFRS 10:15]
A parent must not only have power over an investee and exposure or rights to variable returns from its involvement with the investee,
a parent must also have the ability to use its power over the investee to affect its returns from its involvement with the investee. [IFRS
10:17].
When assessing whether an investor controls an investee an investor with decision-making rights determines whether it acts as
principal or as an agent of other parties. A number of factors are considered in making this assessment. For instance, the
remuneration of the decision-maker is considered in determining whether it is an agent. [IFRS 10:B58, IFRS 10:B60]
Accounting requirements
Preparation of consolidated financial statements
A parent prepares consolidated financial statements using uniform accounting policies for like transactions and other events in similar
circumstances. [IFRS 10:19]
However, a parent need not present consolidated financial statements if it meets all of the following conditions: [IFRS 10:4(a)]
- it is a wholly-owned subsidiary or is a partially-owned subsidiary of another entity and its other owners, including those not
otherwise entitled to vote, have been informed about, and do not object to, the parent not presenting consolidated financial
statements
- its debt or equity instruments are not traded in a public market (a domestic or foreign stock exchange or an over-the-counter
market, including local and regional markets)
- it did not file, nor is it 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
- its ultimate or any intermediate parent of the parent produces financial statements available for public use that comply with IFRSs, in
which subsidiaries are consolidated or are measured at fair value through profit or loss in accordance with IFRS 10.
Investment entities are prohibited from consolidating particular subsidiaries (see further information below).
Furthermore, post-employment benefit plans or other long-term employee benefit plans to which IAS 19 Employee Benefits applies
are not required to apply the requirements of IFRS 10. [IFRS 10:4B]
Consolidation procedures Consolidated financial statements: [IFRS 10:B86]
- combine like items of assets, liabilities, equity, income, expenses and cash flows of the parent with those of its subsidiaries
- offset (eliminate) the carrying amount of the parent's investment in each subsidiary and the parent's portion of equity of each
subsidiary (IFRS 3 Business Combinations explains how to account for any related goodwill)
- eliminate in full intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between entities of
the group (profits or losses resulting from intragroup transactions that are recognised in assets, such as inventory and fixed assets, are
eliminated in full).
A reporting entity includes the income and expenses of a subsidiary in the consolidated financial statements from the date it gains
control until the date when the reporting entity ceases to control the subsidiary. Income and expenses of the subsidiary are based on
the amounts of the assets and liabilities recognised in the consolidated financial statements at the acquisition date. [IFRS 10:B88]
The parent and subsidiaries are required to have the same reporting dates, or consolidation based on additional financial information
prepared by subsidiary, unless impracticable. Where impracticable, the most recent financial statements of the subsidiary are used,
adjusted for the effects of significant transactions or events between the reporting dates of the subsidiary and consolidated financial
statements. The difference between the date of the subsidiary's financial statements and that of the consolidated financial statements
shall be no more than three months [IFRS 10:B92, IFRS 10:B93]
Non-controlling interests (NCIs)
A parent presents non-controlling interests in its consolidated statement of financial position within equity, separately from the equity
of the owners of the parent. [IFRS 10:22]
A reporting entity attributes the profit or loss and each component of other comprehensive income to the owners of the parent and
to the non-controlling interests. The proportion allocated to the parent and non-controlling interests are determined on the basis of
present ownership interests. [IFRS 10:B94, IFRS 10:B89]
The reporting entity also attributes total comprehensive income 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. [IFRS 10:B94]
Changes in ownership interests
Changes in a parent's ownership interest in a subsidiary that do not result in the parent losing control of the subsidiary are equity
transactions (i.e. transactions with owners in their capacity as owners).
When the proportion of the equity held by non-controlling interests changes, the carrying amounts of the controlling and noncontrolling interests area adjusted to reflect the changes in their relative interests in the subsidiary. Any difference between the
amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognised
directly in equity and attributed to the owners of the parent.[IFRS 10:23, IFRS 10:B96]
If a parent loses control of a subsidiary, the parent [IFRS 10:25]:
- derecognises the assets and liabilities of the former subsidiary from the consolidated statement of financial position
- recognises any investment retained in the former subsidiary when control is lost and subsequently accounts for it and for any
amounts owed by or to the former subsidiary in accordance with relevant IFRSs. That retained interest is remeasured and the
remeasured value is regarded as the fair value on initial recognition of a financial asset in accordance with IFRS 9 Financial Instruments
or, when appropriate, the cost on initial recognition of an investment in an associate or joint venture
- recognises the gain or loss associated with the loss of control attributable to the former controlling interest.
If a parent loses control of a subsidiary that does not contain a business in a transaction with an associate or a joint venture gains or
losses resulting from those transactions are recognised in the parent's profit or loss only to the extent of the unrelated investors'
interests in that associate or joint venture.
Investment entities consolidation exemption
IFRS 10 contains special accounting requirements for investment entities. Where an entity meets the definition of an 'investment
entity' (see above), it does not consolidate its subsidiaries, or apply IFRS 3 Business Combinations when it obtains control of another
entity. [IFRS 10:31]
An entity is required to consider all facts and circumstances when assessing whether it is an investment entity, including its purpose
and design. IFRS 10 provides that an investment entity should have the following typical characteristics [IFRS 10:28]:
- it has more than one investment
- it has more than one investor
- it has investors that are not related parties of the entity
- it has ownership interests in the form of equity or similar interests.
