International Financial Reporting Standards
Accounting for
share-based payments,
foreign exchange and
hyperinflation.
Joint World Bank and IFRS Foundation
‘train the trainers’ workshop hosted by the
ECCB, 30 April to 4 May 2012
K
The views expressed in this presentation are those of the
presenter, not necessarily those of the IASB or IFRS Foundation.
not necessarily those of the IASB or IFRS Foundation.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
International Financial Reporting Standards
IFRS 2
Share-based Payment
K
The views expressed in this presentation are those of the
presenter,
not necessarily those of the IASB or IFRS Foundation
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Introduction
3
• Relevant and faithfully represented financial
information about an entity’s share-based
payment transactions is useful to existing and
potential investors, lenders and other creditors
in making decisions about providing resources
to the entity.
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Scope
4
• IFRS 2 applies to transactions in which (IFRS 2.2):
• shares or other equity instruments are issued in return
for goods or services (eg employee share options)
• the payment amount is based on the price of the entity’s
shares (eg share appreciation rights).
• The scope is broader than employee share options
• Exceptions—IFRS 2 does not apply to (IFRS 2.3A–6):
• IFRS 3 applies to shares or other equity instruments
issued as consideration in a business combination
• Assets contributed at the formation of a joint venture as
defined in IFRS 11
• Goods or services acquired under a contract within the
scope of IAS 32 or IAS 39.
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Recognition
5
• Principle—a share-based payment transaction is
recognised when the entity obtains the goods or
services.
• Goods or services received are recognised as
assets or expenses as appropriate.
• The transaction is recognised in equity (if equitysettled) or as a liability (if cash-settled).
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Measurement—equity-settled
6
• Principle—measured at the fair value at
measurement date of the goods or services
received.
• If the FV of the goods or services cannot be
estimated reliably, the fair value of the equity
instruments at grant date is used—only if this is
undeterminable, use of the intrinsic value
measurement method is permitted.
• For arrangements with employees must
measure FV of services with reference to the
FV of the instruments granted.
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Measurement—equity-settled
7
• Non-market vesting conditions—eg service
conditions are not taken into account in
measuring fair value at measurement date.
• Market vesting conditions—eg achieving a
specified share price are taken into account in
measuring fair value at measurement date.
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Measurement—equity-settled
8
Example 1 – non-market vesting condition
Entity grants 1 share to each of its 10 staff.
Vesting period = 2 yrs continuous service.
1 staff is expected to leave before vesting.
Grant date fair value = CU10 per share.
Year 1
Dr Expense CU45
Cr Equity CU45
Calculation: 9 staff x CU10 x 1 ÷ 2 years = CU45
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Measurement—equity-settled
Example 1 continued
Year 2
3 employees left in the vesting period.
Dr Expense CU25
Cr Equity CU25
Calculation: 7 staff x CU10 = 70 total expense
CU70 less 45 recognised in year 1 = CU25
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9
10
Measurement—equity-settled
Example 2 – market vesting conditions
Entity grants 1 share option to each of its
10 staff.
Vesting period = 2 yrs continuous service.
Condition = share price increase from CU5
1/1/20X1 to CU6 at 31/12/20X2.
At 1/1/20X1 fair value (measured taking into
account the market condition) = CU2 per
option.
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Measurement—equity-settled
Example 2 – continued
11
Year 1
Dr Expense CU10
Cr Equity CU10
Calculation: 10 staff x CU2 x 1 ÷ 2 years = CU10
Year 2
Dr Expense CU10
Cr Equity CU10
Calculation (irrespective of outcome of market
condition): 10 staff x CU2 x 2 ÷ 2 years = CU20.
CU20 less CU10 recognised in 20X1 = CU10
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Measurement—equity-settled
12
Modifications to terms and conditions
• includes the repricing of options granted (IG Ex 7 to
IFRS 2—see Part B of A Guide through IFRS) and
modification of vesting conditions (IG Ex 8 to IFRS
2—see Part B of A Guide through IFRS)
• Modifications involve a minimum expense equal to
that based on services rendered and the grant date
FV and, in addition, any increased expense (from
modification date) should a modification lead to an
increased FV or lead to increased benefit to an
employee.
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Measurement—cash-settled
13
• Principle—measure at the fair value of the
liability at the end of each reporting period (ie
remeasure) and at settlement date.
• Changes in fair value are recognised in profit or
loss.
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Measurement—cash-settled
14
Example 3
On 31/12/20X1 entity granted 10 cash-settled
share appreciation rights (SAR) to each of its
10 staff conditional upon the staff remaining in
service for the next 2 yrs.
