Anesu Daka CA (SA)
TUT 104 & 105
• Test 3- 23 June 2015
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Tut 104-105
• Test 3 covering:
 Non-current assets held for sale and discontinued
operations (Tut 104)
 Share Based Payments (Tut 105)
 Borrowing costs (Tut 104)
 Revenue (Tut 104)
 Events after the reporting period (Tut 105)
 Provisions, contingent liabilities and assets (Tut
105)
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Non-current assets held for sale
Discontinued Operations: IFRS 5
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Examinability
2015 Possible areas of focus:
Disposal group held for sale or subsidiary +
disclosure note together with IFRIC 17
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Anesu Daka CA (SA)
IFRS 5
• Non-current Assets Held for Sale and
Discontinued Operations
NB: Impairment of assets held for sale, hence,
recoverable amount is only:
 Fair value less cost of disposal
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Example 1
Anesu Daka CA (SA)
Individual Asset of Disposal Group
• A 'disposal group' is a group of assets, possibly
with some associated liabilities, which an entity
intends to dispose of in a single transaction.
• The measurement basis required for non-current
assets classified as held for sale is applied to the
group as a whole, and
• any resulting impairment loss reduces the
carrying amount of the non-current assets in the
disposal group in the order of allocation required
by IAS 36.105 [IFRS 5.4]
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Identifying a Disposal Group
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Held-for-sale classification criteria
Held-for-sale or for distribution classification.
In general, ALL the following conditions must be met for an asset (or 'disposal group')
to be classified as held for sale: [IFRS 5.6-11]
Para 6: CA amt is expected to be recovered principally through sale and not
continued use if:
 the asset is available for immediate sale (para 7)
 Para 8: the sale is highly probable, within 12 months of classification as held for
sale (subject to limited exceptions as per Appendix B), probability of sale is
indicated by the following factors:
 management is committed to a plan to sell (approval received from BOD or Shareholders )
 an active programme to locate a buyer is initiated
 the asset is being actively marketed for sale at a sales price reasonable in relation to its fair
value
 actions required to complete the plan indicate that it is unlikely that plan will be significantly
changed or withdrawn
• NB: An asset (or disposal group) can be classified as held for sale if the delay is
caused by events or circumstances beyond the entity’s control and there is
sufficient evidence that the entity remains committed to its plan to sell the asset
(or disposal group)- Appendix B
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Anesu Daka CA (SA)
Measurement
Anesu Daka CA (SA)
Illustrative Example 2
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Measurement
The following principles apply:
At the time of classification as held for sale.
Immediately before the initial classification of
the asset as held for sale, the carrying amount
of the asset will be measured in accordance
with applicable IFRSs.
Resulting adjustments are also recognised in
accordance with applicable IFRSs. [IFRS 5.18]
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Measurement
No-depreciation.
• Non-current assets or disposal groups that are
classified as held for sale shall not be
depreciated. [IFRS 5.25]
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Anesu Daka CA (SA)
Impairment.
Impairment must be considered both at the time of classification as held for sale and
subsequently:
– At the time of classification as held for sale.
• measure and recognise impairment in accordance with the applicable IFRSs
(generally IAS 16, IAS 36, IAS 38, and IFRS 9).
• Any impairment loss is:
– recognised in profit or loss unless the:
– asset had been measured at revalued amount under IAS 16 or IAS 38, in which
case the impairment is treated as a revaluation decrease. –IFRS 5.28 footnote 6
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Measurement
• After classification as held for sale.
– Non-current assets or disposal groups that are
classified as held for sale are measured at the
lower of:
• carrying amount (CA) and
• fair value less costs of disposal (FVLCS). [IFRS 5.15]
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Measurement
Scope
The measurement provisions of this IFRS5 do not apply to the
following assets:
(a) deferred tax assets (IAS 12 Income Taxes).
(b) assets arising from employee benefits (IAS 19 Employee
Benefits).
(c) financial assets within the scope of IFRS 9 Financial Instruments:
Recognition and Measurement.
(d) non-current assets that are accounted for in accordance with the
fair value model in IAS 40 Investment Property.
(e) non-current assets that are measured at fair value less costs to
sell in accordance with IAS 41 Agriculture. Not Examinable
(f) contractual rights under insurance contracts as defined in IFRS 4
Insurance Contracts. Not Examinable
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Measurement
• Assets carried at fair value prior to initial and
subsequent classification.
– For such assets, the requirement to deduct costs
to sell from fair value will result in an immediate
charge to profit or loss. Deduction of cost of
disposal is NOT allowed in this case.
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Measurement
Impairment.
Impairment must be considered both at the time of classification as
held for sale and subsequently:
– At the time of classification as held for sale.
• measure and recognise impairment in accordance with the applicable IFRSs
(generally IAS 16, IAS 36, IAS 38, and IFRS 9).
• Any impairment loss is:
– recognised in profit or loss unless the:
– asset had been measured at revalued amount under IAS 16 or IAS 38, in which case the
impairment is treated as a revaluation decrease.
– After classification as held for sale.
• Impairment loss = to the difference between the adjusted CA of the
asset/disposal group and fair value less costs to sell, where CA is greater than
FVLCS
• This impairment loss must be recognised in profit or loss (IFRS 5.20), even for
assets previously carried at revalued amounts. This is supported by IFRS 5
BC.47 and BC.48, which indicate the inconsistency with IAS 36.
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What is the deferred Tax Journal Entry?
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Measurement
Impairment Reversal
Subsequent increases in fair value.
• Can be recognised in the profit or loss;
• Limited to the cumulative impairment loss
that has been recognised in accordance with:
– IFRS 5 or
– previously in accordance with IAS 36. [IFRS 5.2122]
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Balance sheet presentation
• Assets classified as held for sale, and the assets
and liabilities included within a disposal group
classified as held for sale, must be presented
separately on the face of the balance sheet
(statement of financial position). [IFRS 5.38]
• Non-current assets per IFRS5 – Current Asset on
B/S
• Liabilities per IFRS5 – Current liabilities on B/S
• Equity- associated with NAHFS
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Presenting non-current assets or disposal
groups classified as
held for sale
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Changes to a plan of sale- para 26-29
If the Held for sale criteria is no-longer met:
• Cease to classify as held for sale
• Measure the asset (disposal group) at lower
of:
– Carrying amt as if the asset was never classified as
held for sale
– Recoverable amt at the date of subsquent
decision Not to sale
• NB- adjustments are done in profit and loss
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Discontinued Operations
Classification as discontinuing.
• A discontinued operation is a component of an
entity that either has been disposed of or is
classified as held for sale, and: [IFRS 5.32]
– represents either a separate major line of business or a
geographical area of operations, and
– is part of a single co-ordinated plan to dispose of a
separate major line of business or geographical area of
operations, or
– is a subsidiary acquired exclusively with a view to
resale and the disposal involves loss of control.
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IFRS 5 and the disposal of interests
• If an investment to be disposed of does meet
the criteria of IFRS 5:
– the accounting treatment will depend on the type
of investment (subsidiary or associate),
– as well as the stage when the criteria are met:
• at acquisition date (acquired exclusively with a view to
resale) or
• only subsequently (after acquisition date) classified as
held for sale
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Subsidiaries acquired exclusively with
a view to resale
• IFRS 5 applies to accounting for an investment in
a subsidiary for which control is intended to be
temporary because the subsidiary was acquired
and is held exclusively with a view to its
subsequent disposal in the near future.
• For such a subsidiary, if it is highly probable that
the sale will be completed within 12 months then
the parent should:
– account for its investment in the subsidiary under
IFRS 5 as an asset held for sale,
– Do not consolidate it under IFRS 10.
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Subsidiaries Held for Disposal (Not
acquired exclusively for sale)
• However, IFRS 10 still requires that if a
subsidiary that had previously been
consolidated is now being held for sale, the
parent must continue to consolidate such a
subsidiary until it is actually disposed of.
• It is not excluded from consolidation and
reported as an asset held for sale under IFRS
5.
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Subsidiaries Held for Disposal
• An entity that is committed to a sale
involving loss of control of a subsidiary that
qualifies for held-for-sale classification under
IFRS 5 shall classify all of the assets and
liabilities of that subsidiary as held for sale,
even if the entity will retain a non-controlling
interest in its former subsidiary after the sale.
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Discontinued Operations P&D
Income statement presentation.
• The sum of the post-tax profit or loss of the discontinued operation
and the post-tax gain or loss recognised on the measurement to fair
value less cost to sell or fair value adjustments on the disposal of the
assets (or disposal group) should be presented as a single amount
on the face of the statement of comprehensive income.
• If the entity presents profit or loss in a separate income statement, a
section identified as relating to discontinued operations is presented
in that separate statement. [IFRS 5.33-33A].
• Detailed disclosure of revenue, expenses, pre-tax profit or loss and
related income taxes is required either in the notes or in the
statement of comprehensive income in a section distinct from
continuing operations. [IFRS 5.33] Such detailed disclosures must
cover both the current and all prior periods presented in the
financial statements. [IFRS 5.34]
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Discontinued Operations
Cash flow statement presentation
– The net cash flows attributable to the operating,
investing, and financing activities of a discontinued
operation shall be separately presented on the face of
the cash flow statement or disclosed in the notes.