The absence of any of these typical characteristics does not necessarily disqualify an entity from being classified as an investment
entity.
An investment entity is required to measure an investment in a subsidiary at fair value through profit or loss in accordance with IFRS 9
Financial Instruments or IAS 39 Financial Instruments: Recognition and Measurement. [IFRS 10:31]
However, an investment entity is still required to consolidate a subsidiary where that subsidiary provides services that relate to the
investment entity’s investment activities. [IFRS 10:32]
Because an investment entity is not required to consolidate its subsidiaries, intragroup related party transactions and outstanding
balances are not eliminated [IAS 24.4, IAS 39.80].
Special requirements apply where an entity becomes, or ceases to be, an investment entity. [IFRS 10:B100-B101]
The exemption from consolidation only applies to the investment entity itself. Accordingly, a parent of an investment entity is
required to consolidate all entities that it controls, including those controlled through an investment entity subsidiary, unless the
parent itself is an investment entity. [IFRS 10:33]
Disclosure
There are no disclosures specified in IFRS 10. Instead, IFRS 12 Disclosure of Interests in Other Entities outlines the disclosures
required.
CHAPTER13. IFRS11–Joint Arrangements
13.1 Overview
IFRS 11 Joint Arrangements outlines the accounting by entities that jointly control an arrangement. Joint control involves the
contractually agreed sharing of control and arrangements subject to joint control are classified as either a joint venture (representing
a share of net assets and equity accounted) or a joint operation (representing rights to assets and obligations for liabilities, accounted
for accordingly).
IFRS 11 was issued in May 2011 and applies to annual reporting periods beginning on or after 1 January 2013.
The core principle of IFRS 11 is that a party to a joint arrangement determines the type of joint arrangement in which it is involved by
assessing its rights and obligations and accounts for those rights and obligations in accordance with that type of joint arrangement.
[IFRS 11:1-2]
Key definitions
Joint arrangement: an arrangement of which two or more parties have joint control.
Joint control: the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant
activities require the unanimous consent of the parties sharing control.
Joint operation: A joint arrangement whereby the parties that have joint control of the arrangement have rights to the assets, and
obligations for the liabilities, relating to the arrangement
Joint venture: A joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the
arrangement
Joint venturer: A party to a joint venture that has joint control of that joint venture
Party to a joint arrangement: An entity that participates in a joint arrangement, regardless of whether that entity has joint control of
the arrangement
Separate vehicle: A separately identifiable financial structure, including separate legal entities or entities recognised by statute,
regardless of whether those entities have a legal personality
Joint arrangements
A joint arrangement is an arrangement of which two or more parties have joint control. A joint arrangement has the following
characteristics:
- the parties are bound by a contractual arrangement, and
- the contractual arrangement gives two or more of those parties joint control of the arrangement.
A joint arrangement is either a joint operation or a joint venture. [IFRS 11:6]
Accounting requirements
Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant
activities require the unanimous consent of the parties sharing control. [IFRS 11:7]
Before assessing whether an entity has joint control over an arrangement, an entity first assesses whether the parties, or a group of
the parties, control the arrangement (in accordance with the definition of control in IFRS 10 Consolidated Financial Statements). [IFRS
11:B5]
After concluding that all the parties, or a group of the parties, control the arrangement collectively, an entity shall assess whether it
has joint control of the arrangement. Joint control exists only when decisions about the relevant activities require the unanimous
consent of the parties that collectively control the arrangement. [IFRS 11:B6]
The requirement for unanimous consent means that any party with joint control of the arrangement can prevent any of the other
parties, or a group of the parties, from making unilateral decisions (about the relevant activities) without its consent. [IFRS 11:B9]
Types of joint arrangements
Joint arrangements are either joint operations or joint ventures:
- A joint operation is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the assets, and
obligations for the liabilities, relating to the arrangement. Those parties are called joint operators. [IFRS 11:15]
- A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of
the arrangement. Those parties are called joint venturers. [IFRS 11:16]
Classifying join tarrangements
The classification of a joint arrangement as a joint operation or a joint venture depends upon the rights and obligations of the parties
to the arrangement. An entity determines the type of joint arrangement in which it is involved by considering the structure and form
of the arrangement, the terms agreed by the parties in the contractual arrangement and other facts and circumstances. [IFRS 11:6,
IFRS 11:14, IFRS 11:17]
Regardless of the purpose, structure or form of the arrangement, the classification of joint arrangements depends upon the parties'
rights and obligations arising from the arrangement. [IFRS 11:B14; IFRS 11:B15]
A joint arrangement in which the assets and liabilities relating to the arrangement are held in a separate vehicle can be either a joint
venture or a joint operation. [IFRS 11:B19]
A joint arrangement that is not structured through a separate vehicle is a joint operation. In such cases, the contractual arrangement
establishes the parties' rights to the assets, and obligations for the liabilities, relating to the arrangement, and the parties' rights to the
corresponding revenues and obligations for the corresponding expenses. [IFRS 11:B16]
Financial statements of parties to a joint arrangement
Joint operations
A joint operator recognizes in relation to its interest in a joint operation:
- its assets, including its share of any assets held jointly;
- its liabilities, including its share of any liabilities incurred jointly;
- its revenue from the sale of its share of the output of the joint operation;
- its share of the revenue from the sale of the output by the joint operation; and
- its expenses, including its share of any expenses incurred jointly.
