that reflects the current market assessments of the time value of money and the risks specific to the liability. [IAS 37.45 and 37.47] In reaching its best estimate, the entity should take into account the risks and uncertainties that surround the underlying events. [IAS 37.42] If some or all of the expenditure required to settle a provision is expected to be reimbursed by another party, the reimbursement should be recognized as a separate asset, and not as a reduction of the required provision, when, and only when, it is virtually certain that reimbursement will be received if the entity settles the obligation. The amount recognized should not exceed the amount of the provision. [IAS 37.53] In measuring a provision consider future events as follows: forecast reasonable changes in applying existing technology [IAS 37.49] ignore possible gains on sale of assets [IAS 37.51] consider changes in legislation only if virtually certain to be enacted [IAS 37.50] Remeasurement of provisions [IAS 37.59] Review and adjust provisions at each balance sheet date If an outflow no longer probable, provision is reversed. Restructurings A restructuring is: [IAS 37.70] Sale or termination of a line of business closure of business locations changes in management structure fundamental reorganizations. Restructuring provisions should be recognized as follows: [IAS 37.72] Sale of operation: recognize a provision only after a binding sale agreement [IAS 37.78] Closure or reorganization: recognize a provision only after a detailed formal plan is adopted and has started being implemented, or announced to those affected. A board decision of itself is insufficient. Future operating losses: provisions are not recognized for future operating losses, even in a restructuring Restructuring provision on acquisition: recognize a provision only if there is an obligation at acquisition date [IFRS 3.11] Restructuring provisions should include only direct expenditures necessarily entailed by the restructuring, not costs that associated with the ongoing activities of the entity. [IAS 37.80] 101 CU IDOL SELF LEARNING MATERIAL (SLM)
What is the debit entry? When a provision (liability) is recognized, the debit entry for a provision is not always an expense. Sometimes the provision may form part of the cost of the asset. Examples: included in the cost of inventories, or an obligation for environmental cleanup when a new mine is opened or an offshore oil rig is installed. [IAS 37.8] Use of provisions Provisions should only be used for the purpose for which they were originally recognized. They should be reviewed at each balance sheet date and adjusted to reflect the current best estimate. If it is no longer probable that an outflow of resources will be required to settle the obligation, the provision should be reversed. [IAS 37.61] Contingent liabilities Since there is common ground as regards liabilities that are uncertain, IAS 37 also deals with contingencies. It requires that entities should not recognize contingent liabilities – but should disclose them, unless the possibility of an outflow of economic resources is remote. [IAS 37.86] Contingent assets Contingent assets should not be recognized – but should be disclosed where an inflow of economic benefits is probable. When the realization of income is virtually certain, then the related asset is not a contingent asset and its recognition is appropriate. [IAS 37.31-35] Disclosures Reconciliation for each class of provision: [IAS 37.84] opening balance additions used (amounts charged against the provision) unused amounts reversed unwinding of the discount, or changes in discount rate closing balance A prior year reconciliation is not required. [IAS 37.84] For each class of provision, a brief description of: [IAS 37.85]nature timing uncertainties assumptions reimbursement, if any. 102 CU IDOL SELF LEARNING MATERIAL (SLM)
9.3 SHARE BASED PAYMENTS IFRS 2 Share-based Payment requires an entity to recognise share-based payment transactions (such as granted shares, share options, or share appreciation rights) in its financial statements, including transactions with employees or other parties to be settled in cash, other assets, or equity instruments of the entity. Specific requirements are included for equity-settled and cash-settled share-based payment transactions, as well as those where the entity or supplier has a choice of cash or equity instruments. IFRS 2 was originally issued in February 2004 and first applied to annual periods beginning on or after 1 January 2005. Summary of IFRS 2 In June 2007, the Deloitte IFRS Global Office published an updated version of our IAS Plus Guide to IFRS 2 Share-based Payment 2007 (PDF 748k, 128 pages). The guide not only explains the detailed provisions of IFRS 2 but also deals with its application in many practical situations. Because of the complexity and variety of share-based payment awards in practice, it is not always possible to be