[IFRS 5.33]
• No retrospective classification
IFRS 5 prohibits the retrospective classification as a
discontinued operation, when the discontinued
criteria are met after the balance sheet date.
[IFRS 5.12]
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Discontinued Operations
Disclosures.
• In addition to the income statement and cash flow
statement presentations noted above, the
following disclosures are required:
– adjustments made in the current period to amounts
disclosed as a discontinued operation in prior periods
must be separately disclosed. [IFRS 5.35]
– if an entity ceases to classify a component as held for
sale, the results of that component previously
presented in discontinued operations must be
reclassified and included in income from continuing
operations for all periods presented. [IFRS 5.36]
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Illustrative guidance
• Use examples 11-13 which demonstrates the
presentation and measurement of
discontinued operations and subsidiaries
classified as held for sale.
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Anesu Daka CA (SA)
Distributions of Non-cash Assets
International Financial Reporting Interpretations
Committee (“IFRIC”) 17
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Scope
Key requirements
 This interpretation provides guidance on accounting for
arrangements whereby an entity distributes non-cash assets to
shareholders either as a distribution of reserves or as dividends.
 The interpretation applies to all non-reciprocal distributions of noncash assets, including those giving the shareholders a choice of cash
or other assets, provided that:
 All owners of the same class of equity instruments are treated equally;
and
 The non-cash assets distributed are not ultimately controlled by the
same party before and after the distribution (i.e., excluding
transactions under common control)
 Only applies when an entity distributes controlling stake as per
IFRS10.B98b(ii)
 IFRIC is applied by the entity paying the dividend
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Key Issues dealt with in IFRIC 17
(a) When should the entity recognise the
dividend payable?- para 10
(b) How should an entity measure the dividend
payable? - para 11-13
(c) how to account for any difference between
the carrying amount of the assets distributed
and the carrying amount of the dividend
payable? - para 14
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Recognition & Measurement of
Dividend Payable
 When to recognise the dividend payable?
o
An entity must recognise a liability for the distribution when it is no
longer at the discretion of the entity (i.e., when shareholder
approval is obtained, if required).
 The dividend payable is measured:
o initially- at the fair value of the assets to be distributed ;and
Dr Dividend Paid/RE(SCE), Cr Dividend Payable(SF)
o Subsequently re-measured at the end of each reporting period and
immediately before settlement:- at the fair value of the assets to be
distributed
Dr/Cr Dividend Paid/RE(SCE), Cr/Dr Dividend Payable (SFP)
 At settlement date, the difference between the carrying amount of
the assets to be distributed and the fv of liability (Fair value – CA)
is recognised in profit or loss as a separate line item (namelygain/loss on distribution) .
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Illustrative Examples
• Management of an entity declares on 1 September 20X7 that it will
distribute two pieces of freehold land to its two owners on 31 March 20X8.
The plan was unlikely to be accepted by shareholders, however, relevant
shareholder approval was subsequently received on 18 Sep X7.
• On 18 September 20X7, the carrying amount of the freehold land pieces
amounts to $3.0m, the fair value of each land piece is $5.0m.
• The entity has a balance sheet date of 31 December 20X7. On that date, the
fair value of each land piece increased to $5.5m.
• The land pieces are distributed to the owner on 31 March 20X8, at which
date each land piece has a fair value of $5.7m.
• The total carrying amount of the land pieces remained stable over the
period from 18 September 2007 to 31 March 2008.
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Suggested Solution
Accounting Dividend Payableapply IFRIC 17
Accounting for Non-Current Assets Held of
Distribution (NCAHFD)-Apply IFRS 5
At the date of declaration
Dr NCAHFD $3.0m
Dr Dividend (Retained Earnings) $ 10.0m
Cr
Dividend Payable
$10.0m
Being FV of the 2 pieces of land ($5.0m
x2)
After the declaration but before
the distribution
Cr Freehold Land $3.0m
Impairment loss-P/L/OCI
Measure at Lower of CA or
FVLCD
Dr Dividend (Retained Earnings) $ 1.0m
Cr Dividend Payable
$ 1.0m
Being increase in FV ($ 5.5m
x2) - $ 10.0m
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Suggested Solution
Accounting Dividend Payable
At the time of distribution
Dr Dividend paid/RE) $0.4m
($ 11.4 - $ 11)
Cr Dividend Payable
$ 0.4m
Settlement of Dividend Payable
Dr Dividend Payable $ 11.4m
($ 5.7m x2)
Cr NCAHFD
$ 3.0m
(lower of CA or FVLCD at stmt date)
Cr Gain on distribution (separate line
in P/L)
$ 8.4m
($11.4 - $3)
Accounting for Non-Current Assets
Held of Distribution (NCAHFD)
Dr NCAHFD
Cr impairment reversal
Impairment ltd to prior IFRS 5
and IAS 36 impairment loss
w/o
NB: See the Settlement of Dividends for
Derecognition of NCAHFD
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Quiz
•
IFRIC 17 Distribution of Non-Cash Assets to Owners provides
guidance on when to recognise a _________________ and how to
measure it.
•
Select the correct answer.
A.Cash distribution
B. Contractual obligation
C. Distribution
D.Dividend
E. Liability on dividend payable
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Quiz Answer
• E- Liability on dividend payable
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Application Questions-IFRS 5
Tut 104 Q1, Q2 & Q3
Tut 105 Q1
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Share Based Payments: IFRS 2
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Examinability
2015 Possible areas of focus:
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Examinability
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What is a Share Based Payment
 A share-based payment is a transaction in which
the entity receives or acquires goods or services
either as consideration for:
 its equity instruments or
 by incurring liabilities for amounts based on the price
of the entity's shares or
 other equity instruments of the entity.
 The accounting requirements for the share-based
payment depend on how the transaction will be
settled, that is, by the issuance of (a) equity, (b)
cash, or (c) equity or cash.
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What is?
Cash-settled share-based payment transaction
 A share-based payment transaction in which the entity acquires
goods or services by incurring a liability to transfer cash or other
assets to the supplier of those goods or services for amounts
that are based on the price (or value) of the entity's shares or
other equity instruments of the entity.
Equity-settled share-based payment transaction
 A share-based payment transaction in which the entity receives
goods or services as consideration for equity instruments of the
entity (including shares or share options).
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What is? …….
Grant date
 The date at which the entity and another party (including an
employee) agree to a share-based payment arrangement,
being when the entity and the counterparty have a shared
understanding of the terms and conditions of the
arrangement. At grant date the entity confers on the
counterparty the right to cash, other assets, or equity
instruments of the entity, provided the specified vesting
conditions, if any, are met.
 If that agreement is subject to an approval process (for
example, by shareholders), grant date is the date when that
approval is obtained.
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Non-vesting- IFRS 2.21A
• Conditions that make it highly impossible for the
benefits to vest (outside the control of the other
party- e.g. the market condition)
• Accounting treatment of non-vesting conditions:
– an entity shall take into account all non-vesting
conditions when estimating the fair value of the
equity instruments granted
– the entity shall recognise the goods or services
received from a counterparty , irrespective of whether
those non-vesting conditions are satisfied.
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Recognition of Transactions
 An entity shall recognise the goods or services received or acquired in a
share-based payment transaction when it obtains the goods or as the
services are received.
 The entity shall recognise a corresponding increase in equity if the goods
or services were received in an equity-settled share-based payment
transaction, or a liability if the goods or services were acquired in a cashsettled share-based payment transaction. [IFRS2.7]
Dr Goods/Service
Cr Equity (if equity-settled),or
Cr SBP Liability (if cash-settled)
 When the goods or services received or acquired in a share-based payment
transaction do not qualify for recognition as assets, they shall be
recognised as expenses. [IFRS2.8]
Dr Expense
Cr Equity (if equity-settled),or
Cr SBP Liability (if cash-settled)
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Initial Recognition
Example1
 Thandi Ltd entered into the following transactions during the 20.1 FY
ending on 31 Dec:
 Professional services with a fair value of R60,000 were rendered by a
lawyer on 31 March 20.1. The lawyer will be paid by issuing 80,000
ordinary.
 Manufacturing plant with a fair value of R200,000 was delivered by a
supplier on 30 April 20.1. The supplier will be paid by issuing 80,000
ordinary
 5,000 phantom shares (the right to receive a cash payment on a 1 Jan 20.3
equal to the value of 5,000 shares), are issued to the managing director of
the company at year end 20.1. There are no vesting conditions and the
share price at year end is R3.00 per share.
 Required: JE to record the transactions above at initial recognition.
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JE associated with the initial
recognition of these transactions are
the following:
31 Mar 20.1
Dr Legal Fees
Cr Share Capital
Equity-settled SBP
R60,000
R60,000
30 April 20.1
Dr Manufacturing Plant (asset)
Cr Share Capital
Equity-settled SBP
R200,000
R200,000
31 Dec 20.1
Dr Employee Benefit Costs (expense)
Cr SBP Liability (5,000 X R3.00)
Cash-settled SBP
R15,000
R15,000
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EXAMPLE 2
• CAA Ltd grants 100 share options to each of its 500 employees.