A joint operator accounts for the assets, liabilities, revenues and expenses relating to its involvement in a joint operation in
accordance with the relevant IFRSs. [IFRS 11:21]
The acquirer of an interest in a joint operation in which the activity constitutes a business, as defined in IFRS 3 Business Combinations,
is required to apply all of the principles on business combinations accounting in IFRS 3 and other IFRSs with the exception of those
principles that conflict with the guidance in IFRS 11. [IFRS 11:21A] These requirements apply both to the initial acquisition of an
interest in a joint operation, and the acquisition of an additional interest in a joint operation (in the latter case, previously held
interests are not remeasured). [IFRS 11:B33C]
A party that participates in, but does not have joint control of, a joint operation shall also account for its interest in the arrangement in
accordance with the above if that party has rights to the assets, and obligations for the liabilities, relating to the joint operation. [IFRS
11:23]
Joint ventures
A joint venturer recognises its interest in a joint venture as an investment and shall account for that investment using the equity
method in accordance with IAS 28 Investments in Associates and Joint Ventures unless the entity is exempted from applying the
equity method as specified in that standard. [IFRS 11:24]
A party that participates in, but does not have joint control of, a joint venture accounts for its interest in the arrangement in
accordance with IFRS 9 Financial Instruments unless it has significant influence over the joint venture, in which case it accounts for it
in accordance with IAS 28 (as amended in 2011). [IFRS 11:25]
Separate Financial statements
The accounting for joint arrangements in an entity's separate financial statements depends on the involvement of the entity in that
joint arrangement and the type of the joint arrangement:
- If the entity is a joint operator or joint venturer it shall account for its interest in
a) a joint operation in accordance with paragraphs 20-22;
b) a joint venture in accordance with paragraph 10 of IAS 27 Separate Financial Statements. [IFRS 11:26]
- If the entity is a party that participates in, but does not have joint control of, a joint arrangement shall account for its interest in:
a) a joint operation in accordance with paragraphs 23;
b) a joint venture in accordance with IFRS 9, unless the entity has significant influence over the joint venture, in which case it shall
apply paragraph 10 of IAS 27 (as amended in 2011). [IFRS 11:27]
Disclosure
There are no disclosures specified in IFRS 11. Instead, IFRS 12 Disclosure of Interests in Other Entities outlines the disclosures
required.
CHAPTER14. IAS28–Investments in Associates and JV
Overview
IAS 28 Investments in Associates and Joint Ventures (as amended in 2011) outlines how to apply, with certain limited exceptions, the
equity method to investments in associates and joint ventures. The standard also defines an associate by reference to the concept of
"significant influence", which requires power to participate in financial and operating policy decisions of an investee (but not joint
control or control of those polices).
IAS 28 was reissued in May 2011 and applies to annual periods beginning on or after 1 January 2013.
The objective of IAS 28 (as amended in 2011) is to prescribe the accounting for investments in associates and to set out the
requirements for the application of the equity method when accounting for investments in associates and joint ventures. [IAS
28(2011).1]
IAS 28 applies to all entities that are investors with joint control of, or significant influence over, an investee (associate or joint
venture). [IAS 28(2011).2]
Key definitions
Associate: An entity over which the investor has significant influence
Significant influence: The power to participate in the financial and operating policy decisions of the investee but is not control or joint
control of those policies
Joint arrangement: An arrangement of which two or more parties have joint control
Joint control: The contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant
activities require the unanimous consent of the parties sharing control
Joint venture: A joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the
arrangement
Joint venture: A party to a joint venture that has joint control of that joint venture
Equity method: A method of accounting whereby the investment is initially recognised at cost and adjusted thereafter for the postacquisition change in the investor's share of the investee's net assets. The investor's profit or loss includes its share of the investee's
profit or loss and the investor's other comprehensive income includes its share of the investee's other comprehensive income.
Significant influence
Where an entity holds 20% or more of the voting power (directly or through subsidiaries) on an investee, it will be presumed the
investor has significant influence unless it can be clearly demonstrated that this is not the case. If the holding is less than 20%, the
entity will be presumed not to have significant influence unless such influence can be clearly demonstrated. A substantial or majority
ownership by another investor does not necessarily preclude an entity from having significant influence. [IAS 28(2011).5]
The existence of significant influence by an entity is usually evidenced in one or more of the following ways: [IAS 28(2011).6]
- representation on the board of directors or equivalent governing body of the investee;
- participation in the policy-making process, including participation in decisions about dividends or other distributions;
- material transactions between the entity and the investee;
- interchange of managerial personnel; or
- provision of essential technical information
The existence and effect of potential voting rights that are currently exercisable or convertible, including potential voting rights held
by other entities, are considered when assessing whether an entity has significant influence. In assessing whether potential voting
rights contribute to significant influence, the entity examines all facts and circumstances that affect potential rights [IAS 28(2011).7,
IAS 28(2011).8]
An entity loses significant influence over an investee when it loses the power to participate in the financial and operating policy
decisions of that investee. The loss of significant influence can occur with or without a change in absolute or relative ownership levels.