definitive as to what is the 'right' answer. However, in this guide Deloitte shares with you our approach to finding solutions that we believe are in accordance with the objective of the Standard. Special edition of our IAS Plus newsletter You will find a four-page summary of IFRS 2 in a special edition of our IAS Plus newsletter (PDF 49k). Definition of share-based payment A share-based payment is a transaction in which the entity receives 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. Scope The concept of share-based payments is broader than employee share options. IFRS 2 encompasses the issuance of shares, or rights to shares, in return for services and goods. Examples of items included in the scope of IFRS 2 are share appreciation rights, employee share purchase plans, employee share ownership plans, share option plans and plans where 103 CU IDOL SELF LEARNING MATERIAL (SLM)
the issuance of shares (or rights to shares) may depend on market or non-market related conditions. IFRS 2 applies to all entities. There is no exemption for private or smaller entities. Furthermore, subsidiaries using their parent's or fellow subsidiary's equity as consideration for goods or services are within the scope of the Standard. There are two exemptions to the general scope principle: First, the issuance of shares in a business combination should be accounted for under IFRS 3 Business Combinations. However, care should be taken to distinguish share-based payments related to the acquisition from those related to continuing employee services Second, IFRS 2 does not address share-based payments within the scope of paragraphs 8-10 of IAS 32 Financial Instruments: Presentation, or paragraphs 5-7 of IAS 39 Financial Instruments: Recognition and Measurement. Therefore, IAS 32 and IAS 39 should be applied for commodity-based derivative contracts that may be settled in shares or rights to shares. IFRS 2 does not apply to share-based payment transactions other than for the acquisition of goods and services. Share dividends, the purchase of treasury shares, and the issuance of additional shares are therefore outside its scope. Recognition and measurement The issuance of shares or rights to shares requires an increase in a component of equity. IFRS 2 requires the offsetting debit entry to be expensed when the payment for goods or services does not represent an asset. The expense should be recognised as the goods or services are consumed. For example, the issuance of shares or rights to shares to purchase inventory would be presented as an increase in inventory and would be expensed only once the inventory is sold or impaired. The issuance of fully vested shares, or rights to shares, is presumed to relate to past service, requiring the full amount of the grant-date fair value to be expensed immediately. The issuance of shares to employees with, say, a three-year vesting period is considered to relate to services over the vesting period. Therefore, the fair value of the share-based payment, determined at the grant date, should be expensed over the vesting period. As a general principle, the total expense related to equity-settled share-based payments will equal the multiple of the total instruments that vest and the grant-date fair value of those instruments. In short, there is truing up to reflect what happens during the vesting period. However, if the equity-settled share-based payment has a market related performance condition, the expense would still be recognised if all other vesting conditions are met. The 104 CU IDOL SELF LEARNING MATERIAL (SLM)
following example provides an illustration of a typical equity-settled share-based payment. Illustration – Recognition of employee share option grant Company grants a total of 100 share options to 10 members of its executive management team (10 options each) on 1 January 20X5. These options vest at the end of a three-year period. The company has determined that each option has a fair value at the date of grant equal to 15. The company expects that all 100 options will vest and therefore records the following entry at 30 June 20X5 - the end of its first six-month interim reporting period. Dr. Share option expense 250 Cr. Equity 250 [(100 × 15) ÷ 6 periods] = 250 per period If all 100 shares vest, the above entry would be made at the end of each 6-month reporting period. However, if one member of the executive management team leaves during the second half of 20X6, therefore forfeiting the entire amount of 10 options, the following entry at 31 December 20X6 would be made: Dr. Share option expense 150 Cr. Equity 150 [(90 × 15) ÷ 6 periods = 225 per period. [225 × 4] – [250+250+250] = 150 Measurement guidance Depending on the type of share-based payment, fair value may be determined by the value of the shares or rights to shares given up, or by the value of the goods or services received: General fair value measurement principle. In principle, transactions in which