Diploma in IFRS
Module 6
Financial Instruments,
Interim reporting and
Disclosure Standards
www.charteredaccountants.ie
EDUCATING
SUPPORTING
REPRESENTING
Introduction and Overview
Learning Objectives
On completion of this module, you should be able to:
•
•
•
•
•
•
Define a financial instrument
Distinguish between debt and equity instruments and, in hybrid instruments,
account for both elements, taking account of the presentation requirements of
IAS 32 Financial Instruments: Presentation
Understand the recognition, classification, de-recognition and measurement
principles in IAS 39 Financial Instruments: Recognition and Measurement and
IFRS 9 Financial Instruments
Understand how to measure and account for impairment losses
Explain how to account for hedging contracts
Understand the scope and extent of disclosure requirements and the nature of
both qualitative and quantitative disclosures required by IFRS 7 Financial
Instruments: Disclosures
Introduction and overview
•
•
•
•
•
•
•
•
Explain the objective of preparing interim reports
Outline the main contents to be included in the report
Apply the recognition and measurement principles in IAS 34 Interim Financial
Reporting to specific applications
Distinguish between adjusting and non-adjusting events under IAS 10 Events
after the Reporting Period
Illustrate the disclosure required for non-adjusting events
Understand the need for the disclosure of related party transactions
Define related parties listed under the standard
Outline the disclosure required for related parties and the need to disclose the
name of the ultimate parent company
Financial Instruments
•
•
•
•
Major project replace IAS 39 with IFRS 9
Dynamic nature, OBSF, additional risks
IAS 32 Presentation (formerly included
disclosures)
IFRS 7 Disclosure standard
Financial instruments
IAS 32 Financial Instruments Presentation
IAS 32 Presentation of Financial Instruments
IAS 32 Presentation of Financial Instruments
Substance over Form
IAS 32 Presentation of Financial Instruments
Compound Instruments – debt and equity
•
•
•
•
•
Split proceeds date of issue of instrument
Calculate debt first – equity is residual
Identify similar loan agreement with no convertible element
Discount principal and interest using straight loan interest rate
Deduct debt from net proceeds = equity
IAS 32 Convertible loans
IAS 32 Convertible Loan
IAS 32 Convertible loans
IAS 32
Convertible loan
IAS 32 Convertible loan
IAS 32 Presentation
•
Treasury Shares
Deducted from equity
•
Puttable Financial Instruments
What are they?
Liability normally
Equity if pass 5 criteria
Holder entitled pro rata share of net assets on liquidation
Instrument subordinate to all others
All instruments in class have similar features
There is only a redemption or repurchase obligation
Total cash flows based substantially on profit/loss
IAS 32 Classification
IAS 32 Classification
IAS 32 Classification
IAS 39 Recognition and Measurement
•
•
Must be a party to contractual provisions
Classification Financial assets – 4 categories until 1.01.2015
IAS 39 Recognition and Measurement
Financial assets at fair value through profit or loss
Financial assets are classified into this category if:
•
•
•
they are acquired principally for selling in the near future
they are part of a portfolio of identified financial instruments that
are managed together and there is recent evidence of short-term
and actual profit-taking ; or
they are derivatives, other than a financial guarantee contract, that
is not designated as an effective hedging instrument (e.g. forward
and options contracts)
IAS 39 Recognition and Measurement
Held-to-maturity financial assets
•
Have fixed or determinable payments and fixed maturity for
which the reporting entity has a positive intent and ability to hold
until maturity. Rarely used as there are tainting rules
Loans and receivables
•
Non-derivative financial assets with fixed or determinable
payments that are not quoted in an active market
Available-for-sale financial assets
•
These are non-derivative financial assets which do not fit into any
of the above three categories (i.e. the default category)
IFRS 9 Financial Assets
•
Business Model
Objective to collect contractual cash flows
•
Contractual Cash Flow Characteristics
Only instruments with contractual cash flows of interest and
principal qualify
These are measured at amortised cost but if do not pass tests must
fair value through profit and loss
Examples
Effective from 1st January 2015
IFRS 9 Financial Liabilities IAS 39 and IFRS 9
Two categories
Amortised cost; and
Fair value through profit and loss
Examples
Derecognition of Financial Assets IAS 39 and IFRS 9
IAS 39 Can only be derecognised if either of the following occurs:
•
•
the contractual rights to future cash flows have expired as the
customer has paid or the option has expired; or
the financial asset has been transferred along with substantially
all of the risks and rewards of ownership of the asset.