Each grant is conditional upon the employee working for the entity
over the next three years. The entity estimates that the fair value of
each share option is CU15.
• During year 1, 20 employees leave. The entity revises its estimate of
total employee departures over the three-year period from 20 per
cent (100 employees) to 15 per cent (75 employees).
• During year 2, a further 22 employees leave. The entity revises its
estimate of total employee departures over the three-year period
from 15 per cent to 12 per cent (60 employees).
• During year 3, a further 15 employees leave. Hence, a total of 57
employees forfeited their rights to the share options during the
three-year period, and a total of 44,300 share options (443
employees × 100 options per employee) vested at the end of year
3.
Prepared by Anesu Daka CA (SA)
Application of requirements
Cumulative
Expense remuneration
for period
expense
CU
CU
Year
Calculation Remuneration
1
500 options × 85% × CU15 × 1/3
212,500
212,500
2
(500 options × 88% × CU15 × 1/3×
2/3) – CU212,500
227,500
440,000
3
(443 employees × 100 shares
× CU15 × 3/3 ) – CU440,000
224,500
664,500
Journal Entries
Y1
Employee benefit costs (P/L)
212 500
Share-based payment reserve (Equity SCE) (212 500)
Expense for the year
Prepared by Anesu Daka CA (SA)
Y2
227 500
(227 500)
Y3
224 500
(224 500)
Recording at Vesting Date
• Using Example 2, assume, for example, that 200 of the
qualifying employees exercised their options at 31
December 20.5 at an exercise price of CU10 per share,
while the remaining 243 employees indicate that they will
not take up any shares. The journal entries are as follows:
Dr Bank (exercise price paid) (200*100*10) 200 000
Dr SBP Equity reserve (total FV of equity instruments granted
which vested)
(443*100*15)
664 500
Cr Share Capital (No. Of Shares X Par value)
(200*100*10) + (200/443)*664500
500 000
Cr Share Premium ( Total amount less SC)
Cr Retained Earnings (forfeited amt of reserve) 364 500
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Performance Condition VS Market
Conditions
•
For performance condition other than a market condition ( revenue target):
– Adjust as per the terms if met
– Adjust for service conditions as earlier discussed under service conditions
Refer to Example 3 &4 in the IFRS2. Part B- must do
•
For performance condition that is a market condition (attainment of a certain
share price):
– Do not adjust for changes in equity instruments no matter the condition is met
or not.
– Just adjust for the service condition only (number of employees left)
– Also use the Fv that take into account the market conditions
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Example 3: Grant with a performance condition, in which the length of the vesting period
varies
CAA Ltd grants 100 shares each to 500 employees, conditional upon the employees’ remaining
in the entity’s employ during the vesting period. The shares will vest at the end of year 1 if the
entity’s earnings increase by more than 18 per cent; at the end of year 2 if the entity’s earnings
increase by more than an average of 13 per cent per year over the two-year period; and at the
end of year 3 if the entity’s earnings increase by more than an average of 10 per cent per year
over the three-year period. The shares have a fair value of CU30 per share at the start of year 1,
which equals the share price at grant date. No dividends are expected to be paid over the threeyear period.
By the end of year 1, the entity’s earnings have increased by 14 per cent, and 30 employees
have left. The entity expects that earnings will continue to increase at a similar rate in year 2,
and therefore expects that the shares will vest at the end of year 2. The entity expects, on the
basis of a weighted average probability, that a further 30 employees will leave during year 2, and
therefore expects that 440 employees will vest in 100 shares each at the end of year 2.
By the end of year 2, the entity’s earnings have increased by only 10 per cent and therefore the
shares do not vest at the end of year 2. 28 employees have left during the year. The entity
expects that a further 25 employees will leave during year 3, and that the entity’s earnings will
increase by at least 6 per cent, thereby achieving the average of 10 per cent per year.
By the end of year 3, 23 employees have left and the entity’s earnings had increased by 8 per
cent, resulting in an average increase of 10.67 per cent per year. Therefore, 419 employees
received 100 shares at the end of year 3.
Prepared by Anesu Daka CA (SA)
Application of requirements
Cumulative
Expense remuneration
for period
expense
CU
CU
Year
Calculation Remuneration
1
440 employees × 100 shares × CU30
× 1/2
660,000
660,000
2
(417 employees × 100 shares × CU30
× 2/3) – CU660,000
174,000
834,000
3
(419 employees × 100 shares
× CU30 × 3/3 ) – CU834,000
423,000
1,257,000
Journal Entries
Y1
Y2
Employee benefit costs (P/L)
660 000
174 000
Share-based payment reserve (Equity SCE) (660 000)
(174 000)
Expense for the year
Prepared by Anesu Daka CA (SA)
Y3
423 000
(423 000)
Example 4: Grant with a performance condition, in which the number of equity instruments
varies
CAA Ltd grants share options to each of its 100 employees working in the sales department at start of year 1. The
share options will vest at the end of year 3, provided that the employees remain in the entity’s employ, and
provided that the volume of sales of a particular product increases by at least an average of 5 per cent per year. If
the volume of sales of the product increases by an average of between 5 per cent and 10 per cent per year, each
employee will receive 100 share options. If the volume of sales increases by an average of between 10 per cent and
15 per cent each year, each employee will receive 200 share options. If the volume of sales increases by an average
of 15 per cent or more, each employee will receive 300 share options. On grant date, Entity A estimates that the
share options have a fair value of CU20 per option. Entity A also estimates that the volume of sales of the product
will increase by an average of between 10 per cent and 15 per cent per year, and therefore expects that, for each
employee who remains in service until the end of year 3, 200 share options will vest. The entity also estimates, on
the basis of a weighted average probability, that 20 per cent of employees will leave before the end of year 3.
By the end of year 1, seven employees have left and the entity still expects that a total of 20 employees will leave by
the end of year 3. Hence, the entity expects that 80 employees will remain in service for the three-year period.
Product sales have increased by 12 per cent and the entity expects this rate of increase to continue over the next 2
years.
By the end of year 2, a further five employees have left, bringing the total to12 to date. The entity now expects only
three more employees will leave during year 3, and therefore expects a total of 15 employees will have left during
the three-year period, and hence 85 employees are expected to remain. Product sales have increased by 18 per
cent, resulting in an average of 15 per cent over the two years to date. The entity now expects that sales will
average 15 per cent or more over the three-year period, and hence expects each sales employee to receive 300
share options at the end of year 3.
By the end of year 3, a further two employees have left. Hence, 14 employees have left during the three-year
period, and 86 employees remain. The entity’s sales have increased by an average of 16 per cent over the three
years. Therefore, each of the 86 employees receives 300 share options.
Prepared by Anesu Daka CA (SA)
Application of requirements
Cumulative
Expense remuneration
for period
expense
CU
CU
Year
Calculation Remuneration
1
80 employees × 200 options × CU20
× 1/3
106,667
106,667
2
(85 employees × 300 options × CU20
× 2/3) – CU106,667
233,333
340,000
3
(86employees × 300 options
× CU20 × 3/3 ) – CU340,000
176,000
516,000
Journal Entries
Y1
Y2
Employee benefit costs (P/L)
106 667
233 333
Share-based payment reserve (Equity SCE) (106 667)
(233 333)
Expense for the year
Prepared by Anesu Daka CA (SA)
Y3
176 000
(176 000)
Fair value
•
•
•
•
Use the market price of the shares (if shares are issued, whether listed or unlisted)
taking into account the terms and conditions of issue.
Conditions of issue include, exclusion from dividends for a number of years, hence,
a lower fair value in that case.
FV of options – measure at the market price of similar quoted share options, or an
option pricing model (Black-Scholes or the Binomial Model), if not possible.
Valuation factors include:
– Life of the option
– Strike price
– Current market price of the underlying share
– The expected volatility of the share price
– Dividends expected, and
– The-risk-free interest rate for the life of the option
– Vesting conditions (non-vesting and market)
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Options – Intrinsic Value
• Intrinsic Value is equal to the difference between FV of
a share and exercise price.
• For example, if the strike price for a call option is USD
$15 and the price of the underlying is USD $20, then
the option has an intrinsic value of USD $5.
• The total value of an option is the sum of its intrinsic
value and its time value.
• NB: Use the intrinsic value as the fair value of the
options granted if the entity concludes that it cannot
estimate reliably the fair value of the share options
granted
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Modifications to terms and conditions
of equity instruments granted
• Golden Rule: Always recognise as per the original
terms and conditions
• Ignore any decrease in benefits ( reduction in
FV)to the employee
• An increase in benefits should, however, be
recognised over the remaining vesting period.
• Treatment of beneficial modifications:
– Modification during the vesting period – recognise
over the remaining period
– After vesting date – recognise immediately.
– Try Example 8 in IFRS2.Part B
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Cancellations- IFRS 2.28
•
•
Failure to meet the vesting conditions by employees is deemed cancellation.
Any cancellation by the entity of the shares or options granted, other than by
failure to meet vesting conditions, shall be accounted for as follows:
– Treat as accelerated vesting (recognised the remaining amount
immediately)
– Any payment made to the employee at date of cancellation will be treated
as a repurchase of equity interest. (Dr Equity and Cr Bank)
– If the amount paid is in excess of the FV of the recognised equity
instrument at the cancellation date , the excess is treated as an expense.