goods or services are received as consideration for equity instruments of the entity should be measured at the fair value of the goods or services received. Only if the fair value of the goods or services cannot be measured reliably would the fair value of the equity instruments granted be used. Measuring employee share options. For transactions with employees and others providing similar services, the entity is required to measure the fair value of the equity instruments granted, because it is typically not possible to estimate reliably the fair value of employee services received. When to measure fair value - options. For transactions measured at the fair value of the equity instruments granted (such as transactions with employees), fair value should be estimated at grant date. When to measure fair value - goods and services. For transactions measured at the fair value of the goods or services received, fair value should be 105 CU IDOL SELF LEARNING MATERIAL (SLM)
estimated at the date of receipt of those goods or services. Measurement guidance. For goods or services measured by reference to the fair value of the equity instruments granted, IFRS 2 specifies that, in general, vesting conditions are not taken into account when estimating the fair value of the shares or options at the relevant measurement date (as specified above). Instead, vesting conditions are taken into account by adjusting the number of equity instruments included in the measurement of the transaction amount so that, ultimately, the amount recognised for goods or services received as consideration for the equity instruments granted is based on the number of equity instruments that eventually vest. More measurement guidance. IFRS 2 requires the fair value of equity instruments granted to be based on market prices, if available, and to take into account the terms and conditions upon which those equity instruments were granted. In the absence of market prices, fair value is estimated using a valuation technique to estimate what the price of those equity instruments would have been on the measurement date in an arm's length transaction between knowledgeable, willing parties. The standard does not specify which particular model should be used. If fair value cannot be reliably measured. IFRS 2 requires the share-based payment transaction to be measured at fair value for both listed and unlisted entities. IFRS 2 permits the use of intrinsic value (that is, fair value of the shares less exercise price) in those \"rare cases\" in which the fair value of the equity instruments cannot be reliably measured. However, this is not simply measured at the date of grant. An entity would have to remeasure intrinsic value at each reporting date until final settlement. Performance conditions. IFRS 2 makes a distinction between the handling of market-based performance conditions from non-market performance conditions. Market conditions are those related to the market price of an entity's equity, such as achieving a specified share price or a specified target based on a comparison of the entity's share price with an index of share prices of other entities. Market based performance conditions are included in the grant-date fair value measurement (similarly, non-vesting conditions are taken into account in the measurement). However, the fair value of the equity instruments is not adjusted to take into consideration non-market-based performance features - these are instead taken into account by adjusting the number of equity instruments included in the measurement of the share-based payment transaction, and are adjusted each period until such time as the equity instruments vest. Note: Annual Improvements to IFRSs 2010–2012 Cycle amends the definitions of ‘vesting condition' and 'market condition' and adds definitions for 'performance condition' and 'service condition' (which were previously part of the definition of 'vesting condition'). The amendments are effective for annual periods beginning on or after 1 July 2014. Modifications, cancellations, and settlements The determination of whether a change in terms and conditions has an effect on the amount recognised depends on whether the fair value of the new instruments is greater than the fair value of the original instruments (both determined at the modification date). 106 CU IDOL SELF LEARNING MATERIAL (SLM)