IFRS 9 Will only be derecognised if:
•
•
•
the contractual rights to the cash flows have expired;
the entity transfers the asset and has no continuing involvement
in it; or
the entity transfers the asset and retains a continuing involvement
in it BUT the transferee has the practical ability to transfer the
asset for its own benefit, not the entity’s.
Derecognition Financial Assets
Derecognition Financial Liabilities
IAS 39
When discharged – paid off, cancelled or expired
IFRS 9
When eliminated and no longer required to transfer
economic resources
If exchange substantially different terms assume settled
old and created new liability
Measurement IAS 39 and IFRS 9
•
Initial Measurement
Fair value
Transaction costs
FA not held at FVTPL – in price
Others - expensed
Subsequent Measurement under IAS 39
Amortised Cost Approach
Subsequent measurement IFRS 9
Measurement The Fair Value Approach
•
IFRS 13 Fair value measurement (May 2011 –
effective 1st January 2013)
Fair value hierarchy
Level 1 – 3
Disclosure
•
All fair value changes through profit and loss
except for irrevocable election for equity
instrument NOT held for trading – through OCI
Measurement The Fair Value Approach
Measurement Financial Liabilities IAS 39 and IFRS 9
•
•
•
•
Amortised cost – majority
Fair value through Profit and Loss
Option to elect fair value
Own credit portion – profit IAS 39
- OCI
Measurement – Financial Liabilities IFRS 9
Fair Value Measurement - IFRS 13 and IFRS 7
Fair Value Measurement
•
•
•
Exit Price – orderly transaction
Hypothetical transaction
Improve transparency re measurements
Reclassifications
IAS 39
•
•
From FVTPL to loans/receivables – rare
Possible Held to Maturity – to reclassify as Available for Sale
IFRS 9
•
•
•
Will permit reclassification ONLY if change to the business model
Switch from Amortised Cost to FVTPL – calculate profit/loss
Switch from FVTPL to Amortised Cost – fair value is cost
Impairments – Amortised Cost Financial Assets
•
•
•
Annual review
Available for sale – review for possible recycling through profit
Evidence of impairment – judgement
Significant financial difficulty of the issuer;
A breach of contract, e.g. default in interest or principal payments;
the lender has granted the borrower a concession not normally
considered;
It is likely that the borrower will enter bankruptcy;
An active market has disappeared due to overall financial
difficulties; or
There is evidence of a measurable decrease in the estimated future
cash flows from a group of financial assets.
Impairments – Amortised Cost Financial Assets
Measurement
Financial assets carried at amortised cost
Financial assets carried at cost
Financial assets held at fair value as available for sale
Impairment - Example
Impairment - Example
IAS 39 Impairment Example
IAS 39 Impairment Example
IAS 39 Impairment Example
Derivatives
Embedded Derivative – split net proceeds where following
preconditions exist
•
•
•
the economic characteristics and risks of the embedded
derivative are not closely related to those of the host
contract;
a separate instrument having the same terms as the
embedded derivative would be characterised as an
independent derivative; and
the hybrid instrument is not accounted for as FVTPL.
Can only apply when contract is first entered into – not
reassessed unless significant modification of cash flows
Hedging (IAS 39)
•
•
Why does hedging exist?