[IAS 28(2011).9]
The equity method of accounting
Basic principle. Under the equity method, on initial recognition the investment in an associate or a joint venture is recognised at cost,
and the carrying amount is increased or decreased to recognise the investor's share of the profit or loss of the investee after the date
of acquisition. [IAS 28(2011).10]
Distributions and other adjustments to carrying amount. The investor's share of the investee's profit or loss is recognised in the
investor's profit or loss. Distributions received from an investee reduce the carrying amount of the investment. Adjustments to the
carrying amount may also be necessary for changes in the investor's proportionate interest in the investee arising from changes in the
investee's other comprehensive income (e.g. to account for changes arising from revaluations of property, plant and equipment and
foreign currency translations.) [IAS 28(2011).10]
Potential voting rights. An entity's interest in an associate or a joint venture is determined solely on the basis of existing ownership
interests and, generally, does not reflect the possible exercise or conversion of potential voting rights and other derivative
instruments. [IAS 28(2011).12]
Interaction with IFRS 9. IFRS 9 Financial Instruments does not apply to interests in associates and joint ventures that are accounted for
using the equity method. An entity applies IFRS 9, including its impairment requirements, to long-term interests in an associate or
joint venture that form part of the net investment in the associate or joint venture but to which the equity method is not applied.
Instruments containing potential voting rights in an associate or a joint venture are accounted for in accordance with IFRS 9, unless
they currently give access to the returns associated with an ownership interest in an associate or a joint venture. [IAS 28(2011).1414A]
Classification as non-current asset. An investment in an associate or a joint venture is generally classified as non-current asset, unless
it is classified as held for sale in accordance with IFRS 5 Non- current Assets Held for Sale and Discontinued Operations. [IAS
28(2011).15]
Application of the equity method of accounting
Basic principle. In its consolidated financial statements, an investor uses the equity method of accounting for investments in
associates and joint ventures. [IAS 28(2011).16] Many of the procedures that are appropriate for the application of the equity method
are similar to the consolidation procedures described in IFRS 10. Furthermore, the concepts underlying the procedures used in
accounting for the acquisition of a subsidiary are also adopted in accounting for the acquisition of an investment in an associate or a
joint venture. [IAS 28.(2011).26]
Exemptions from applying the equity method. An entity is exempt from applying the equity method if the investment meets one of
the following conditions:
- The entity is a parent that is exempt from preparing consolidated financial statements under IFRS 10 Consolidated Financial
Statementsor or if all of the following four conditions are met (in which case the entity need not apply the equity method): [IAS
28(2011).17]
a) the entity is a wholly-owned subsidiary, or is a partially-owned subsidiary of another entity and its other owners, including those
not otherwise entitled to vote, have been informed about, and do not object to, the investor not applying the equity method
b) the investor or joint venturer's debt or equity instruments are not traded in a public market
c) the entity did not file, nor is it 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
d) the ultimate or any intermediate parent of the parent produces financial statements available for public use that comply with
IFRSs, in which subsidiaries are consolidated or are measured at fair value through profit or loss in accordance with IFRS 10.
- When an investment in an associate or a joint venture is held by, or is held indirectly through, an entity that is a venture capital
organisation, or a mutual fund, unit trust and similar entities including investment-linked insurance funds, the entity may elect to
measure investments in those associates and joint ventures at fair value through profit or loss in accordance with IFRS 9. The election
is made separately for each associate or joint venture on initial recognition. [IAS 28(2011).18] When an entity has an investment in an
associate, a portion of which is held indirectly through a venture capital organisation, or a mutual fund, unit trust and similar entities
including investment-linked insurance funds, the entity may elect to measure that portion of the investment in the associate at fair
value through profit or loss in accordance with IFRS 9 regardless of whether the venture capital organisation, or the mutual fund, unit
trust and similar entities including investment-linked insurance funds, has significant influence over that portion of the investment. If
the entity makes that election, the entity shall apply the equity method to any remaining portion of its investment in an associate that
is not held through a venture capital organisation, or a mutual fund, unit trust and similar entities including investment-linked
insurance funds. [IAS 28(2011).19]
Classification as held for sale. When the investment, or portion of an investment, meets the criteria to be classified as held for sale,
the portion so classified is accounted for in accordance with IFRS 5. Any remaining portion is accounted for using the equity method
until the time of disposal, at which time the retained investment is accounted under IFRS 9, unless the retained interest continues to
be an associate or joint venture. [IAS 28(2011).20]
Discontinuing the equity method. Use of the equity method should cease from the date that significant influence or joint control
ceases: [IAS 28(2011).22]
- If the investment becomes a subsidiary, the entity accounts for its investment in accordance with IFRS 3 Business Combinations and
IFRS 10
- If the retained interest is a financial asset, it is measured at fair value and subsequently accounted for under IFRS 9
- Any amounts recognised in other comprehensive income in relation to the investment in the associate or joint venture are
accounted for on the same basis as if the investee had directly disposed of the related assets or liabilities (which may require
reclassification to profit or loss)
- If an investment in an associate becomes an investment in a joint venture (or vice versa), the entity continues to apply the equity
method and does not remeasure the retained interest. [IAS 28(2011).24]
Changes in ownership interests. If an entity's interest in an associate or joint venture is reduced, but the equity method is continued
to be applied, the entity reclassifies to profit or loss the proportion of the gain or loss previously recognised in other comprehensive
income relative to that reduction in ownership interest. [IAS 28(2011).25]
Equity method procedures
Transactions with associates or joint ventures. Profits and losses resulting from upstream (associate to investor, or joint venture to
joint venturer) and downstream (investor to associate, or joint venturer to joint venture) transactions are eliminated to the extent of
the investor's interest in the associate or joint venture. However, unrealised losses are not eliminated to the extent that the
transaction provides evidence of a reduction in the net realisable value or in the recoverable amount of the assets transferred.