– Replacements (cancellation to replace) should be treated as modification
of the original instruments if they replace the cancelled grant.
– If new issue is not similar to original – treat as a new grant.
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Cash-Settled SBP
Cash-settled share-based payment transaction
– A share-based payment transaction in which the entity acquires goods or
services by incurring a liability to transfer cash or other assets to the supplier
of those goods or services for amounts that are based on the price (or value)
of the entity's shares or other equity instruments of the entity.
– An example is a SARs (Share Appreciation Rights)
– Employee is entitled to a cash payment rather than to shares
– Measure the SBP liability and related gds & services at the fair value of the
equity instruments.
– Until settlement – revalue the fair value of the liability at each balance sheet
date and recognise the mvts in the P/L.
– Recognition – Similar to the Equity-settled SBP goods & services are
recognised when goods are received and when services are rendered.
– Take all relevant vesting conditions and terms of the grant as usual.
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Cash-Settled SBP- IFRS 2.30-33
• Calculation procedure, where there is a
vesting period:
– Adjust for employees resignations
– Use the fair value of the SARs at the end of the
year.
– SARs exercised are measured at the intrinsic value
at exercise date and those not exercised are
measured at FV of SARs
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Anesu Daka CA (SA)
Example 13: Cash-settled share-based payment
• On 1 Jan 2007 an entity grants 100 cash share
appreciation rights (SARs) to each of its 500
employees, on condition that the employees
continue to work for the entity until 31 Dec 209.
– During 2007 35 employees leave. The entity estimates
that a further 60 will leave during 2008 and 2009.
– During 2008 40 employees leave and the entity
estimates that a further 25 will leave during 2009.
– During 2009 22 employees leave.
• At 31 Dec 2009 150 employees exercises their
SARs. Another 140 employees exercise their SARs
at 31 Dec 2010 and the remaining 113 employees
exercise their SARs at the end of 2011.
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• The fair values of the SARs for each year in which
a liability exists are shown below, together with
the intrinsic values at the dates of exercise.
• Required: Calculate the amount to be recognised
in the income statement for each of the five years
ended 31 Dec 2011 and the liability to be
recognised in the statement of financial position
at 31 Dec for each of the five years.
Prepared by Anesu Daka CA (SA)
Solution:
• For the 3 years to the vesting date of 31 Dec 2009 the
expense is based on the entity’s estimate of the
number of SARs that will actually vest (as for equitysettled transaction). However, the fair value of the
liability is re-measured at each year end.
– Intrinsic value of the SARs at the date of exercise is the
amount of cash actually paid.
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SBP with Cash Alternatives
• SBP of this nature may be:
– A compound financial instrument
– Either an Equity or Cash-Settled SBP
• Counter-party has choice of manner of settlement –
treat as compound financial instrument and use the
component approach to separate the liability and the
equity components. (to be dealt with in IAS 32)
• Entity has choice of manner of settlement – classify
entire instrument as either equity or cash settled.
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Anesu Daka CA (SA)
Example 15: 3rd party has choice of
settlement
The fair value of the share alternative is CU2.50 whereas
the market share price of Leigh at 31 May 20x7 is CU3
per share
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Remember
• Since the counter-party (3rd party has the choice
it shall be accounted for as a compound
instrument).
• SBP are measured at the fair value of plant the
grant date (e.g. grand date FV=CU4 million)
• Equity Component at grant CU100k = Total FV of
shares (4 million) – Cash alternative at grant date
(3.9 million shares*CU 3).
• Cash settled SBP are all measured at the fair
valued at the yr end (e.g. yr 1 FV=CU3.5)
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Accounting Entries
Dr Plant
4,000,000
Cr SBP Liability (1300000*3)
3,900,000
Cr Equity (4m-1.9m)
100,000
Initial recognition on transfer date
Dr Fv adjustment (P/L)
650,000
Cr SBP Liability (1300000*3.5)-3.9m
FV adjustment on liability
Prepared by Anesu Daka CA (SA)
650,000
SBP where entity has choice of
settlement
•
Where an entity has a choice of the manner of settlement:
– It should determine if it has an obligation to settle in cash, and if so, the transaction is a
cash-settled SBP
– An entity has obligation to pay cash if:
• Issuing equity has no commercial substance (entity is legally prohibited from issuing
shares)
• Entity has past practice or stated policy of settling in cash, or
• Generally settles in cash when ever the counterparty asks
– If entity has no obligation to pay cash, it shall therefore account for the transaction as an
equity share based payment.
Settlement
• Entity elects to settle in cash, the cash settlement shall be regarded as a repurchase of equity
interest.
• If an entity elects equity no recording other that transfer from equity reserve to share capital.
• Where a higher FV is taken, an additional expense is recognised
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At Acquisition date- Replacement Awards-IFRS 3
 Other Group Schemes not arising on acquisition date
GROUP SHARE BASED PAYMENTS
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(SA)
Recognizing and measurement at
acquisition date
Share-based payment awards
 Recognised and measured in accordance with IFRS 2;
 Mandatory replacements (include in consideration) Vs Nonmandatory (ignore)
 Refer to IFRS 3.56-62 and Illustrative examples 61-71
 For recognition in acquiree and at acquisition valuation value as at
date of recognition using original terms.
 For acquirer use the new terms as if the SBP is issued at acquisition
date. This should form part of the investment as it is what the
acquirer has to pay to acquire the asset (assumed liability) at initial
and any subsequent re-measurement.
 Eliminate this investment against the share based payment reserve
of the subsidiary at consolidation.
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Acquirer’s
Replacement
Awards
Pre-combination
service
Post-combination
Recognition
Recognition
Dr Inv in S
Dr Expense in P/L
Cr SBP Liability/reserve
Cr SBP Liability/reserve
Calculation:
Calculation:
Acquiree Award X completed period
Acquirer awards less pre-combination
awards over remaining period
Greater of total or original period
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Accounting in separate books-post
acquisition
Parent
Dr Investment in S xx
Cr SBP reserve
xx
SBP obligation replaced by
parent
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Subsidiary
The replacement award is
regarded as a modification by
the subsidiary but accounted
for as per IFRS 2 by Sub
Dr Employee exp (p/l)
Cr SBP reserve
xx
Recognition: Replacement Awards at
acquisition
Purchase of shares- E.G on slide
45
Purchase of Assets & Liabilitiesslide 15
Dr Investment in shares 38
Dr Acq-related cost (P/L) 1m
Dr Investment Property
Dr PPE
Dr Inventory
Dr Debtors
Dr Settlement loss
2m
Cr Bank
6 m
Cr Share Capital
15 m
Cr Contingent Consideration 10m
Cr Debenture
5m
Cr Share –based RA
5m
2.5 m
1.5 m
1m
1.5 m
Dr Re-acquired right 0.5 m
DR GOODWILL
2.5 M
Cr Creditors
0.2 m
Cr Cont liability
0.1
CR BANK
10 M
Cr Share –based RA
Dr Settlement loss
Prepared by Anesu Daka CA (SA)
0.2 m
5m
Pro-forma JE: Replacement Awards
post-acquisition
Dr Equity reserve (recognised by sub)
Dr Employee benefit expense (P/L)- (balancing figure)
Cr Investment in S Ltd (reserve recognised by parent)
This JE eliminates the additional Investment recognised
by the parent, and removes the equity reserve
recognised by the subsidiary and increases the
employee benefit expense by the difference.
NB: the final expense is therefore equal to the parent SBP
reserve which has been maintained. S’ SBP should be
reversed at group since it has been replaced by the one
of the parent.
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E.G- Replacement Award SBP
transaction
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E.G- Replacement Award SBP
transaction
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Other Group Schemes not arising on
acquisition date
IFRS 2 PARA 43A – 43D AND B48-B61 DEALS
WITH HOW THE ENITIES IN A GROUP
ACCOUNT FOR SBP IN SEPARATE FINANCIALS
AND IN CONSOLIDATED FINANCIALS:
IE. IS THE TRANSACTION CASH-SETTLED OR
EQUITY- SETTLED?
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SCOPE - IN
IFRS 2 para 3A
PARENT
SUB A
Receives goods/services
SUB B
Settles transaction
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SCOPE - IN
Issues equity to
employee of sub
PARENT
SUB
Continued service
EMPLOYEE
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Accounting for Group Share Based
Payments
43A For share-based payment transactions among group
entities, in its separate or individual financial statements,
the entity receiving the goods or services shall measure the
goods or services received as either an equity-settled or a
cash-settled share-based payment transaction by assessing:
• (a) the nature of the awards granted, and (are they share
or rights to cash?)
• (b) its own rights and obligations. (does entity have to pay
cash or deliver shares ? )
NB: Amount recognised by the entity receiving the goods or
services may differ from the amount recognised by the
consolidated group or by another group entity settling the
share-based payment transaction.
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43B The entity receiving the goods or services shall measure the
goods or services received as an equity-settled share-based
payment transaction when:
(a) the awards granted are its own equity instruments, or
(b) the entity has no obligation to settle the share-based
payment
transaction.
The entity shall subsequently re-measure such an equity-settled
share-based payment transaction only for changes in nonmarket vesting conditions in accordance with paragraphs 19–21.