Three types of hedging relationships
Fair value hedge
Cash flow hedge
Hedge of a net investment in foreign operations
Hedging (IAS 39)
•
Formal documentation
Identification of instrument, details of hedged item,
details of nature of risk being hedged, explanation how
will assess effectiveness
•
Effectiveness of Hedging
Not just at inception but throughout period
The range 80% - 125%
Hedging (IAS 39)
Hedging (IAS 39)
Hedging (IAS 39) -
Accounting for a Fair Value Hedge
Hedging (IAS 39) – Fair Value Hedges
Reporting of Gains and Losses
•
•
gains/losses from remeasuring the hedging instrument at fair value
should be recognised immediately in profit and loss;
gains/losses on the hedged item attributable to the hedged risk
should adjust the carrying amount of the hedged item and be
recognised immediately in profit or loss.
Example – Fair Value Hedge
Example Fair Value Hedge
Hedging (IAS 39) Cash Flow Hedges
Example
Cash Flow Hedging
Example Cash Flow Hedges
Example Cash Flow Hedge
Example Cash Flow Hedge
Example Cash Flow Hedge
Cash Flow Hedge Example
Cash Flow Hedge Example
Cash Flow Hedge Example
Hedge of a net investment in a foreign operation
• A foreign operation
• Loans or receivables - not likely to be settled in the foreseeable
future and thus is, in substance, part of the entity’s net investment
in that foreign operation. It includes long-term loans granted by
another subsidiary but excludes trade receivables and payables.
• Accounting treatment is similar to a cash-flow hedge with gains and
losses that are found to be effective being recognised in equity.
• The gains and losses of the ineffective portion are recognised in
profit and loss. On disposal the cumulative gain or loss on the
hedging instrument is recycled to profit and loss.
Hedge of an investment in a foreign operation
Case Study 1 IAS 32 and 39
Case Study 1 IAS 32 and 39
Case Study 1 IAS 32 and 39
Case Study 1 Solution
Case Study 1 Solution
Case Study 1 Solution
Case Study 1 Solution
Case Study 1
Solution
Case Study 1 Solution
IFRS 7 Financial Instruments: Disclosure
Objective
•
•
Significance and impact
Nature and extent of risks
Significance for financial position
Disclosures by categories
Example Close Bros
IFRS 7 Financial Instruments: Disclosure
Fair value – financial assets and liabilities
Additional Disclosure
•
•
•
•
maximum credit exposure;
extent of the risk being mitigated by the use of derivatives;
changes in fair value attributable to credit risk during the
year and cumulatively; and
changes in the fair value of credit derivatives during the
year and cumulatively.
Example Deutsche Bank AG
IFRS 7 Financial Instruments Disclosure
Reclassifications
Reclassifications in and out of a category. If reclassified out of AFS/FVTPL
categories into amortised cost categories:
•
amount reclassified;
•
fair value of reclassified financial asset for each period until derecognised;
•
fair value gain/loss recognised in profit/loss or OCI in year of reclassification;
•
amount of gain/loss that would be recognised in profit/loss or OCI in each
reporting period after reclassification until derecognition;
•
the effective interest rate and estimated cash flows expected to be recovered on
the date of reclassification;
•
a description of the rare circumstances resulting in reclassification.
Example Munchener Ruckversichrungs Gesellschaft AG
IFRS 7 Financial Instruments Disclosure
Collateral
Details of assets pledged, terms and conditions
Example Deutsche Bank AG
Impairment allowance
Details of defaults and breaches
Example Domino Printing Group
IFRS 7 Financial instruments Disclosure
Significance of financial instruments – financial performance
Gains and losses, interest income and expenses, fee income and
expenses should all be disclosed as follows:
• net gain or loss classified by category of financial assets and
liabilities;
• total interest income and expenses using the effective interest rate
method;
• fees, income and expenses other than those included in arriving at
the effective rate of interest;
• interest income on impaired financial assets accrued; and
• impairment losses for each class of financial asset.