Fair value of SAR: 31/12/20X1 = CU5 and
31/12/20X2 = CU6. On 31/12/20X3 entity
paid CU800 to redeem the 100 vested SARs.
One staff member was expected to leave in
20X2.
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Measurement—cash-settled
15
Example 3 continued
31/12/20X1
Dr Expense CU0
Cr Liability CU0
Calculation: 10 SAR x CU5 x 9 staff x 0 ÷ 2 years
31/12/20X2
Dr Expense CU300
Cr Liability CU300
Calculation: 10 SAR x CU6 x 10 staff x 1 ÷ 2
years
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Measurement—cash-settled
Example 3 continued
31/12/20X3
Dr Expense CU500
Dr Liability CU300
Cr Cash CU800
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16
Measurement—cash alternatives
17
• If counterparty has the option = compound
financial instrument, therefore split accounting
(ie determine liability component and the
residual of total fair value is equity).
• If counterparty is third party, FV of total
instrument = FV of goods or services received
• If counterparty is employee, FV of total
instrument = FV of equity instruments granted
• If the entity has the option = a liability is
recognised only to the extent that the entity has
an established practice of selling in cash.
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Group entities
18
• Separate or individual financial statements
– Recipient of goods or services: recognise a SBP
transaction
• Determining whether the transaction is recognised
as equity-settled or cash-settled in the group
financial statements is based on whether equity
must be issued in settlement an obligation to settle
in cash exists (IFRS 2.43C).
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Disclosures
19
• Information that enables users to understand
the nature and extent of share-based payment
arrangements.
• Information that enables users to understand
how fair value of the goods or services received
was determined.
• Information that enables users to understand
the effect of share-based payment transactions
on profit or loss and financial position.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Comparison to the IFRS for SMEs
20
• Differences between Section 26 Share-based
Payment and IFRS 2 include:
– less application guidance is provided in the IFRS for
SMEs.
– when the fair value is not determined using
observable data, IFRS 2 allows use of the intrinsic
valuation method—this is not permitted in
Section 26.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Judgements and estimates
21
• Identifying share-based payment transactions
may not always be straightforward.
• Distinguishing equity-settled and cash-settled
plans.
• Understanding of plan terms.
• Estimating the fair value of an options and use
of valuation models (Black-Scholes, binomial,
Monte Carlo).
• Estimating vesting periods and vesting
conditions.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
International Financial Reporting Standards
IAS 21
The Effects of Changes in
Foreign Exchange Rates
K
The views expressed in this presentation are those of the
presenter,
not necessarily those of the IASB or IFRS Foundation
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Introduction
23
• IAS 21 prescribes how to:
• determine an entity’s functional currency.
• account for foreign currency transactions.
• account for foreign operations (ie entities
that are consolidated or accounted for using
the equity method).
• translate financial statements into a
presentation currency.
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Functional currency versus
presentation currency
24
• An entity must determine its functional currency—
the currency of the primary economic environment
in which the entity operates (IAS 21.9–14)
• all other currencies are foreign currencies
• An entity can choose to present its financial
statements in any currency—its presentation
currency
• However, the entity must first measure all items in
its functional currency before translation to the
presentation currency
• A group does not have a functional currency
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Judgements and estimates
25
• In some cases judgement is required to
determine the functional currency of an entity.
• A foreign operation (regardless of its legal form)
may be carried out as an extension of the
reporting entity and the assessment of its
functional currency depends on factors such as
• degree of autonomy
• significance of transactions with reporting
entity
• the level of financial dependence.
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Reporting foreign currency
transactions
26
• Initially recognise in the functional currency using
the spot exchange rate at the date of the
transaction
• At the end of each reporting period:
• translate monetary items at the closing spot rate
• translate non-monetary items at the spot rate at
the date their amount (cost or fair value) was
determined
• exchange differences are recognised as income
or expense for the period in which they arise.
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Reporting foreign currency
transactions
27
• Ex 1: A’s functional currency is CU.
On 1/12/20X1 A buys goods on credit for
FCU100,000 (FCU denominated) when
spot currency exchange rate =
FCU1:CU2.
On 1/12/20X1 A recognises inventories
and trade payables of CU200,000.
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Reporting foreign currency
transactions
28
• Ex 1 continued:
• On 31/12/20X1 (A’s year-end) the spot
currency exchange rate = FCU1:CU2.1.
On 1/2/20X2 when the spot rate =
FCU1:CU2.05 A pays CU205,000 to settle
the FCU100,000 liability.