Modification of the terms on which equity instruments were granted may have an effect on the expense that will be recorded. IFRS 2 clarifies that the guidance on modifications also applies to instruments modified after their vesting date. If the fair value of the new instruments is more than the fair value of the old instruments (e.g., by reduction of the exercise price or issuance of additional instruments), the incremental amount is recognised over the remaining vesting period in a manner similar to the original amount. If the modification occurs after the vesting period, the incremental amount is recognised immediately. If the fair value of the new instruments is less than the fair value of the old instruments, the original fair value of the equity instruments granted should be expensed as if the modification never occurred. The cancellation or settlement of equity instruments is accounted for as an acceleration of the vesting period and therefore any amount unrecognised that would otherwise have been charged should be recognised immediately. Any payments made with the cancellation or settlement (up to the fair value of the equity instruments) should be accounted for as the repurchase of an equity interest. Any payment in excess of the fair value of the equity instruments granted is recognised as an expense New equity instruments granted may be identified as a replacement of cancelled equity instruments. In those cases, the replacement equity instruments are accounted for as a modification. The fair value of the replacement equity instruments is determined at grant date, while the fair value of the cancelled instruments is determined at the date of cancellation, less any cash payments on cancellation that is accounted for as a deduction from equity. Disclosure Required disclosures include: the nature and extent of share-based payment arrangements that existed during the period how the fair value of the goods or services received, or the fair value of the equity instruments granted, during the period was determined the effect of share-based payment transactions on the entity's profit or loss for the period and on its financial position. Effective date IFRS 2 is effective for annual periods beginning on or after 1 January 2005. Earlier application is encouraged. 107 CU IDOL SELF LEARNING MATERIAL (SLM)
Transition All equity-settled share-based payments granted after 7 November 2002, that are not yet vested at the effective date of IFRS 2 shall be accounted for using the provisions of IFRS 2. Entities are allowed and encouraged, but not required, to apply this IFRS to other grants of equity instruments if (and only if) the entity has previously disclosed publicly the fair value of those equity instruments determined in accordance with IFRS 2. The comparative information presented in accordance with IAS 1 shall be restated for all grants of equity instruments to which the requirements of IFRS 2 are applied. The adjustment to reflect this change is presented in the opening balance of retained earnings for the earliest period presented. IFRS 2 amends paragraph 13 of IFRS 1 First-time Adoption of International Financial Reporting Standards to add an exemption for share-based payment transactions. Similar to entities already applying IFRS, first-time adopters will have to apply IFRS 2 for share-based payment transactions on or after 7 November 2002. Additionally, a first-time adopter is not required to apply IFRS 2 to share-based payments granted after 7 November 2002 that vested before the later of (a) the date of transition to IFRS and (b) 1 January 2005. A first-time adopter may elect to apply IFRS 2 earlier only if it has publicly disclosed the fair value of the share-based payments determined at the measurement date in accordance with IFRS 2. Differences with FASB Statement 123 Revised 2004 In December 2004, the US FASB published FASB Statement 123 (revised 2004) Share- Based Payment. Statement 123(R) requires that the compensation cost relating to share-based payment transactions be recognised in financial statements. Click for FASB Press Release (PDF 17k). Deloitte (USA) has published a special issue of its Heads-Up newsletter summarising the key concepts of FASB Statement No. 123(R). Click to download the Heads- Up Newsletter (PDF 292k). While Statement 123(R) is largely consistent with IFRS 2, some differences remain, as described in a Q&A document FASB issued along with the new Statement: 9.4 INCOME TAXES IAS 12 Income Taxes implements a so-called 'comprehensive balance sheet method' of accounting for income taxes which recognizes both the current tax consequences of transactions and events and the future tax consequences of the future recovery or settlement of the carrying amount of an entity's assets and liabilities. Differences between the carrying amount and tax base of assets and liabilities, and carried forward tax losses and credits, are 108 CU IDOL SELF LEARNING MATERIAL (SLM)