IFRS 7 Financial Instruments Disclosure
Hedge Accounting
Hedging in general
•
•
•
description of each type of hedge
description of the financial instruments designated as hedging instruments and
their fair value at the end of the reporting period
the nature of the risks being hedged
Cash flow hedges
•
•
•
•
•
•
periods when cash flows are expected to occur and affect profit or loss
description of previously-applied hedge accounting to a forecast transaction
that is no longer expected to apply
amount recognised in OCI during the period under the cash-flow hedge reserve
recycling for the period out of the cash-flow hedge reserve
amount of recycling included in the initial cost or other carrying amount of a
non-financial asset or liability
the ineffectiveness recognised directly in profit and loss
IFRS 7 Financial Instruments Disclosure
Fair value hedges
• gains and losses on the hedging instrument or on the hedged item
attributable to the hedged risk
Hedging net investments in foreign operations
• The ineffectiveness recognised in profit or loss
Fair value disclosures
• Level 1-3 hierarchy
Example Sandvik AB
IFRS 7 Financial instruments Disclosure
The nature and extent of risk arising from financial instruments
Credit risk
Market risk
Liquidity risk
IFRS 7 Financial instruments Disclosure
Credit risk
The following should be disclosed:
• the maximum exposure at the end of the reporting period;
• any collateral pledged as security;
• information about the credit quality of financial assets not overdue
nor impaired; and
• the carrying amount of impaired financial assets.
Market risk
The following should be disclosed:
• a sensitivity analysis for each risk including details of methods and
assumptions used and any changes from the previous period; and
• if the above reflects interdependencies between risk variables, it
must also disclose an explanation for the method adopted, the
underlying assumptions and an explanation of the objective of the
method used and its limitations.
IFRS 7 Financial instruments Disclosure
Liquidity risk
The following should be disclosed:
• a maturity analysis for financial liabilities; and
• a description of how the entity manages its liquidity risk.
Example
Sandvik AB
SECTION 2
IAS 34 Interim Financial Reporting
IAS 34 Interim Financial Reporting
Introduction
Prescribes minimum content
Prescribes the principles
Not mandatory
Encourages half yearly and within 60 days
IAS 34 Interim Financial Reporting
Definitions and Basic Concepts
Interim period – half or quarterly
Interim financial report - complete or condensed
Basic and diluted EPS
IAS 34 Interim Financial Reporting
Content of Interim Report
An entity preparing interim financial statements may present a complete
set of financial statements which comprise:
•
•
•
•
•
a Statement of Financial Position;
a Statement of Comprehensive Income;
a Statement of Changes in Equity;
a Statement of Cash Flows; and
notes, comprising a summary of significant accounting policies
and other explanatory notes.
IAS 24 Interim Financial Reporting
Minimum components
If prepare a set of condensed financial statements. The minimum
content:
•
•
•
•
•
•
•
•
•
a condensed Statement of Financial Position;
a condensed Statement of Comprehensive Income;
a condensed Statement of Changes in Equity;
a condensed Statement of Cash Flows; and
selected explanatory notes.
the headings/subheadings used in the most recent annual financial
statements.
In the Statement of Changes in Equity all material movements in equity
in the interim period must be disclosed separately.
In the Statement of Cash Flows – aggregation but more than O, F and I
Additional line items if omission misleading
IAS 34 Interim Financial Reporting
Comparative figures
IAS 34 Interim Financial Reporting
Minimum Explanatory Notes
•
•
•
a statement that the same accounting policies and methods were used in the interim financial
statements as in most recent annual financial statements;
explanatory comments about the seasonality or cyclicality of interim operations;
the nature and amount of items affecting assets, liabilities ,equity, net income or cash flows that
are unusual because of their size, nature or incidence;
•
the nature and amount of changes in estimates reported in prior interim periods
•
details of changes in debt and equity securities;
•
dividends paid;
•
segment information in accordance with IFRS 8 Operating Segments;
•
material events subsequent to end of the interim period not reflected in the interim fin sts;
•
details of changes in the composition of the entity; and
•
details of changes contingent assets /contingent liabilities since end of the last reporting period.