At 31/12/20X1 A reports the trade payable
at CU210,000 and recognises loss of
CU10,000 in profit or loss.
On 1/2/20X2 A derecognises the
FCU100,000 payable and recognises gain
of CU5,000.
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Reporting foreign currency
transactions
29
• Ex 2: A’s functional currency is CU.
On 1/12/20X1 A buys an investment
property for FCU100,000 when the spot
currency exchange rate = FCU1:CU2 (ie
A pays CU200,000).
A accounts for the investment property at
its fair value.
On 1/12/20X1 A recognises its
investment property at CU200,000.
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Reporting foreign currency
transactions
30
• Ex 2 continued: On 31/12/20X1 (A’s financial
year-end) the fair value of the investment
property = FCU100,000 (ie coincidentally no
change) and the spot currency exchange
rate = FCU1:CU2.1.
At 31/12/20X1 A remeasures the investment
property at CU210,000 and records a gain
of CU10,000 as a change in fair value
(rather than exchange difference) in profit or
loss.
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Reporting foreign currency
transactions
31
• Ex 3: Same as Ex 2 except:
– A accounts for its investment property
using the cost model.
At 31/12/20X1 A records the investment
property at CU200,000 (ie no
remeasurement because it is a nonmonetary asset carried at historical cost).
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Presentation currency
32
If the presentation currency is different from the
functional currency…
• …translate assets and liabilities using the closing rate
and income and expenses using the transaction date
rates.
• an appropriately weighted average rate for a period can
be used if it is a reasonable approximation of the
transaction rates.
• All resulting exchange differences are recognised in
other comprehensive income (OCI).
• The cumulative amount recognised in OCI is
reclassified to profit or loss when the foreign subsidiary
is disposed of (ie recycling).
• note: the IFRS for SMEs prohibits such recycling
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Presentation currency of a group
33
• A group chooses a currency in which to present
its consolidated financial statements.
• A group does not have a functional currency.
• The functional currency of individual entities in
a multinational diversified group may differ. In
such cases, the financial statements of
individual entities will be translated into a
common presentation currency for the purpose
of presenting the group’s consolidated financial
statements.
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Presentation currency of a group
34
Ex 1:
On 1/1/20X1 A paid CU60,000 to
acquire 75% of B for FCU7,500 when
B’s only assets were cash FCU1,000 &
machine FCU9,000.
CU = functional currency of A &
presentation currency of group.
FCU = functional currency of B.
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Presentation currency of a group
Ex 1 continued:
Trial balances 31/12/20X1
35
A
B
CU
FCU
(100)
(1,000)
Opening retained earnings
(80,000)
(9,000)
Profit for the year
(10,000)
(5,000)
Share capital
Investment in B
60,000
Machine
Cash
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6,000
30,100
9,000
Presentation currency of a group
36
Ex 1 continued: Translate B’s trial balance
FCU
Exch rate
CU
Share capital
(1,000)
× 8 actual
(8,000)
Retained earnings
(9,000)
× 8 actual
(72,000)
Profit for the year
(5,000) × 7.5 actual (37,500)
Machine
6,000 × 7 closing
42,000
Cash
9,000 × 7 closing
63,000
Balancing
12,500
Translation
difference
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Presentation currency of a group
37
Ex 1 continued: Consolidated SOCI (working)
Profit
A
B
10,000
37,500
OCI
Profit
Consol
47,500
(12,500)
C income
Allocation
Adjust
(12,500)
35,000
Owners’ of parent
NCI
38,125 (ie 10,000A +
75% × 37,500B)
9,375 (ie 25% ×
37,500B)
(9,375)
(3,125)
(ie 75% × -12,500)
(ie 25% × -12,500)
OCI
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Presentation currency of a group
38
Ex 1 continued: Consolidated SOFP (working)
A
Share
capital
R earning
B
8,000 (8,000)
100
90,000
97,000 (78,250)
108,750
26,250
30,100
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26,250
(60,000)
60,000
Machine
Cash
Consol
100
NCI
Invest in B
Adjst
42,000
42,000
63,000
93,100
Comparison to the IFRS for SMEs
39
• Differences between IAS 21 and Section 30
Foreign Currency Translation include:
– less application guidance is provided in the
IFRS for SMEs.
– on disposal (or partial disposal) of a foreign
subsidiary full IFRSs requires recycling of
the FCTR in profit or loss. The IFRS for
SMEs prohibits such recycling.