Contributions of non-monetary assets to an associate or joint venture in exchange for an equity interest in the associate or joint
venture are also accounted for in accordance with these requirements. [IAS 28(2011).28-30]
Initial accounting. An investment is accounted for using the equity method from the date on which it becomes an associate or a joint
venture. On acquisition, any difference between the cost of the investment and the entity’s share of the net fair value of the
investee's identifiable assets and liabilities in case of goodwill is included in the carrying amount of the investment (amortisation not
permitted) and any excess of the entity's share of the net fair value of the investee's identifiable assets and liabilities over the cost of
the investment is included as income in the determination of the entity's share of the associate or joint venture’s profit or loss in the
period in which the investment is acquired. Adjustments to the entity's share of the associate's or joint venture's profit or loss after
acquisition are made, for example, for depreciation of the depreciable assets based on their fair values at the acquisition date or for
impairment losses such as for goodwill or property, plant and equipment. [IAS 28(2011).32]
Date of financial statements. In applying the equity method, the investor or joint venturer should use the financial statements of the
associate or joint venture as of the same date as the financial statements of the investor or joint venturer unless it is impracticable to
do so. If it is impracticable, the most recent available financial statements of the associate or joint venture should be used, with
adjustments made for the effects of any significant transactions or events occurring between the accounting period ends. However,
the difference between the reporting date of the associate and that of the investor cannot be longer than three months. [IAS
28(2011).33, IAS 28(2011).34]
Accounting policies. If the associate or joint venture uses accounting policies that differ from those of the investor, the associate or
joint venture's financial statements are adjusted to reflect the investor's accounting policies for the purpose of applying the equity
method. [IAS 28(2011).35]
Application of the equity method by a non-investment entity investor to an investment entity investee. When applying the equity
method to an associate or a joint venture, a non-investment entity investor in an investment entity may retain the fair value
measurement applied by the associate or joint venture to its interests in subsidiaries. The election is made separately for each
associate or joint venture.[IAS 28(2011).36A]
Losses in excess of investment. If an investor's or joint venturer's share of losses of an associate or joint venture equals or exceeds its
interest in the associate or joint venture, the investor or joint venturer discontinues recognising its share of further losses. The interest
in an associate or joint venture is the carrying amount of the investment in the associate or joint venture under the equity method
together with any long-term interests that, in substance, form part of the investor or joint venturer's net investment in the associate
or joint venture. After the investor or joint venturer's interest is reduced to zero, a liability is recognised only to the extent that the
investor or joint venturer has incurred legal or constructive obligations or made payments on behalf of the associate. If the associate
or joint venture subsequently reports profits, the investor or joint venturer resumes recognising its share of those profits only after its
share of the profits equals the share of losses not recognised. [IAS 28(2011).38, IAS 28(2011).39]
Disclosure
There are no disclosures specified in IAS 28. Instead, IFRS 12 Disclosure of Interests in Other Entities outlines the disclosures required
for entities with joint control of, or significant influence over, an investee.
CHAPTER15. IFRS3–BC
Overview
IFRS 3 Business Combinations outlines the accounting when an acquirer obtains control of a business (e.g. an acquisition or merger).
Such business combinations are accounted for using the 'acquisition method', which generally requires assets acquired and liabilities
assumed to be measured at their fair values at the acquisition date.
A revised version of IFRS 3 was issued in January 2008 and applies to business combinations occurring in an entity's first annual period
beginning on or after 1 July 2009.
IFRS 3 (2008) seeks to enhance the relevance, reliability and comparability of information provided about business combinations (e.g.
acquisitions and mergers) and their effects. It sets out the principles on the recognition and measurement of acquired assets and
liabilities, the determination of goodwill and the necessary disclosures.
IFRS 3 (2008) resulted from a joint project with the US Financial Accounting Standards Board (FASB) and replaced IFRS 3 (2004). FASB
issued a similar standard in December 2007 (SFAS 141(R)). The revisions result in a high degree of convergence between IFRSs and US
GAAP in the accounting for business combinations, although some potentially significant differences remain.
Scope
IFRS 3 must be applied when accounting for business combinations, but does not apply to:
- The formation of a joint venture;
- The acquisition of an asset or group of asset that is not a business, although general guidance is provided on how such transaction
should be accounted for;
- Combinations of entities or business under common control;
- Acquisitions by an investment entity of a subsidiary that is required to be measured at fair value through profit or loss under IFRS 10
Consolidated Financial Statements.
Determining whether a transaction is a business combination
IFRS 3 provides additional guidance on determining whether a transaction meets the definition of a business combination, and so
accounted for in accordance with its requirements. This guidance includes:
- Business combinations can occur in various ways, such as by transferring cash, incurring liabilities, issuing equity instruments (or any
combination thereof), or by not issuing consideration at all (i.e. by contract alone) [IFRS 3.B5]
- Business combinations can be structured in various ways to satisfy legal, taxation or other objectives, including one entity becoming
a subsidiary of another, the transfer of net assets from one entity to another or to a new entity [IFRS 3.B6]
- The business combination must involve the acquisition of a business, which generally has three elements: [IFRS 3.B7]
a) Inputs – an economic resource (e.g. non-current assets, intellectual property) that creates outputs when one or more processes are
applied to it
b) Process – a system, standard, protocol, convention or rule that when applied to an input or inputs, creates outputs (e.g. strategic
management, operational processes, resource management)
c) Output – the result of inputs and processes applied to those inputs
Key definitions
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 [IFRS 3]
Business: An integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing goods
or services to customers, generating investment income (such as dividends or interest) or generating other income from ordinary
activities.
