International Financial Reporting Standards
Accounting for liabilities in
accordance with IAS 37,
IAS 17 and IAS 19
Joint World Bank and IFRS Foundation
‘train the trainers’ workshop hosted by the
ECCB, 30 April to 4 May 2012
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
International Financial Reporting Standards
IAS 37
Provisions, Contingent Liabilities
and Contingent Assets
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
• IAS 37 applies to all provisions and contingent
liabilities except for:
• those that result from executory contracts
unless the contract is onerous; and
• those covered by another IFRS (ie income
taxes and employee benefits).
• IAS 37 does not apply to financial instruments
within the scope of IFRS 9.
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Measurement of provisions
4
• A provision is measured at the amount that the
entity would rationally pay to settle the
obligation at the end of the reporting period or
to transfer it to a third party at that time.
• risks and uncertainties are taken into account in
the measurement of a provision.
• if measured using risk adjusted cash flow
forecasts a provision is discounted to its present
value.
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Measurement of provisions continued
5
•
Measure provision at ‘best estimate’ of the
amount required to settle the obligation at the
reporting date, ie
– amount an entity would rationally pay to
settle the obligation at the end of the
reporting period; or
– to transfer it to a third party at that time
•
Review provisions at each reporting date and
adjust them to reflect the current best estimate
at that reporting date
– unwinding of the discount is a finance cost
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Measurement of provisions continued
6
•
If large population of items, best estimate
reflects probability weighting of all possible
outcomes.
•
If single obligation, best estimate is the
adjusted individual most likely outcome
•
Present value using pre-tax discount rate/s
that reflect current market assessments of the
time value of money (& risks specific to the
liability if not already reflected in estimated
cash flows).
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Examples—measurement of provisions
•
7
Ex 1: A has 1,000 units of a product sold with
active warranties (ie A will repair defects found
up to 6 months after sale).
Probabilities & repair cost: major defect = 5%
chance of CU400 repair; minor defect = 20%
chance of CU100 repair; 75% chance of no
defects.
• Best estimate (expected value) = CU40,000
Calculation: (75% x 1,000 units x nil) +
(20% x 1,000 units x CU100) +
(5% x 1,000 units x CU400)
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Examples—measurement of provisions
continued
8
• Ex 2: Personal injury lawsuit brought by
•
customer. Lawyers estimate 30% chance
compensation = CU2,000,000 & 70% chance =
CU300,000.
Ruling expected in 2 years. Discount rate = 4%
per year (ie 2-year government bonds = 5%
less 1% risks specific to liability).
Individual most likely outcome = CU300,000.
Because only other possible outcome is higher,
the best estimate to settle the obligation at
31/12/20X1 will be higher than PV of the most
likely outcome of CU300,000, eg PV of
CU810,000 at 4% = ±CU748,890
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Examples—measurement of provisions
continued
9
• Ex 3: Provision for a lawsuit = CU40,000 at
31/12/20X1 & remeasured to CU90,000 at
31/12/20X2. CU3,000 of the increase =
unwinding of the discount & the remainder is
for better information becoming available.
The increase of CU50,000 will be recognised
as an expense in the determination of the
entity’s profit or loss for the year ended
31/12/20X2
– CU3,000 = finance cost
– CU47,000 = change in estimate
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Disclosure exception
10
• When disclosure of some or all information
normally required by IAS 37 can be expected to
prejudice seriously the position of the entity in a
dispute then disclose only general nature of the
dispute and reason why alternative disclosures
made. Note: no recognition and measurement
alternative.
• such a situation is expected to be an extremely
rare case.
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Comparison to the IFRS for SMEs
11
• IAS 37 and Section 21 Provisions and
Contingencies of the IFRS for SMEs share similar
principles, but the IFRS for SMEs is drafted in
simplified language.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Judgements and estimates
12
• Measuring a provision requires estimating the
amount that the entity would rationally pay to
settle the obligation at the end of the reporting
period or to transfer it to a third party at that
time.
• the risks and uncertainties that inevitably
surround many events and circumstances are
taken account in measuring a provision (eg
measure a provision at its expected value by
weighing all possible outcomes by their
associated probabilities).
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
International Financial Reporting Standards
IAS 17
Leases
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
14
• A lease is an agreement that conveys to the
lessee a right to use an asset for a period of
time.
• For accounting purposes, leases are classified
as finance leases or operating leases.
• finance leases are accounted for as insubstance purchases (ie recognise the asset
‘acquired’ (eg PPE) and the obligation to make
lease payments—a liability)
• operating leases are accounted for as
executory contacts—generally no asset/liability
recognition
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Scope
15
• Applied to all leases other than:
• leases for resource exploration; and
• licencing agreements for certain items (eg plays)
• IAS 17’s measurement requirements are not
applied to:
• lessee-held property accounted for as Investment
Property
• investment property provided under an operating
lease
• biological assets held under finance leases
• biological assets provided under an operating lease
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Operating leases
16
• The leased asset remains in the statement of
financial position of the lessor.