In all other circumstances, the entity receiving the goods or
services shall measure the goods or services received as a cashsettled share-based payment transaction.
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Example 17: Parent entity grants own instruments to subsidiary’s employees
H Ltd grants 100 share options to 50 of S Ltd, a subsidiary of H Ltd, employees. The fair
value of a share option on grant date is CU20 each. The options vests immediately. S Ltd
as the receiving entity has no obligation to settle the payment.
Application- para 43B:
S Ltd as the receiving entity has no obligation to settle the payment. S Ltd therefore
classifies the transaction as equity-settled.
S Ltd
Employee benefits (P/L)
Equity (Contribution from parent)
(50 × 100 × 20)
100 000
100 000
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43C The entity settling a share-based payment
transaction when another entity in the group receives
the goods or services shall recognise the transaction as
an equity-settled share-based payment transaction
only if it is settled in the entity’s own equity
instruments. Otherwise, the transaction shall be
recognised as a cash-settled share-based payment
transaction.
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Example 17: Parent entity grants own instruments to subsidiary’s employees
H Ltd grants 100 share options to 50 of S Ltd, a subsidiary of H Ltd, employees. The fair
value of a share option on grant date is CU20 each. The options vests immediately. S Ltd
as the receiving entity has no obligation to settle the payment.
Application of para 43C:
H Ltd as the settling entity has the obligation to settle the payment in own equity
instruments. H Ltd therefore classifies the transaction as equity-settled.
H Ltd
Investment in subsidiary (SFP)
SBP Equity reserve (SCE)
(50 × 100 × 20)
100 000
100 000
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Consolidation/ Pro-forma JEs
S Ltd
Employee benefits (P/L)
Equity (Contribution from parent)
(50 × 100 × 20)
100 000
100 000
H Ltd
Investment in subsidiary (SFP)
SBP Equity reserve (SCE)
(50 × 100 × 20)
100 000
100 000
Consolidation Elimination Entry
Dr Equity (Contribution from parent)
Cr Investment in subsidiary (SFP)
100 000
100 000
Effective Impact in the group
Dr Employee benefits (P/L) (employee services rcvd by group) 100 000
Cr SBP Equity reserve (SCE) (promise to deliver share by grp)
100 000
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Taxation
Equity-settled SBP
 Issuances of equity are not seen as an expense for tax
purposes, as a cost has not been incurred from a tax
perspective, hence, no deferred tax, unless special
deductions are awarded e.g. for broad-based share
based payments.
Cash settled SBP
 Amounts deductible for tax purposes as they are actually
incurred.
 NB: If cash settlement vest and get paid immediately – no
deferred tax
 If it vests over a period and only paid at end there is
deferred tax, as expense only deductible upon payment.
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Disclosure 44–52 and IG23 cont….
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Disclosure 44–52 and IG23
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Disclosure 44–52 and IG23
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Disclosure 44–52 and IG23
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Accounting for BEE (AC 503)
BEE is similar to indigenization type
transactions
AC 503 of APB is applied
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Background
• In the context of empowerment of black people
through meaningful participation in the South African
economy, entities may issue equity instruments to
black people or entities controlled by black people at a
discount to fair value. Such transactions are known as
Black Economic Empowerment (BEE) transactions.
• IFRS 2 applies to the accounting for BEE transactions
where the fair value of cash and other assets received
is less than the fair value of equity instruments
granted. AC 503 addresses issues specific to BEE
transactions.
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Scope
AC503 applies to BEE transactions where the entity:
• grants equity instruments to black people
(directly or indirectly) and
• the fair value of the cash and other assets
received (or to be received) is less than the fair
value of the equity instruments granted.
It does not apply to transactions where the BEE
partner is issued with equity instruments for
transactions that are unrelated to the entity
obtaining BEE equity credentials (IFRS 2 applies to
these transactions).
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Forms of BEE transactions
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Accounting Treatment/Consensus
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Accounting Treatment/Consensus
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Apply IFRS 2
Tut 105 Q17.1-Q17.3 and Q1 – Q4
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Questions ?
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Borrowing Costs: IAS 23
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Examinability
2014 Possible areas of focus
• Focus on key principles- BC could feature with
PPE most of the time + Deferred tax
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Key Areas of Focus
• Identification of qualifying assets
• Calculation & recognition of borrowing cost
for specific loans and general borrowings
• Deferred tax implications
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Big Picture
1.
Is it a borrowing cost ?[IAS 23.05 & .06]
i.
ii.
2.
Is it a qualifying asset ? [IAS 23.05 & .06]
i.
ii.
3.
5.
If No, recognise in P&L as finance cost
If Yes, refer to 3 below
Are the borrowing costs directly attributable to acquiring a
qualifying asset? [IAS 23.10]
i.
ii.
4.
If No, recognise in P&L as finance cost
If Yes, refer to 2 below
If No, it is a General Borrowing [IAS 23.12 & 14]
If Yes, it is a Specific borrowing [IAS 23.12 & 14]
When does capitalisation commence, is suspended or ceases [IAS
23.17 – 22]
What are the deferred tax implications?
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Timing of Capitalisation (par 17)
• Capitalisation should commence when:
– expenditures are being incurred,
– borrowing costs are being incurred, and
– activities that are necessary to prepare the asset
for its intended use or sale are in progress (may
include some activities prior to commencement of
physical production). [IAS 23.17-18]
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Timing of Capitalisation
• Capitalisation should be suspended during
extended periods in which active development is
interrupted. [IAS 23.20]
• General rule:
– Events under control of management (incorrect
planning & management inefficiencies)- suspend
capitalisation
– Events beyond control of management ( ongoing bad
whether, inherent delays e.g. aging of inventory,
normal or expected seasonal trends)- do NOT suspend
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Timing of Capitalisation
• Capitalisation should cease when substantially
all of the activities necessary to prepare the
asset for its intended use or sale are complete.
[IAS 23.22] If only minor modifications are
outstanding, this indicates that substantially
all of the activities are complete. [IAS 23.23]
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Recognition of Borrowing costs
First Journal entry as per IFRS9
Dr Finance costs 25000
Dr Loan (borrowing)5000
Cr Bank
30000
Recording of interest on a
borrowing as required by
IFRS 9-amortised cost
financial liabilities using
effective interest method.
Second Journal entry as per IAS
23
Dr Asset-borrowing cost 10k
Cr Finance cost
10K
Capitalisation of part of finance
cost as a borrowing cost to the
cost of the qualifying asset.
Classifying part of finance cost as
borrowing cost, hence only
15000 of the 25000 will be
expensed as other borrowing
cost
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Accounting Treatment
Measurement : Specific Borrowings
• Where funds are borrowed specifically, costs
eligible for capitalisation are the actual costs
incurred less any income earned on the
temporary investment of such borrowings.
[IAS 23.12]
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Specific Borrowings
For an Actual Loan received as cash
Capitalised Borrowing Costs=
Interest paid/incurred
less Interest received on surplus funds
xxxxx
(xxxx)
XXXX
For a Loan or mortgage Facility (cash only used upon payment of
expenditure)
Apply the market rate:
- on actual expenditure; and
- Interest cost to effect compounding
on a systematic basis
NB: Always use the market rate and not the nominal rate
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Accounting Treatment
Measurement : General Borrowings
• Where funds are part of a general pool, the
eligible amount is determined by applying a
capitalisation rate to the expenditure on that
asset. The capitalisation rate will be the
weighted average of the borrowing costs
applicable to the general pool. [IAS 23.14]
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Rate
For General Borrowings:
Determine an interest rate (capitalisation rate), as follows:
 Single general loan – use the loan’s market rate
 Multiple general loans – calculate the Weighted average interest
rate, as follows:
Capitalisation rate = actual interest costs for the year
Weighted borrowings for the year
NB: Borrowings are weighted for the period used ( e.g. A loan used
for 6 months will be multiplied by 6/12 and that used for the
whole year will taken in full)
 NB: Always use the market rate and not the nominal rate
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Expenditure
Adjusting expenditure to determine borrowing
costs, is as follows:
• Normal Expenditure (not evenly incurred) –
Use actually incurred.
• Expenditure incurred evenly – Average the
expenditure by diving by 2
• Watch-out on compounding periods
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BCs: Deferred tax Implications
• Borrowing costs are deductible when the
asset is available for use (pre-production
interest).
• Capital allowance is levied on the capital
expenditure excluding borrowing costs
capitalised
• Refer to example below
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Example
During the yr $7m was capitalised to a factory
building. Building completed in Sep at a cost
of $47m (including borrowing costs) and was
available for use on 1 Oct. Y/E is 31 Dec.
Useful life is 20 yrs from 1 Oct. Capital
allowance of 5% is allowed by the taxman.
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Answer
SoFP method of Calculating deferred tax
CA
TB
TD
Factory
46.4m
38m
8.4m
Workings
CA = 47m less (47m x 1/20 x 3/12)
TB = 47m less 7m less (40m x 5%)
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Questions ?