Acquisition date: the date on which the acquirer obtains control of the acquiree.
Acquirer: the entity that obtains control of the acquiree.
Acquiree: the business or business that the acquirer obtains control of in a business combination.
Method of accounting for business combinations
Acquisition method
The acquisition method (called the 'purchase method' in the 2004 version of IFRS 3) is used for all business combinations. [IFRS 3.4]
Steps in applying the acquisition method are:
a) Identification of the “acquirer”
b) Determination of the “acquisition date”
c) Recognition and measurement of the identifiable assets acquired, the liabilities assumed and any non-controlling interest (NCI,
formerly called minority interest) in the acquire
d) Recognition and measurement of goodwill or a gain from a bargain purchase
Identifying an acquirer
The guidance in IFRS 10 Consolidated Financial Statements is used to identify an acquirer in a business combination, i.e. the entity that
obtains 'control' of the acquiree. [IFRS 3.7]
If the guidance in IFRS 10 does not clearly indicate which of the combining entities is an acquirer, IFRS 3 provides additional guidance
which is then considered:
- The acquirer is usually the entity that transfers cash or other assets where the business combination is effected in this manner [IFRS
3.B14]
- The acquirer is usually, but not always, the entity issuing equity interests where the transaction is effected in this manner, however
the entity also considers other pertinent facts and circumstances including: [IFRS 3.B15]
a) relative voting rights in the combined entity after the business combination
b) the existence of any large minority interest if no other owner or group of owners has a significant voting interest
c) the composition of the governing body and senior management of the combined entity
d) the terms on which equity interests are exchanged
- The acquirer is usually the entity with the largest relative size (assets, revenues or profit) [IFRS 3.B16]
- For business combinations involving multiple entities, consideration is given to the entity initiating the combination, and the relative
sizes of the combining entities. [IFRS 3.B17]
Acquisition date
An acquirer considers all pertinent facts and circumstances when determining the acquisition date, i.e. the date on which it obtains
control of the acquiree. The acquisition date may be a date that is earlier or later than the closing date. [IFRS 3.8-9]
IFRS 3 does not provide detailed guidance on the determination of the acquisition date and the date identified should reflect all
relevant facts and circumstances. Considerations might include, among others, the date a public offer becomes unconditional (with a
controlling interest acquired), when the acquirer can effect change in the board of directors of the acquiree, the date of acceptance of
an unconditional offer, when the acquirer starts directing the acquiree's operating and financing policies, or the date competition or
other authorities provide necessarily clearances.
Acquired assets and liabilities
IFRS 3 establishes the following principles in relation to the recognition and measurement of items arising in a business combination:
- Recognition principle. Identifiable assets acquired, liabilities assumed, and non-controlling interests in the acquiree, are recognised
separately from goodwill [IFRS 3.10]
- Measurement principle. All assets acquired and liabilities assumed in a business combination are measured at acquisition-date fair
value. [IFRS 3.18]
In applying the principles, an acquirer classifies and designates assets acquired and liabilities assumed on the basis of the contractual
terms, economic conditions, operating and accounting policies and other pertinent conditions existing at the acquisition date. For
example, this might include the identification of derivative financial instruments as hedging instruments, or the separation of
embedded derivatives from host contracts.[IFRS 3.15] However, exceptions are made for lease classification (between operating and
finance leases) and the classification of contracts as insurance contracts, which are classified on the basis of conditions in place at the
inception of the contract. [IFRS 3.17]
Acquired intangible assets must be recognised and measured at fair value in accordance with the principles if it is separable or arises
from other contractual rights, irrespective of whether the acquiree had recognised the asset prior to the business combination
occurring. This is because there is always sufficient information to reliably measure the fair value of these assets. [IAS 38.33- 37] There
is no 'reliable measurement' exception for such assets, as was present under IFRS 3 (2004).
Exceptions to the recognition and measurement principles
The following exceptions to the above principles apply:
- Liabilities and contingent liabilities within the scope of IAS 37 or IFRIC 21 – for transactions and other events within the scope of IAS
37 or IFRIC 21, an acquirer applies IAS 37 or IFRIC 21 (instead of the Conceptual Framework) to identify the liabilities it has assumed in
a business combination [IFRS 3.21A-21B]
- Contingent liabilities and contingent assets – the requirements of IAS 37 Provisions, Contingent Liabilities and Contingent Assets do
not apply to the recognition of contingent liabilities arising in a business combination; an acquirer does not recognise contingent
assets acquired in a business combination [IFRS 3.22-23A]
- Income taxes – the recognition and measurement of income taxes is in accordance with IAS 12 Income Taxes [IFRS 3.24-25]
- Employee benefits – assets and liabilities arising from an acquiree's employee benefits arrangements are recognised and measured
in accordance with IAS 19 Employee Benefits (2011) [IFRS 2.26]
- Indemnification assets - an acquirer recognises indemnification assets at the same time and on the same basis as the indemnified
item [IFRS 3.27-28]
- Reacquired rights – the measurement of reacquired rights is by reference to the remaining contractual term without renewals [IFRS
3.29]
- Share-based payment transactions - these are measured by reference to the method in IFRS 2 Share-based Payment
- Assets held for sale – IFRS 5 Non-current Assets Held for Sale and Discontinued Operations is applied in measuring acquired noncurrent assets and disposal groups classified as held for sale at the acquisition date.