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International Financial Reporting Standards
IAS 29
Financial Reporting in
Hyperinflationary Economies
K
The views expressed in this presentation are those of the
presenter,
not necessarily those of the IASB or IFRS Foundation
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Introduction
41
• IAS 29 applies when the functional currency of
an entity is under recurring and significant
purchasing power loss (hyperinflation).
• in a hyperinflationary economy, reporting of
operating results and financial position in the local
currency without restatement is not useful. Money
loses purchasing power at such a rate that
comparison of amounts from transactions and
other events that have occurred at different times,
even within the same accounting period, is
misleading.
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Characteristics of hyperinflationary
economy include...
42
• general population prefers to keep wealth in
non-monetary assets or stable currencies
• monetary amounts are often regarded in terms
of a stable currency reference
• credit sales prices have significant adjustments
according to their credit periods (even if short)
• prices and contracts are linked to a price index
• cumulative inflation over three years > 100%
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Example—the effect of hyperinflation on
the purchasing power of monetary assets
43
On 31 December 20X1 Entity A was formed when its
owner contributed CU100,000 in cash to the entity.
A held the cash throughout 20X2 and it did not enter
into any other transactions.
In 20X2 general price levels rose by 100% (ie the
relevant general price index rose from 100 to 200 in
20X2) in the primary economic environment in which
A operates.
• Because A’s only assets are monetary, in 20X2
when general price levels increased by 100%, A’s
purchasing power declined by 100%. In other
words, A’s CU100,000 would purchase half as
many goods and services at the end of 20X2 as it
could have purchased at the end of 20X1.
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Example—the effect of hyperinflation on the
purchasing power of a non-monetary asset
44
The facts are the same as in the previous
example.
However, in this example, on 1 January 20X2
Entity A used the cash contributed by the
owner to purchase a plot of land for
CU100,000 (ie A held only land throughout
20X2 and it did not enter into any other
transactions).
A plans to build a factory on the land in which
it plans to manufacture a product.
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Example—the effect of hyperinflation on the
purchasing power of a non-monetary asset
continued
45
• Because A’s only assets are non-monetary, in 20X2
when general price levels increased by 100%, it is likely
that A’s purchasing power remained constant. In other
words, assuming that the value of the land measured in
nominal currency units increased by 100%, if A had
sold its land at the end of 20X2 it could have used the
proceeds from the sale to purchase as many goods and
services on 31/12/20X2 as it could have originally
purchased with the CU100,000 cash it received from
the owner on 31/12/20X1. This assumes that the
nominal selling price of the land increases at the rate of
inflation. Consequently, being invested in a
non-monetary asset (land) prevented the erosion of A’s
purchasing power.
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Restatement of financial statements
46
• Financial statements must be expressed in
units of the functional currency current as at the
end of the reporting period.
• Restate all non-monetary items (assets and
liabilities) by applying the change in a general
price index.
• Do not restate monetary items and nonmonetary items carried at amount current at the
end of the reporting period (eg items measured
at fair value) they are already.
continued…
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Restatement of financial statements
47
…continued
• all equity and comprehensive income items are
restated by adjusting from initial recognition up
to the reporting date.
• gains or losses resulting from hyperinflation
effects accounting are recognised in profit and
loss.
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Comparison to the IFRS for SMEs
48
• Differences between IAS 29 and Section 31
Hyperinflation include:
– less application guidance is provided in the
IFRS for SMEs.
– the IFRS for SMEs does not have specific
procedures for the translation of the results and
financial position of an entity whose functional
currency is the currency of a hyperinflationary
economy into a different presentation currency.
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Judgements and estimates
49
• In some circumstances judgement is needed to:
• determine an entity’s functional currency (see
IAS 21)
• determine whether an economy is
hyperinflationary
• identify a general price index in a
hyperinflationary economy that reflects changes
in general purchasing power.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Questions or comments?
Expressions of individual
views by members of the
IASB and its staff are
encouraged.
The views expressed in this
presentation are those of the
presenter.
Official positions of the IASB
on accounting matters are
determined only after
extensive due process and
deliberation.
© IFRS
2012 IFRS
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www.ifrs.org
50
51
The requirements are set out in International Financial
Reporting Standards (IFRSs), as issued by the IASB at
1 January 2012 with an effective date after 1 January
2012 but not the IFRSs they will replace.
The IFRS Foundation, the authors, the presenters and
the publishers do not accept responsibility for loss
caused to any person who acts or refrains from acting
in reliance on the material in this PowerPoint
presentation, whether such loss is caused by
negligence or otherwise.
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