IAS 34 Interim Financial Reporting
Compliance with IFRS
If an entity’s interim financial report complies with IAS 34, that fact may be disclosed.
Recognition and Measurement
Same accounting policies interim report as in its annual financial statements. The only
exception to this rule is where an accounting policy change has been made after the date of
the most recent annual financial statements, but this change will be reflected in the next set
of annual financial statements.
Revenues received seasonally, cyclically or occasionally
Revenues should not be anticipated or deferred, if not appropriate at the end of the financial
year e.g. a retailer does not divide forecasted revenue by two to arrive at its half-year
revenue figures. Instead, reports actual results for the 6 month period. If wishes to
demonstrate cyclicality, it could include revenue for the 12 months up to the end of the
interim reporting period and comparative information for the corresponding previous 12month period.
IAS 34 Interim Financial Reporting
Costs
The rule on revenues also applies to costs.
Costs that are incurred unevenly during an entity’s financial year should be
anticipated or deferred for interim reporting purposes if, and only if, it is also
appropriate to anticipate or defer that type of cost at the end of the financial year.
A cost - not meet the definition of an asset at the end of an interim period is not
deferred in the Statement of Financial Position at the interim reporting date.
When preparing interim financial statements, the entity’s usual recognition and
measurement practices are followed. The only costs that are capitalised are those
incurred after the specific point in time at which the criteria for recognition of the
particular class of asset are met. Deferral of costs as assets in an interim
Statement of Financial Position in the hope that the criteria will be met before the
year-end is prohibited.
Greater use of estimates in interim reports
IAS 34 Interim Financial Reporting
The Standard provides a number of examples of the use of estimates in interim
financial reports. These include:
• Inventories. Full stock taking is not usually undertaken at interim periodend;
• Classification of current/non-current assets and liabilities;
• Provisions. Usually the provisions reported in the last annual financial
statements are updated, rather than full calculations made at the interim
date;
• Pensions. An independent actuarial valuation is not required at the interim
date, as this is a very costly exercise. Extrapolation of previous valuations
is usually made;
• Income taxes;
• Contingencies; and
• Revaluations. Professional valuations are not required at the interim date.
IAS 34 Interim Financial Reporting
Application of recognition and Measurement Principles
•
•
•
•
•
•
Employer payroll taxes and insurance contributions
Major planned periodic maintenance or overhaul
Provisions
Year end bonuses
Contingent lease payments
Intangible assets
IAS 34 Interim Financial Reporting
•
•
Recent developments
IFRIC 10
Interaction with IAS 36
Could goodwill w/d be reversed?
Example John Lewis Partnership
IAS 34 Interim Financial Reporting
IAS 34 Interim Financial Reporting
IAS 34 Interim Financial Reporting
Key Points
SECTION 3
Events after the Reporting Period
IAS 10
•
•
•
Events after the Reporting Period
The need for disclosure
Definition
Adjusting Events
Provide evidence of conditions that exist at reporting date
Examples
•
Non adjusting events
Indicative of conditions that arose after the reporting period
Examples
IAS 10 Events after the Reporting Period
•
•
Date of authorisation
Accounting for events after the reporting period
Non adjusting events - disclose
Adjusting events – adjust financial statements
•
•
•
Proposed Dividends
Going Concern
Disclosure – non adjusting events
IAS 10 Events after the Reporting period
Self Test Questions
Question 1
Mountain plc acquired some non-current investments during the year
ended 30 April 2011. The investments had maintained their value
during the year ended 30 April 2011 but shortly after the end of the
financial year, market conditions changed and there was a significant
decline in the value of the investments. The investments had not
recovered their value by the date on which the financial statements
were authorised for issue.
Requirement
State with reasons how this item should be dealt with in the
financial statements of Mountain plc for the year ended 30 April
2011.