• Operating lease payments are usually
recognised in profit or loss on a straight-line
basis.
• From the perspective of the lessee, if payments
are subject to escalation, straight-line
recognition is profit or loss may give rise to a
liability on the statement of financial position
• the liability reduces as future payments are
made
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Examples—operating leases
•
•
•
17
Ex 1: On 1/1/20X1 A entered into a 5-year
non-cancellable operating lease over a building.
Rentals X1–X4 = 0. Rental X5 = 5,000.
Ex 2: Same as Ex 1 except lessor agrees to pay
the lessee’s relocation costs (ie 500) as an
incentive to the lessee for entering into the new
lease
Ex 3: Operating lease payments increase by
expected CPI (10% p.a.) to compensate the
lessor for expected inflation.
X1 = 1,000; X2 = 1,100; X3 = 1,210; etc
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Finance leases
18
• Finance leases are accounted for by lessees as
an asset purchased (other IFRSs then apply to
the asset) on credit (a liability).
• Initially, the liability is recognised at:
• the fair value of the leased property, or if lower
• the present value of the minimum lease
payments—the implicit interest rate is used as
the discount rate
• Lease payments are apportioned between a
reduction in the lease liability and interest
expense.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Example—finance lease
19
On 1/1/20X1 enter into 5-yr non-cancellable
lease over a machine.
Machine’s cash cost = 100,000, economic life
= 10 yrs and residual value = 0.
Annual lease payments on 31/12: 4 × 23,000
& 23,539 at end of yr 5 when ownership
transfers to the lessee.
The interest rate implicit in the lease is 5%
p.a. which approximates lessee’s
incremental borrowing rate.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Example—finance lease continued
20
Finance lease obligation amortisation table:
1 Jan
Finance
cost
Payment
31 Dec
20X1
100,000
5,000
(23,000)
82,000
20X2
82,000
4,100
(23,000)
63,100
20X3
63,100
3,155
(23,000)
43,255
20X4
43,255
2,163
(23,000)
22,418
20X5
22,418
1,121
(23,539)
–
15,539
115,539
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Example—finance lease continued
21
1/1/20X1 (initial recognition) recognise:
– asset (PPE) 100,000; and
– liability (finance lease obligation) 100,000
For the year ended 31/12/20X1 recognise:
– allocate payment of 23,000 (5,000 finance cost
in profit or loss & 18,000 repayment of finance
lease obligation)
– CU10,000 depreciation expense in profit or
loss and as a reduction to the asset
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Sale and leaseback
•
22
A sale and leaseback transaction involves the
sale of an asset and the leasing back of the
same asset.
– the lease payment & the sale price are usually
interdependent because they are negotiated
as a package
– the accounting treatment of a sale and
leaseback transaction depends on the type of
lease (finance or operating).
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Recognition of sale & finance
leaseback
23
• the seller-lessee defers recognition of
income (ie does not recognise any excess
of sales proceeds over the carrying amount
in profit or loss immediately)
• Deferred income is recognised in profit or
loss over the lease term
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Recognition of sale & operating
leaseback by seller-lessee
24
• if at FV, recognise profit or loss immediately
• if SP < FV & lease payments not adjusted,
recognise profit or loss immediately
• if SP < FV & lease payments are adjusted, defer
& amortise such loss in proportion to the lease
payments over the period for which the asset is
expected to be used.
• If SP > FV defer the excess over fair value and
amortise it over the period for which the asset is
expected to be used.
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Comparison to the IFRS for SMEs
25
• Section 20 Leases of the IFRS for SMEs does
not require lease payments in an operating
lease that are structured to increase in line with
expected general inflation to be recognised by
the lessee or lessor on a straight-line basis,
unlike IAS 17.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Judgements and estimates
26
• Identifying arrangements that contain a lease
• Classifying a lease—finance or operating lease
• Determining the interest rate implicit in a lease
(particularly for a lessee)
• For manufacturer or dealer lessors, bifurcating
the sale and financing transactions.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
International Financial Reporting Standards
IAS 19
Employee Benefits
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
28
• IAS 19 specifies accounting for and disclosure
of employee benefits by employers.
• It is applied by an employer in accounting for all
employee benefits, except those to which
IFRS 2 Share-based Payment applies.
• Information about employee benefits expenses
and obligations can help users assess the
extent and uncertainty of an entity’s future
employee benefit cash outflows. Uncertainties
can be significant (eg some pension promises).
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Employee benefits
29
• Employee benefits are all forms of consideration
paid for services of employees or for termination
of employment.