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Revenue from Contracts with
Customers
IFRS 15
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Revenue
Overview
The five step model
1
Identify the contract
2
Identify the performance obligations
3
4
5
Determine the transaction price
Allocate the transaction price
Recognise revenue when (or as) a
performance obligation is satisfied
Other Considerations
Anesu Daka CA (SA)
Unprecedented change in accounting
for revenue
At a glance
•
• The IASB issued IFRS 15 Revenue
from Contracts with Customers on
Wednesday, 28 May 2014.
• Just about every entity that
generates revenue will be affected
in some way.
• Currently effective for periods
beginning on or after 1 January
2017 (but likely to change based on
recent Board decision)
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Impacts
• Significant change to
how many recognise
revenue
• Expanded disclosure
requirements
• Companies will need
to assess adequacy
of data provided by
current systems
IFRS 15 Revenue from contracts
with customers Scope
Evaluate contracts
under other
applicable standard
first
All contracts
with
customers
Interest &
dividends
IAS 39/IFRS 9 – Financial instruments
IAS 17 – Leases
IFRS 4 – Insurance
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IFRS 15 –
Residual
Standard
IFRS 15 - Core Principle
An entity recognises 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.
•
Revenue is recognised in accordance with the core
principle by applying a 5 step model.
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The five step model
•
Step 1: Identify the
contract(s) with the
customer
Step 2: Identify the
separate performance
obligations in the
contract(s)
Step 4: Allocate the
transaction price
Step 3: Determine the
transaction price
Step 5: Recognise revenue when (or as) a
performance obligation is satisfied
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A simple example
Applying the five step model
• Contract: Entity sells products X, Y and Z to the customer
• Transaction price: R12m, 50% upfront, 50% when all three
delivered
• Stand alone price: Each sold separately for R5m each
• Nature of products:
Product X: Good, control transferred at a point in time
Product Y: Good, control transferred at a point in time
Service Z: Service transferred over one year
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A simple example
Solution
Step 1
Signed contract exists
Step 2
Customer can benefit from X, Y and Z separately as they are sold
separately - three performance obligations
Step 3
The transaction price is fixed at R12m
Step 4
20% discount is allocated evenly
across X, Y, Z
Total stand alone price = R15m
Total transaction price = R12m
Total discount = 20%
Discount * stand alone = R4m
Step 5
Recognise when control of X / Y transfers = R4m each
Recognise over the period that Z is provided = R4m
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Revenue recognition
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Revenue recognition
 Examples:
Building a house, swimming pool & a tennis court
(control can be transferred on completion)
Ship building - the performance obligation occurs
when the ship is completed
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Revenue recognition
 Examples:
Building a house, swimming pool & a tennis court
(control can be transferred on completion)
Ship building - the performance obligation occurs
when the ship is completed
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Revenue recognition
 Phase 3
 Determine the Transaction price (The total revenue)
For example:
Mobile phone handset and service contract
Transaction price
1. The basic contractual minimum revenue
plus
1. All the expected other revenue (Roaming charges, SMS, Data plan etc.)
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Factors that may affect the transaction price
Variable
consideration
Transaction
price =
Amount of
consideration to
which the entity
expects to be
entitled to in
exchange for
transferring
goods or services
Significant
financing
component
Non-cash
consideration
Consideration
payable to
customers
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Step 3 – Determine the transaction price
Variable consideration
• Estimate an amount of variable consideration
• Measure at either most likely outcome or expected value
• Variable consideration constraint
Included in the transaction price only if highly probable that
there will not be a significant revenue reversal
Uncertainty
over long
period of time
Limited
experience
with similar
contracts
Susceptible
to factors
outside control
Must recognise minimum amount
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Broad range
of outcomes
Reassessment
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How to allocate the transaction price
1
2
3
Transaction price (and
any subsequent changes)
Allocate to each performance obligation based
on relative stand-alone selling price unless
clear that discount or variable consideration
relates to only one good/service
Stand-alone selling price
Possible estimation
methods include
Should be estimated if the actual
selling price is not directly
observable
•
•
•
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Cost plus reasonable margin
Market prices similar good/service
Residual approach when selling
price is highly variable
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Revenue recognition
 Phase 5
 Recognise revenue when the performance obligation is
satisfied
 Upon completion of the obligation and control
is transferred to the client/customer
e.g. when I take control of my new house
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Revenue over time or at a point in
time?
Customer receives benefits as performed/
another would not need to re-perform
e.g. cleaning service, shipping
Yes
No
Create/enhance an asset customer
controls
e.g. house on customer land
Yes
No
Does not create asset with alternative use
and Right to payment for work to date
e.g. an ‘audit’ report
Yes
Over time
No
Point in time
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Other considerations
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Other considerations
Further guidance
Warranties
Customer option to obtain
additional goods or services
Right of return
Agent vs Principal
Disclosure
Repurchase agreements
Licenses
Contract costs
Transition
Bill-and-Hold and
Consignment arrangements
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Contract costs
Incremental Costs- IFRS15.91
• Definition: Costs incurred to
obtain a contract with a
customer that it would not
have incurred if the contract
had not been obtained.e.g. sales commission
• Acc Treatment: capitalise as
an asset and amortise of
the contract term
Cost to fulfil a contract
• Definition- refer para 97-98
• Acc treatment: refer to para
95
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Cost to fulfil a contract
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Acc Treatment
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Apply IFRS 15
Level 2
Try the following:
• Tut 102 Question 14.1-14.2
Level 1
Try the following:
• Tut 104 Question 11.1-11.2
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177
Events After the Reporting Period: IAS
10
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Examinability
2015 Possible areas of focus:
Theory + Disclosure
Normally together with IAS 37
With ISA 560: Subsequent Events in Audit
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Agenda
Definitions
Date of authorisation for issue
Recognition and measurement:
Adjusting events after the reporting period
Non-adjusting events after the reporting period
Dividends
Going concern
Disclosure
Updating disclosure about conditions at the end
of the reporting period
What is an event after reporting
period?
Definition of Events after reporting date: [IAS10.3]
 Events after the reporting period are those events,
favourable and unfavourable, that occur between the
end of the reporting period and the date when the
financial statements are authorised for issue. Two
types of events can be identified:
(a) those that provide evidence of conditions
that existed at the end of the reporting period
(adjusting events after the reporting period); and
(b) those that are indicative of conditions that
arose after the reporting period (non-adjusting events
after the reporting period).
What is an event after reporting
period?
Reporting date
AFS Authorisation
Date
Events after the reporting period
What is the AFS Authorisation Date?
• The date of authorisation the financial
statements for issue will vary depending:
– upon the management structure,
– statutory requirements and procedures followed in
preparing and finalising the financial statements.
Recognition & Measurement
• Adjusting events
• Non-adjusting events
Adjusting events after the reporting
period
Adjusting events:
• Those events that provide evidence of
conditions that existed at the end of the
reporting period.
Accounting Treatment:
• adjust the amounts recognised in its financial
statements to reflect adjusting events after the
reporting period.
Non-Adjusting events after the
reporting period
Non-Adjusting events:
• Events that are indicative of conditions that arose after the reporting
period.
Accounting Treatment:
• those that are indicative of conditions that arose after the reporting
period.
Disclosure:
• Material events:
• Disclose each material category of non-adjusting event after the reporting
period:
(a) the nature of the event; and
(b) an estimate of its financial effect, or a statement that such
an estimate cannot be made.
Adjusting and Non-adjusting Event
Events after Reporting Date
Adjusting Events:
Event confirms
circumstances existing at
reporting date
Non-adjusting Events:
New events NOT confirming
circumstances at reporting date
Examples-IAS10.9:
- court case settlement
Examples -IAS10.22:
-bankruptcy of a customer
-major buzz combination
-stock sold below cost
Discovery of fraud or error
Plan to discontinue a line of
operations
-going concern issues
Change in current tax rate
Dividends
12 If dividend declared after the reporting period:
– the entity shall NOT recognise those dividends as a
liability at the end of the reporting period.
13 If dividends are declared after the reporting
period but before the financial statements are
authorised for issue:
– the dividends are NOT recognised as a liability at the
end of the reporting period because no obligation
exists at that time.
– Such dividends are disclosed in the notes in
accordance with IAS 1 Presentation of Financial
Statements.
Going concern
14 An entity shall not prepare its financial statements on a going concern
basis if management determines after the reporting period either that it
intends to liquidate the entity or to cease trading, or that it has no realistic
alternative but to do so.
15 Deterioration in operating results and financial position after the reporting
period may indicate a need to consider whether the going concern
assumption is still appropriate. If the going concern assumption is no
longer appropriate, the effect is so pervasive that this Standard requires a
fundamental change in the basis of accounting, rather than an adjustment
to the amounts recognised within the original basis of accounting.
16 IAS 1 specifies required disclosures if:
(a) the financial statements are not prepared on a going concern basis;
or
(b) management is aware of material uncertainties related to events or
conditions that may cast significant doubt upon the entity’s ability to
continue as a going concern. The events or conditions requiring disclosure
may arise after the reporting period.
Disclosure (IAS10.17-22)
• General disclosures:
– The date when the financial statements were
authorised for issue;
– who gave that authorisation; and
– that the entity's owners or others have the power
to amend the financial statements after they have
been issued, should this be the case.
Disclosure (IAS10.17-22)
• Adjusting events (information received after
the reporting period about conditions existing
at the reporting date)
– Update the relevant amounts and other
disclosures to reflect the new information.