IAS 10 Events after the Reporting Period
Solution
This is a non-adjusting event after the reporting period. The
diminution in value of the non-current investments is attributable to
factors which have arisen after the date of the Statement of
Financial Position.
The figure reported in the Statement of Financial Position for noncurrent investments as at 30 April 2011 should not be adjusted.
If the diminution in value is material it should be disclosed as a
note to the financial statements. [IAS 10]
IAS 10 Events after the Reporting Period
Question 2
Included in IOM Productions plc’s inventory as at 30 April 2011 were
1,000 DVDs which had cost £10 each. Shortly after 30 April 2011 it was
discovered that these DVDs were leaking a poisonous chemical which
meant that the DVDs could not be used and had to be scrapped. It was
agreed that the DVDs had probably started leaking some time before 30
April. Because of the leak it was necessary to clean and redecorate the
store room. This cost 6,344. The work was started shortly before the
financial statements were authorised for issue but was not paid for until
after that date.
Requirement
State with reasons how this should be dealt with in the financial
statements of IOM Productions plc for the year ended 30 April 2011.
IAS 10 Events after the Reporting period
Solution
As far as having to scrap the digital DVDs tapes is concerned, this is
an adjusting event after the reporting period. The inventory was
impaired as at the date of the Statement of Financial Position and
should be written off in the financial statements for the year ended 30
April 2011. Inventory as at 30 April 2011 should be written down by
£10,000. [IAS 10]
There was no liability for the cleaning and redecoration of the store
room as at 30 April 2011. Also the amount may not be material. No
adjustment to or disclosure in the financial statements for the year
ended 30 April 2011 is necessary. [IAS 37]
IAS 10 Events after the reporting period - Examples
Glaxo Smith Kline Plc
40 Post balance sheet events
On 17th February 2010, GSK received a Complete Response letter from
the FDA regarding the new drug application for Horizant Extended
Release tablets for restless legs syndrome. The letter indicated that
questions remained that precluded the approval of Horizant for restless
legs syndrome at that time. GSK is evaluating the letter and considering
the appropriate next steps. The Group’s intangible assets include £85
million in relation to this compound. It is not yet possible to determine the
amount, if any, of any impairment that may be recorded in future periods,
pending completion of a full analysis of the situation.
IAS 10 Events after the Reporting period - Rio Tinto Plc
48 Events after the statement of financial position date
On 29 January 2010, US$2.0 billion of Facility D of the Alcan facility was paid. An
additional US$2.0 billion was paid on 26 February 2010, leaving US$4.5 billion
outstanding on the facility.
All of Tranches A and B of the Alcan facility have now been repaid. Facility B of the
acquisition facility is a revolving facility of which US$2.1 billion was undrawn at 31
December 2009. On 5 February 2010, in accordance with the acquisition facility
agreement, proceeds from the sale of the majority of Alcan Packaging to Amcor
were used to cancel US$2.0 billion of the outstanding capacity. At the same time,
the Group voluntarily surrendered the remaining US$0.1 billion of the facility.
Rio Tinto completed the sale of Alcan Packaging global pharmaceuticals, global
tobacco, food Europe and food Asia divisions to Amcor for a total consideration of
US$1,948 million on 1 February 2010. The consideration has been adjusted to
exclude the Medical Flexibles operations and to reflect the actual business
performance over the past six months. The final consideration remains subject to
certain customary post-close adjustments.
IAS 10 Events after the Reporting period - Rio Tinto Plc
The sale of Maules Creek to Aston Resources was completed on 18 February 2010.
The sale of the Alcan Packaging Food Americas division to Bemis Company Inc., for a total
all-cash consideration of US$1.2 billion was completed on 1 March 2010.
These divestments have not been reflected in the 2009 results, and will be reflected in the
period in which the sales are completed.