• IAS 19 separates employee benefits into four
categories:
• short-term benefits
• post-employment benefits
• other long-term benefits
• termination benefits
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Short-term employee benefits
30
• Short-term employee benefits are expected to
be settled wholly before 12 months after the
period in which the employee rendered the
related service.
• recognise as an expense as the employee
provides the related service
• measure obligations at undiscounted amounts
(application of the cost constraint)
• no disclosures specified in IAS 19.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Examples—
short-term employee benefits
•
31
Ex 1: An employee is entitled to 5 days paid
sick leave a year. Unused sick leave is carried
forward for 1 calendar year. It is allocated on a
FIFO basis. No sick leave is expected to lapse.
Employee 1 earns 400 per working day. Sick
leave record: 4.5 days accumulated at
1/1/20X1; 2 days taken in 20X1. Salary
increase = 5% effective 1/1/20X2.
31/12/20X1 liability = CU2,100 (ie CU400 wage
rate × 1.05 increase × 5 (max) days due at
31/12/20X1 & expected to be taken in 20X2.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Examples—
short-term employee benefits
32
•
Ex 2: Same as Ex 1 except sick leave cannot
be carried forward to the next calendar year &
does not vest (ie is not paid out in cash).
No liability at 31/12/20X1 (no obligation).
•
Ex 3: Similar to Ex 1 and Ex 2 except sick
leave is paid out in cash in January 20X2
payroll at 20X1 salary rate.
31/12/20X1 liability = CU1,200 (ie CU400
wage rate × 3 (5 earned less 2 taken) days
due at 31/12/20X1 & paid out in 20X2.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Examples—
short-term employee benefits
•
33
Ex 4: A pays 3% of year’s profit (before profit
sharing) to employees who serve throughout
the current year & who will continue to serve
throughout the following year. A expects to
save 10% through staff turnover. The bonus
will be paid on 31/12/20X2.
Profit for 20X1 before profit sharing =
CU1,000,000.
Liability at 31/12/20X1 & expense = CU27,000
(ie 3% × CU1,000,000 × 90%)
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Post-employment benefits
34
• Post-employment benefits are payable after the
completion of employment.
• Two types:
• defined contribution plan, entity pays fixed
contributions to a separate entity (a fund) and
has no legal or constructive obligation to pay
further contributions if the fund cannot pay the
employee.
• all other post-employment plans are defined
benefit plans.
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Post-employment benefits—
defined contribution
35
• Employees (not the employer) are exposed to
risks.
• Employer:
• recognises contributions payable as an
expense as the employee provides services in
exchange for the contributions.
• measures obligations for unpaid contributions at
undiscounted amounts (application of the cost
constraint).
• disclose amount recognised as an expense.
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Post-employment benefits—
defined benefit
36
• Recognise the defined benefit liability as follows:
• use the projected unit credit method based on
actuarial assumptions to measured the obligation at
its present value; less
• the fair value of plan assets (if any).
• Recognise all changes in the defined benefit liability
(asset) when they occur:
• service costs and net interest in profit and loss
• remeasurements in other comprehensive income.
• Extensive disclosures specified.
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Other long-term benefits
37
• Other long-term benefits are all employee
benefits other than short-term employee
benefits, post-employment benefits and
termination benefits
• Recognition and measurement is the same as
that for post-employment benefits: defined
benefit plans.
• No disclosures specified in IAS 19.
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Termination benefits
38
• Termination benefits arise only on termination,
rather than during employment.
• principle—the event that gives rise to an obligation
is the termination of employment rather than
employee service
• Recognise expense and a liability at the earlier of:
• when the entity can no longer withdraw the offer of
those benefits
• when the entity recognises the related restructuring
provision in accordance with IAS 37.
• No disclosures specified in IAS 19.
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Comparison to the IFRS for SMEs
39
• The primary differences between IAS 19 and
Section 28 Employee Benefits are:
• Section 28 allows simplification of measurement
principles meaning that external specialists may not
need to be engaged (ie full application of the projected
unit credit method may not be required)
• less detailed disclosures are required
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Judgements and estimates
40
• To measure the liability for a defined benefit
post-employment plan (eg mortality, employee
turnover, age at and date of retirement, future
salary and benefit levels, future medical costs,
the discount rate and fair value of plan assets).
• extensive disclosures required to: explain
characteristics of the plan and associated risks;
identify and explain related amounts in financial
statements; possible affects on the amount,
timing and uncertainty of future cash flows.
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Judgements and estimates continued
41
• Measuring obligations for profit-sharing plans
often require estimates of expected payments
to employees and expected forfeitures if loyalty
period applies.
• Accumulating compensated absence schemes
(eg some sick leave, holiday leave, maternity
leave, military leave and long-service leave
schemes) require estimates of expected
employee compensated absences.
© 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.
42
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43
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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