Disclosure (IAS10.17-22)
• Non-adjusting events (conditions that arose
after the reporting date)
– If Non-adjusting Event is Material:
– Disclose each material category of non-adjusting
event after the reporting period:
(a) the nature of the event; and
(b) an estimate of its financial effect, or a
statement that such an estimate cannot be
made.
Apply IAS 10
• Tut 105 Q17.1 & Q17.2
Provisions, Contingent Liabilities and
Assets: IAS 37
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Examinability
2015 Possible areas of focus:
Discussion Question
Onerous Contracts-together with IFRIC 13
Restructuring provision- together with IAS 19
(termination benefits)
Rehabilitation provision together with IFRIC 1
& IFRIC 5 + IAS 16
Presentation and Disclosure
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Provision
• What is a Provision?
A provision has to meet the
A provision is a:
definition of a liability first
liability of
Payment
date not
Uncertain:
definite
Amount may be
timing or
estimated
amount.
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Recognition
Incorporation or recording of the monetary
effects of a business transaction into books of
account or financial statements.
Dr
Cr
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Provisions
• When is a provision recognized?
IAS37.14: A provision shall be recognised when:
(a) an entity has a present obligation (legal or constructive) as a
result of a past event;
(b) it is probable that an outflow of resources embodying economic
benefits will be required to settle the obligation; and
(c) (c) a reliable estimate can be made of the amount of the
obligation.
NB: If these conditions are not met, no provision shall be recognised.
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Definitions
• A legal obligation is an obligation that derives from:
(a)
a contract (through its explicit or implicit
terms); (e.g. warranty cost or breach of contract costs)
(b)
legislation; or (e.g. environmental law requirements)
(c)
other operation of law. (court or arbitration ruling)
A constructive obligation is an obligation that derives from an entity’s
actions where:
(a) by an established pattern of past practice, published policies or a
sufficiently specific current statement, the entity has indicated to
other parties that it will accept certain responsibilities; and (13th
cheque or bonus payment)
(b) as a result, the entity has created a valid expectation on the part
of those other parties that it will discharge those responsibilities.
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Start
Present obligation
as a result of an
obligating event
Yes
No
Yes
No
Probable outflow
Yes
Possible
Obligation
No
Remote
No
Yes
No
Reliable Estimate
Yes
Recognise a
provision
Disclose
Contingent
Liability
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Do nothing
Provisions: Measurement
a reliable estimate can be made of the amount
of the obligation
Use the Best Estimate to measure the provision
In the extremely rare case where no reliable
estimate can be made, a liability exists that
cannot be recognised. That liability is
disclosed as a contingent liability
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Measurement
• Best estimate– The amount recognised as a provision shall be the best estimate
of the expenditure required to settle the present obligation at
the end of the reporting period.
• Best estimate is:
– Based on management’s judgement
– Supported by experience of similar transactions
– Take time value of money into account
– Takes uncertainty & expected value:
• for large population – weighted probability of all possible
outcomes (see next slide)
• Single item- recognise in full
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Measurement
Example: (refer to the TV Sales & Home example)
The company’s past experience and future expectations
indicate the following pattern of likely repairs:
Goods sold
Defects
Expected cost of repairs
75%
None
Nil
20%
Minor
$1 million
5%
Major
$4 million
What is the value of the warranty provision at year end?
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Provisions
Answer:
Best estimate is equal to expected value
(75% x $nil) + (20% x 1 million) + (5% x 4 million)
$ 400,000
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Provisions
• Present Value:
• Where time value of money is material, use present value
at the best estimate.
• The discount rate (or rates) shall be a pre-tax rate (or rates)
that reflect(s) current market assessments of the time value
of money and the risks specific to the liability.
• The discount rate(s) shall not reflect risks for which future
cash flow estimates have been adjusted.
• Future events
• 48 Future events that may affect the amount required
to settle an obligation shall be reflected in the amount
of a provision where there is sufficient objective
evidence that they will occur.
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Reimbursements (IAS 37.53-58)
• Where some or all of the expenditure required to settle a provision
is expected to be reimbursed by another party, the reimbursement
shall be recognised when,
– and only when, it is virtually certain that reimbursement will
be received if the entity settles the obligation.
• Recognition- treat as a separate asset.
• Measurement- reimbursement shall not exceed the amount of the
provision.
• In the P/L, the expense relating to a provision may be presented net
of the amount recognised for a reimbursement. (set-off
reimbursement against the expense of the provision and show only
net amount) – para 54
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Use of provisions (IAS 37.61-62)
• A provision should be used only for the purpose for which it was
originally raised and any unused amount is therefore reversed to
profit or loss. Settling expenditures against a provision that was
originally raised for another purpose would conceal the impact of
two different events.
• E.G. A provision raised for a court case at reporting date shall be
reversed to P/L if the court case do not result in any obligation:
Dr Provision for court case (SoFP)
Cr Reversal of provision of court case (P/L)
NB: This be regarded as a change in accounting estimate, hence,
reverse to current year profits even if the provision was raised in
prior period.
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Application of the recognition &
measurement rules:
1. Future operating losses (IAS 37.63-65)
2. Onerous Contracts (IAS 37.66-69)
3. Restructuring (IAS 37.70-83)
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Future operating losses
• 63 Provisions shall NOT be recognised for
future operating losses.
– Does NOT meet definition of a provision
– Rather indicate impairment of assets – test for
impairment under IAS 36.
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Application of recognition & measurement rules
Onerous contracts
• Definition: An onerous contract is a contract in which the
unavoidable costs of meeting the obligations under the
contract exceed the economic benefits expected to be
received under it.
• 66 If an entity has a contract that is onerous, the present
obligation under the contract shall be recognised and
measured as a provision.
• Measurement- at the least net cost of exiting from the
contract, which is the lower of:
– the cost of fulfilling it and
– any compensation or penalties arising from failure to fulfil it
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Ex 1-Onerous Contracts
• On 1 January 20.12, Tate Ltd entered into a lease contract for
premises in the city centre of Bulawayo Centre. The lease is to run
for a period of four years (contract expires on 31 December 20.15).
• As a result of several factors, the board of directors decided on 31
October 20.13 to move the entity to Hillside Centre with effect from
1 January 20.14.
• However, the lease contract determines the following:
$
– Operating lease payments per year (no escalation)
– Fine payable on early cancellation of the contract
– The premises cannot be sub-let
100 000
150 000
• The company’s year end is 31 December.
Q- Discuss and determine the impact of the above transaction in the
P/L
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Ex 1-Onerous Contracts
Answer
• The decision of the board of directors on 31 October
20.3 resulted in an onerous contract.
• Assume that the time value of money does not play a
material role here. Since the contract represents a
present legal obligation, a provision needs to be raised
for the smaller of:
$
– Remaining operating lease payments from 1 January 20.14
until 31 December20.15 (100 000 × 2)* =
200 000
– Fine payable on cancellation
150 000
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Ex 1-Onerous Contracts
Answer
• Since the company will only relocate to Menlyn
from 1 January 20.4, November and December
20.3 are not taken into account.
• Consequently, a provision of R150 000 (the
smaller figure) is accounted for as follows:
Dr Fine at cancellation of lease contract (P/L) 150k
Cr Provision for onerous contract (SFP)
150k
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Ex 2- Onerous Contract
• An entity has an agreement to provide 100 000 truck tyres to a
once-off customer at a fixed price over two years. At the end of the
first year, after providing 50 000 truck tyres to the customer, the
price of the raw materials used increased unexpectedly. The entity
was unable to renegotiate the sales price with its customer and
would have to pay a penalty of R500 000 if it cancels the contract
• It is expected that the remaining truck tyres will be delivered twelve
months after reporting date for a total price of R3.5 million. The
total cost of producing the truck tyres measured at the same point
in time is expected to be R4.1 million. Assume that a discount rate
of 10% per annum before tax is appropriate.
Q- Discuss the accounting treatment of the transactions and events.
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Ex 2- Onerous Contract
Answer
• The obligating event is the signing of the sales contract, giving rise
to a legal obligation. Once the sales contract has become onerous,
an outflow of resources embodying economic benefits is probable.
• The present value of the expected net cost of meeting the
obligations under the contract amounts to R545 455 [(3.5 million –
4.1 million) /1.10]. As this amount is larger than the penalty payable
to cancel the contract, a provision would be raised at reporting date
for the penalty amount of R500 000.
• As the contract is onerous, a provision should be raised for the
present obligation under the contract. Taking into account that the
penalty payment is lower than the costs to fulfil the contract, it
appears a reasonable assumption that the entity will opt for the
penalty payment instead of continuing with the contract.
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Restructurings
• Examples of events that may fall under the definition of
restructuring:
•
(a)
sale or termination of a line of business;
•
(b)
the closure of business locations in a country or
region or the relocation of business activities from one country or
region to another;
•
(c)
changes in management structure, for example,
eliminating a layer of management; and
•
(d)
fundamental reorganisations that have a material
effect on the nature and focus of the entity’s operations.