Goodwill
Goodwill is measured as the difference between:
- the aggregate of (i) the value of the consideration transferred (generally at fair value), (ii) the amount of any non-controlling interest
(NCI, see below), and (iii) in a business combination achieved in stages (see below), the acquisition-date fair value of the acquirer's
previously- held equity interest in the acquiree, and
- the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed (measured in accordance with
IFRS 3). [IFRS 3.32]
This can be written in simplified equiation form as follows:
Goodwill = consideration transferred + amount of non-controlling interest + fair value of previous equity interests – net assets
recognized.
If the difference above is negative, the resulting gain is a bargain purchase in profit or loss, which may arise in circumstances such as a
forced seller acting under compulsion. [IFRS 3.34-35] However, before any bargain purchase gain is recognised in profit or loss, the
acquirer is required to undertake a review to ensure the identification of assets and liabilities is complete, and that measurements
appropriately reflect consideration of all available information. [IFRS 3.36]
Choice in the measurement of non-controlling interests (NCI)
IFRS 3 allows an accounting policy choice, available on a transaction by transaction basis, to measure non-controlling interests (NCI)
either at: [IFRS 3.19]
- fair value (sometimes called the full goodwill method), or
- the NCI's proportionate share of net assets of the acquiree.
The choice in accounting policy applies only to present ownership interests in the acquiree that entitle holders to a proportionate
share of the entity's net assets in the event of a liquidation (e.g. outside holdings of an acquiree's ordinary shares). Other components
of non-controlling interests at must be measured at acquisition date fair values or in accordance with other applicable IFRSs (e.g.
share- based payment transactions accounted for under IFRS 2 Share-based Payment). [IFRS 3.19]
Example
P pays 800 to acquire an 80% interest in the ordinary shares of S. The aggregated fair value of 100% of S's identifiable assets and
liabilities (determined in accordance with the requirements of IFRS 3) is 600, and the fair value of the non-controlling interest (the
remaining 20% holding of ordinary shares) is 185.
The measurement of the non-controlling interest, and its resultant impacts on the determination of goodwill, under each option is
illustrated below:
(1) the fair value of the 20% non-controlling interest in S will not necessarily be proportionate to the price paid by P for its 80%
interest, primarily due to any control premium or discount
(2) calculated as 20% of the fair value of the net assets of 600
Business combination achieved in stages (step acquisitions)
Prior to control being obtained, an acquirer accounts for its investment in the equity interests of an acquiree in accordance with the
nature of the investment by applying the relevant standard, e.g. IAS 28 Investments in Associates and Joint Ventures (2011), IFRS 11
Joint Arrangements, IAS 39 Financial Instruments: Recognition and Measurement or IFRS 9 Financial Instruments. As part of
accounting for the business combination, the acquirer remeasures any previously held interest at fair value and takes this amount into
account in the determination of goodwill as noted above [IFRS 3.32] Any resultant gain or loss is recognised in profit or loss or other
comprehensive income as appropriate. [IFRS 3.42]
The accounting treatment of an entity's pre-combination interest in an acquiree is consistent with the view that the obtaining of
control is a significant economic event that triggers a remeasurement. Consistent with this view, all of the assets and liabilities of the
acquiree are fully remeasured in accordance with the requirements of IFRS 3 (generally at fair value). Accordingly, the determination
of goodwill occurs only at the acquisition date. This is different to the accounting for step acquisitions under IFRS 3(2004).
Measurement period
If the initial accounting for a business combination can be determined only provisionally by the end of the first reporting period, the
business combination is accounted for using provisional amounts. Adjustments to provisional amounts, and the recognition of newly
identified asset and liabilities, must be made within the 'measurement period' where they reflect new information obtained about
facts and circumstances that were in existence at the acquisition date. [IFRS 3.45]
NCI based on net assets
NCI based on fair value
Consideration transferred 800
Non-controlling interest 185 (1)
985
Net assets
(600)
Goodwill
800
120 (2)
920
(600)
385
320
The measurement period cannot exceed one year from the acquisition date and no adjustments are permitted after one year except
to correct an error in accordance with IAS 8. [IFRS 3.50]
Related transactions and subsequent accounting
General principles In general:
transactions that are not part of what the acquirer and acquiree (or its former owners) exchanged in the business combination are
identified and accounted for separately from business combination
the recognition and measurement of assets and liabilities arising in a business combination after the initial accounting for the business
combination is dealt with under other relevant standards, e.g. acquired inventory is subsequently accounted under IAS 2 Inventories.
[IFRS 3.54]
When determining whether a particular item is part of the exchange for the acquiree or whether it is separate from the business
combination, an acquirer considers the reason for the transaction, who initiated the transaction and the timing of the transaction.