On 1 March 2010, Rio Tinto announced that it has agreed to acquire 15 million shares in
Ivanhoe Mines Ltd. at a subscription price of C$16.31 per share, increasing its ownership in
Ivanhoe Mines by 2.7 per cent to 22.4 per cent. The total consideration for this acquisition is
C$244.7 million. The shares are being issued to Rio Tinto in satisfaction of an agreement
with Ivanhoe Mines in 2008 to finance equipment for the Oyu Tolgoi copper-gold complex in
Mongolia’s South Gobi region. After the completion of the acquisition, Rio Tinto will own
98.6 million shares of Ivanhoe Mines. If Rio Tinto were to execute all of its shares purchase
warrants and convert its US$350 million loan into shares it would own approximately 267.6
million shares of Ivanhoe Mines representing 44.0 per cent of Ivanhoe Mines.
IAS 10 Events after the Reporting Date
EXAMPLE
SFS Group Y/e 31st December 2009
Lonmin Plc Y/e 30th September 2009
Case Study 3 Kyle Ltd
Case Study 3 Kyle Ltd
Case Study 3 Kyle Ltd
Case Study 3 Kyle Ltd
Case Study 3 Kyle Ltd
IAS 24 Related Party Disclosures
•
•
•
Why disclose RPTs
Objective of IAS 24
Definitions (see next slide)
IAS 24 Related Party Disclosures
Related party
A party is related to an entity if:
(a) directly, or indirectly through one or more intermediaries, the party:
i. controls, is controlled by, or is under the common control of another entity;
ii. has an interest in the entity that gives it significant influence over the entity;
or
iii. has joint control over the entity;
(b) the party is an associate of the entity;
(c) the party is a joint venture in which the entity is a venturer;
(d) the party is a member of key management personnel of the entity or its parent;
(e) the party is a close member of the family of any individual referred to in (a) or (d);
(f) the party is an entity that is controlled, jointly controlled or significantly influenced
by, or for which significant voting power in such entity resides with, directly or
indirectly, any individual referred to in (d) or (e); or
(g) the party is a post-employment benefit plan for the benefit of employees of the
entity, or of any entity which is a related party of the entity.
IAS 24 Related Party Disclosures
Related-party transaction
• A related party transaction is a transfer of resources, services or obligations
between related parties, regardless of whether a price is charged.
Close members of the family of an individual
• These are the family members who may be expected to influence, or be
influenced by, that individual in their dealings with the entity. They may
include:
the individual’s domestic partner and children;
children of the individual’s domestic partner; and
dependants of the individual or the individual’s domestic partner.
Key management personnel
• These are the persons having authority and responsibility for planning,
directing and controlling the activities of the entity, directly or indirectly,
including any director (whether executive or otherwise) of that entity.
IAS 24 Related Party Disclosures
The following are NOT related parties:
•
•
•
•
two entities simply because they have a director or other member of key
management personnel in common;
two venturers simply because they share joint control over a joint venture;
providers of finance, trade unions, public utilities, government departments and
agencies simply by virtue of their normal dealings with the entity;
customers, suppliers, franchisors, distributors, agents with whom an entity
transacts a significant volume of business, merely by virtue of the resulting
economic dependence.
IAS 24 Related Party Disclosures - Disclosures
Disclosure of parent - subsidiary relationship
•
•
Disclosed, irrespective of transactions between the parties. Must disclose the
name of its parent and, if different, the name of the ultimate controlling party.
This disclosure enables users to appreciate the existence of control, even in the
absence of any related party transactions between the two parties.
Disclosure of compensation of key management personnel
•
•
All employee benefits as defined in IAS 19 Employee Benefits, including
employee benefits to which IFRS 2 Share Based Payments applies.
Must disclose compensation to KMP in total and for each of the following
categories:
short-term employee benefits, such as salaries;
post-employment benefits, such as pensions;
other long-term benefits, such as long-service leave;
termination benefits, such as redundancy payments; and
share-based payments.