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Restructurings
Recognition Criteria for Restructuring provision
•
•
Recognise a provision from a constructive obligation to restructure which arises
only when an entity:
(a) has a detailed formal plan for the restructuring identifying at least:
(i)
the business or part of a business concerned;
(ii) the principal locations affected;
(iii) the location, function, and approximate number of employees who will be
compensated for terminating their services;
(iv) the expenditures that will be undertaken; and
(v) when the plan will be implemented; and
has raised a valid expectation in those affected that it will carry out the
restructuring by starting to implement that plan or announcing its main features to
those affected by it.
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Restructurings
Measurement of a Restructurings Provision:
•
•
Measurement- Cost to be included:
A restructuring provision shall include only the direct expenditures arising from
the restructuring, which are those that are both:
(a) necessarily entailed by the restructuring; and
(b) not associated with the ongoing activities of the entity.
•
A restructuring provision does not include such costs as:
(a)
(b)
(c)
retraining or relocating continuing staff;
marketing; or
investment in new systems and distribution networks.
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EX 1- Restructurings
No implementation before reporting date
• On 15 December 2011 the board of PARS Ltd decided to close down its
restaurant division. Before reporting date (31 December 2011), the
decision was not communicated to any of those affected and no other
steps were taken to implement the decision.
Answer
•
•
Conclusion
There has been no obligating event, no obligation has arisen and accordingly no provision is
recognised. If the plan is implemented after year-end and is regarded as material, it should
be disclosed as a non-adjusting event after the reporting period.
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Ex 2- Restructurings
Communication or implementation before reporting date
• On 15 December 2011 the board of Yada Ltd decided to close down its
bakery division. On 22 December 2011 a detailed plan for closing down
the division was agreed upon by the board; letters were sent to customers
warning them to seek an alternative source of supply, and redundancy
notices were sent to the staff of the division.
Answer
•
•
Conclusion
The obligating event is the communication of the decision to the customers and employees,
which gives rise to a constructive obligation that the division will be closed. An outflow of
resources embodying economic benefits in settlement is probable. A provision is recognised
at 31 December 2011 for the best estimate of the costs of closing the division.
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Provision for Dismantling costs
According to IAS16.16(c), the estimated cost (PV of
future dismantling cost) of dismantling and removing the
asset and restoring the site should be added to the cost of
the asset at initial recognition (see IAS 37, Provisions,
Contingent Liabilities and Contingent Assets).
However, the entity must have a present legal obligation or
constructive obligation to dismantle and remove the item
in order to include such costs in the cost of PPE.
Apply the recognition creteria of a provision in IAS
37 – at initial recognition of dismantling costs on
PPE.
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Changes in Existing
Decommissioning, Restoration and
Similar Liabilities
IFRIC 1
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SUMMARY OF IFRIC 1
 The IFRIC the provision to re-measured:
 Considering changes in estimated cash flows
 at the current best estimate, which should reflect
current discount rates.
 The third kind of change dealt with by the
Interpretation is an increase in the liability that
reflects the passage of time – also referred to as the
unwinding of the discount. This is recognised in profit
or loss as a finance cost as it occurs.
NB: Also, the IFRIC considered it important that both
kinds of change should be dealt with in the same way.
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SUMMARY OF IFRIC 1
Changes in Dismantling costs JEs: Cost Model
Increase in Provision:
Dr PPE
Cr Provision for Dismantling cost
Decrease in Provision:
Dr Provision for Dismantling cost
Cr PPE
 NB: an increase in the provision could an indicator of
impairment and impairment testing should be carried
out where the provision has increased.
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SUMMARY OF IFRIC 1
 Changes in Dismantling costs JEs: Revaluation Model
Increase in Provision:
Dr Revaluation surplus (OCI)[ltd to rev reserve]
Dr Increase in dismantling costs (P/L) [excess over rev
reserve]
Cr Provision for Dismantling cost
Decrease in Provision:
Dr Provision for Dismantling cost
Cr Revaluation surplus (OCI)[ltd to rev reserve]
Cr Increase in dismantling costs (P/L) [excess over rev
reserve]
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Rights to Interests Arising from
Decommissioning, Restoration and
Environmental Funds
IFRIC 5
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SUMMARY OF IFRIC 5
• Some entities have obligations to
decommission assets or to perform
environmental restoration or rehabilitation
(refer to slides above). Some such entities
contribute to a fund established to reimburse
the decommissioning, restoration or
rehabilitation costs when they are incurred.
The fund may be set up to meet the
decommissioning costs of a single contributor
or for many contributors.
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SUMMARY OF IFRIC 5
The issues addressed in IFRIC 5 are:
1. How should a contributor account for its
interest in a fund?
2. When a contributor has an obligation to
make additional contributions, how should
that obligation be accounted for?
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SUMMARY OF IFRIC 5
ACCOUNTING TREATMENT
If the Fund is a separate entity in which entity has some
control:
If entity has absolute control – consolidate under IAS
IFRS 10 Consolidated Financial Statements
If entity has significant influence- equity account
under IAS 28 Investments in Associates & JVs, and
If entity has joint control in a:
 Joint Venture- equity account under IAS 28 Investments in
Associates & JVs
 Joint operation- proportionately consolidate under IFRS
11 Joint Arrangements.
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SUMMARY OF IFRIC 5
ACCOUNTING TREATMENT
 Where the entity has no any form control in the fund, it
should account for the fund as a reimbursement asset,
measured at the LOWER of:
 (i) the amount of the decommissioning obligation recognised
and
 (ii) the contributor's share of the fair value of the net assets
of the fund.
 Changes in the carrying amount of this right (other than
contributions to and payments from the funds) should be
recognised in profit or loss.
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SUMMARY OF IFRIC 5
When a contributor has an obligation to make
potential additional contributions to the fund,
that obligation is a contingent liability within
the scope of IAS 37. When it becomes probable
that the additional contributions will be made, a
provision should be recognised.
NB:IFRIC 5 amends IAS 39 to exclude from its scope
rights to reimbursement for expenditure
required to settle a liability recognised as a
provision. Such rights will be accounted for in
accordance with IAS 37.
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Disclosure - Provision
• For each class of provision, an entity shall disclose:
(a) the carrying amount at the beginning and end of the period;
(b) additional provisions made in the period, including increases
to existing provisions;
(c) amounts used (ie incurred and charged against the provision)
during the period;
(d) unused amounts reversed during the period; and
(e) the increase during the period in the discounted amount
arising from the passage of time and the effect of any change in the
discount rate.
Comparative information is not required.
Chartered Accounts Academy - Anesu Daka
CA (SA)
Contingent liabilities
 An entity shall not recognise a contingent
liability.
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CA (SA)
Definitions
• A contingent liability is:
(a)
a possible obligation that arises from past events and
whose existence will be confirmed only by the occurrence
or non-occurrence of one or more uncertain future events
not wholly within the control of the entity; or
(b)
a present obligation that arises from past events but is
not recognised because:
(i) it is not probable that an outflow of resources
embodying economic benefits will be required to settle the
obligation; or
(ii) the amount of the obligation cannot be measured with
sufficient reliability.
Chartered Accounts Academy - Anesu Daka
CA (SA)
Disclosure – Contingent Liability
• Unless the possibility of any outflow in
settlement is remote, an entity shall disclose for
each class of contingent liability at the end of the
reporting period a brief description of the nature
of the contingent liability and, where practicable:
(a) an estimate of its financial effect, measured
under paragraphs 36–52;
(b) an indication of the uncertainties relating to
the amount or timing of any outflow; and
(c) the possibility of any reimbursement.
Chartered Accounts Academy - Anesu Daka
CA (SA)
Contingent Assets
 A contingent asset is a possible asset that
arises from past events and whose existence
will be confirmed only by the occurrence or
non-occurrence of one or more uncertain
future events not wholly within the control of
the entity.
 31 An entity shall not recognise a contingent
asset.
Chartered Accounts Academy - Anesu Daka
CA (SA)
Tax Implications
• Three possible alternatives exist regarding the
tax deductibility of expenses resulting from
provisions:
– The expense may be deductible for tax purposes
when the provision is raised.
– The expense may be deductible for tax purposes
when the amount is settled in future.
– The expense may not be deductible for tax
purposes at any stage.
Chartered Accounts Academy - Anesu Daka
CA (SA)
Tax Implications
• This gives rise to the following three different scenarios when dealing with
deferred tax:
– If the expense is deductible for tax purposes when the provision is raised, then
the tax base of the provision will be the same as its carrying amount (tax base
= carrying amount less zero, as zero will be deductible for tax purposes in the
future), with the result that there is no temporary difference and also no
deferred tax consequences. CA= TB
– If the expense is deductible for tax purposes in the future when the amount is
settled, then the tax base of the provision will be zero (tax base = carrying
amount less amount equal to carrying amount that will be deductible in
future), with the result that a deductible temporary difference arises in
respect of which a deferred tax asset is raised. CA=X TB=0
– If the expense is not deductible for tax purposes at any stage, then the tax
base of the provision will be the same as its carrying amount (tax base =
carrying amount less zero, as zero will be deductible for tax purposes in the
future), with the result that there is no temporary difference and also no
deferred tax consequences. CA= TB
Chartered Accounts Academy - Anesu Daka
CA (SA)
Apply IAS 37
• Tut 105- Q18.1 and 18.3
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