[IFRS 3.B50]
Contingent consideration
Contingent consideration must be measured at fair value at the time of the business combination and is taken into account in the
determination of goodwill. If the amount of contingent consideration changes as a result of a post-acquisition event (such as meeting
an earnings target), accounting for the change in consideration depends on whether the additional consideration is classified as an
equity instrument or an asset or liability: [IFRS 3.58]
- If the contingent consideration is classified as an equity instrument, the original amount is not remeasured
- If the additional consideration is classified as an asset or liability that is a financial instrument, the contingent consideration is
measured at fair value and gains and losses are recognised in either profit or loss or other comprehensive income in accordance with
IFRS 9 Financial Instruments or IAS 39 Financial Instruments: Recognition and Measurement
- If the additional consideration is not within the scope of IFRS 9 (or IAS 39), it is accounted for in accordance with IAS 37 Provisions,
Contingent Liabilities and Contingent Assets or other IFRSs as appropriate.
Where a change in the fair value of contingent consideration is the result of additional information about facts and circumstances that
existed at the acquisition date, these changes are accounted for as measurement period adjustments if they arise during the
measurement period (see above). [IFRS 3.58]
Acquisition costs
Costs of issuing debt or equity instruments are accounted for under IAS 32 Financial Instruments: Presentation and IAS 39 Financial
Instruments: Recognition and Measurement/IFRS 9 Financial Instruments. All other costs associated with an acquisition must be
expensed, including reimbursements to the acquiree for bearing some of the acquisition costs. Examples of costs to be expensed
include finder's fees; advisory, legal, accounting, valuation and other professional or consulting fees; and general administrative costs,
including the costs of maintaining an internal acquisitions department. [IFRS 3.53]
Pre-existing relationships and reacquired rights
If the acquirer and acquiree were parties to a pre-existing relationship (for instance, the acquirer had granted the acquiree a right to
use its intellectual property), this must must be accounted for separately from the business combination. In most cases, this will lead
to the recognition of a gain or loss for the amount of the consideration transferred to the vendor which effectively represents a
'settlement' of the pre-existing relationship. The amount of the gain or loss is measured as follows:
- for pre-existing non-contractual relationships (for example, a lawsuit): by reference to fair value
- for pre-existing contractual relationships: at the lesser of (a) the favourable/unfavourable contract position and (b) any stated
settlement provisions in the contract available to the counterparty to whom the contract is unfavourable. [IFRS 3.B51-53]
However, where the transaction effectively represents a reacquired right, an intangible asset is recognised and measured on the basis
of the remaining contractual term of the related contract excluding any renewals. The asset is then subsequently amortised over the
remaining contractual term, again excluding any renewals. [IFRS 3.55]
Contingent liabilities
Until a contingent liability is settled, cancelled or expired, a contingent liability that was recognised in the initial accounting for a
business combination is measured at the higher of the amount the liability would be recognised under IAS 37 Provisions, Contingent
Liabilities and Contingent Assets, and the amount less accumulated amortisation under IAS 18 Revenue. [IFRS 3.56]
Contingent payments to employees and shareholders
As part of a business combination, an acquirer may enter into arrangements with selling shareholders or employees. In determining
whether such arrangements are part of the business combination or accounted for separately, the acquirer considers a number of
factors, including whether the arrangement requires continuing employment (and if so, its term), the level or remuneration compared
to other employees, whether payments to shareholder employees are incremental to non- employee shareholders, the relative
number of shares owns, linkages to valuation of the acquiree, how the consideration is calculated, and other agreements and issues.
[IFRS 3.B55]
Where share-based payment arrangements of the acquiree exist and are replaced, the value of such awards must be apportioned
between pre-combination and post-combination service and accounted for accordingly. [IFRS 3.B56-B62B]
Indemnification assets
Indemnification assets recognised at the acquisition date (under the exceptions to the general recognition and measurement
principles noted above) are subsequently measured on the same basis of the indemnified liability or asset, subject to contractual
impacts and collectibility. Indemnification assets are only derecognised when collected, sold or when rights to it are lost. [IFRS 3.57]
Disclosure
Disclosure of information about current business combinations
An acquirer is required to disclose information that enables users of its financial statements to evaluate the nature and financial effect
of a business combination that occurs either during the current reporting period or after the end of the period but before the financial
statements are authorised for issue. [IFRS 3.59]
Among the disclosures required to meet the foregoing objective are the following: [IFRS 3.B64-B66]
- name and a description of the acquire
- acquisition date
-percentage of voting equity interests acquired
- primary reasons for the business combination and a description of how the acquired obtained control of the acquire
- description of the factors that make up the goodwill recognized
- qualitative description of the factors that make up the goodwill recognized, such as expected synergies from combining operations,
intangible assets that do not qualify for separate recognition
- acquisition-date fair value of the total consideration transferred and the acquisition-date fair value of each major class of
consideration
- details of contingent consideration arrangements and indemnification assets
- details of acquired receivables
- the amounts recognised as of the acquisition date for each major class of assets acquired and liabilities assumed
- details of contingent liabilities recognized
- total amount of goodwill that is expected to be deductible for tax purposes
- details about any transactions that are recognised separately from the acquisition of assets and assumption of liabilities in the
business combination
- information about a bargain purchase
- information about the measurement of non-controlling interests
- details about a business combination achieved in stages
- information about the acquiree's revenue and profit or loss
- information about a business combination whose acquisition date is after the end of the reporting period but before the financial
statements are authorised for issue
Disclosure of information about adjustment of past business combinations
An acquirer is required to 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. [IFRS 3.61]