IAS 24 Related Party Disclosures
Disclosure of related party transactions
a) the nature of the related party relationship;
b) the amount of the transactions;
c) the amount of outstanding balances, their terms and conditions,
security, the nature of consideration to be provided in settlement, and
details of any guarantees given or received;
d) provision for doubtful debts; and
e) any bad debts written off
Disclosure of related-party transactions - separately for:
a) the parent;
b) entities with joint control or significant influence over the entity;
c) subsidiaries;
d) associates;
e) joint ventures in which the entity is a venture;
f) key management personnel of the entity or its parent;
g) other related parties.
IAS 24 Related Party Disclosures
Examples
IAS 24 gives examples of transactions that should be disclosed if they are with a
related party including:
Purchases or sales of goods (finished or unfinished)
Purchases or sales of property and other assets
Rendering or receiving of services
Leases
Transfer of research and development
Transfers under licence agreements
Transfers under finance arrangements (including loans and equity
contributions in cash or in kind)
Provisions of guarantees or collateral
Settlement of liabilities on behalf of the entity or by the entity on behalf of
another party
IAS 24 Related Party Disclosures
Example
Archer plc owns 75% of the ordinary shares of Swift Ltd. Bow Ltd owns
35% of the ordinary shares of Mitchell Ltd. During the current year, there
were no transactions between Archer plc and Swift Ltd, but there were
transactions between Bow Ltd and Swift Ltd and between Archer plc and
Bow Ltd.
Requirement
Outline the related party disclosures required in the separate financial
statements.
IAS 24 Related Party Disclosures
Solution
The following disclosures are required in the separate financial statements:
Archer Plc
The existence of a parent-subsidiary relationship between Archer plc and Swift Ltd (even though
there are no transactions between the two entities in the current year).
Bow Ltd
If Bow Ltd has significant influence over Swift Ltd (although this might not be the case since the
company is controlled by Archer plc), then Swift Ltd is a related party of Bow Ltd. This fact must
be disclosed in the financial statements of Bow Ltd, since there have been transactions between
the companies. Details of transactions & any outstanding balances must also be disclosed.
Swift Ltd
The existence of a parent-subsidiary relationship between Archer plc and Swift Ltd (even though
there are no transactions between the two entities in the current year). If Bow Ltd is a related
party (see above) the nature of the relationship must be disclosed, together with details of the
transactions between the companies and any outstanding balances.
IAS 24 Self Test Questions
Bally Plc
IAS 24 Self Test Solution
Bally Plc
IAS 24 Self Test Solution
Bally Plc
IAS 24 Self Test Question
Pigeon Group
IAS 24 Self Test Solution Pigeon Group
IAS 24 Self Test Solution
Pigeon Group
Case Study 4 Salmon Plc
Case Study 4 Salmon Plc
Case Study 4 Salmon Plc Solution
Case study 4 Salmon Plc
Solution
Module 6 Learning Objectives
Now that you have completed this module, you should be able to:
•
Define a financial instrument
•
Distinguish between debt and equity instruments and, in hybrid instruments,
account for both elements, taking account of the presentation requirements of IAS
32 Financial Instruments: Presentation
•
Understand the recognition, classification, de-recognition and measurement
principles in IAS 39 Financial Instruments: Recognition and Measurement and IFRS 9
Financial Instruments
•
Understand how to measure and account for impairment losses
•
Explain how to account for hedging contracts
•
Understand the scope and extent of disclosure requirements and the nature of both
qualitative and quantitative disclosures required by IFRS 7 Financial Instruments:
Disclosures
Module 6 Learning Objectives
•
Explain the objective of preparing interim reports
•
Outline the main contents to be included in the report
•
Apply the recognition and measurement principles in IAS 34 Interim Financial
Reporting to specific applications
•
Distinguish between adjusting and non-adjusting events under IAS 10 Events
after the Reporting Period
•
Illustrate the disclosure required for non adjusting events
•
Understand the need for the disclosure of related party transactions
•
Define related parties listed under the standard
•
Outline the disclosure required for related parties and the need to disclose the
name of the ultimate parent company