recognized, with limited exceptions, as deferred tax liabilities or deferred tax assets, with the latter also being subject to a 'probable profits' test. IAS 12 was reissued in October 1996 and is applicable to annual periods beginning on or after 1 January 1998. Objective of IAS 12 The objective of IAS 12 (1996) is to prescribe the accounting treatment for income taxes. In meeting this objective, IAS 12 notes the following: It is inherent in the recognition of an asset or liability that that asset or liability will be recovered or settled, and this recovery or settlement may give rise to future tax consequences which should be recognized at the same time as the asset or liability an entity should account for the tax consequences of transactions and other events in the same way it accounts for the transactions or other events themselves. Current tax Current tax for the current and prior periods is recognized as a liability to the extent that it has not yet been settled, and as an asset to the extent that the amounts already paid exceed the amount due. [IAS 12.12] The benefit of a tax loss which can be carried back to recover current tax of a prior period is recognized as an asset. [IAS 12.13] Current tax assets and liabilities are measured at the amount expected to be paid to (recovered from) taxation authorities, using the rates/laws that have been enacted or substantively enacted by the balance sheet date. [IAS 12.46] Tax bases The tax base of an item is crucial in determining the amount of any temporary difference, and effectively represents the amount at which the asset or liability would be recorded in a tax- based balance sheet. IAS 12 provides the following guidance on determining tax bases: Assets. The tax base of an asset is the amount that will be deductible against taxable economic benefits from recovering the carrying amount of the asset. Where recovery of an asset will have no tax consequences, the tax base is equal to the carrying amount. [IAS 12.7] Revenue received in advance. The tax base of the recognized liability is it carrying amount, less revenue that will not be taxable in future periods [IAS 12.8] Other liabilities. The tax base of a liability is it carrying amount, less any amount that will be deductible for tax purposes in respect of that liability in future periods [IAS 12.8] Unrecognized items. If items 109 CU IDOL SELF LEARNING MATERIAL (SLM)
have a tax base but are not recognized in the statement of financial position, the carrying amount is nil [IAS 12.9] Tax bases not immediately apparent. If the tax base of an item is not immediately apparent, the tax base should effectively be determined in such as manner to ensure the future tax consequences of recovery or settlement of the item is recognized as a deferred tax amount [IAS 12.10] Consolidated financial statements. In consolidated financial statements, the carrying amounts in the consolidated financial statements are used, and the tax bases determined by reference to any consolidated tax return (or otherwise from the tax returns of each entity in the group). [IAS 12.11] Recognition and measurement of deferred taxes Recognition of deferred tax liabilities The general principle in IAS 12 is that a deferred tax liability is recognized for all taxable temporary differences. There are three exceptions to the requirement to recognize a deferred tax liability, as follows: liabilities arising from initial recognition of goodwill [IAS 12.15(a)] liabilities arising from the initial recognition of an asset/liability other than in a business combination which, at the time of the transaction, does not affect either the accounting or the taxable profit [IAS 12.15(b)] liabilities arising from temporary differences associated with investments in subsidiaries, branches, and associates, and interests in joint arrangements, but only to the extent that the entity is able to control the timing of the reversal of the differences and it is probable that the reversal will not occur in the foreseeable future. [IAS 12.39] Recognition of deferred tax assets A deferred tax asset is recognized for deductible temporary differences, unused tax losses and unused tax credits to the extent that it is probable that taxable profit will be available against which the deductible temporary differences can be utilized, unless the deferred tax asset arises from: [IAS 12.24] the initial recognition of an asset or liability other than in a business combination which, at the time of the transaction, does not affect accounting profit or taxable profit. Deferred tax assets for deductible temporary differences arising from investments in subsidiaries, branches and associates, and interests in joint arrangements, are only recognized to the extent that it is probable that the temporary difference will reverse in the foreseeable future and that taxable profit will be available against which the temporary difference will be utilized. [IAS 12.44] The carrying amount of deferred tax assets are reviewed at the end of each reporting period 110 CU IDOL SELF LEARNING MATERIAL (SLM)
and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow the benefit of part or all of that deferred tax asset to be utilized. Any such reduction is subsequently reversed to the extent that it becomes probable that sufficient taxable profit will be available. [IAS 12.37] A deferred tax asset is recognized for an unused tax loss carryforward or unused tax credit if, and only if, it is considered probable that there will be sufficient future taxable profit against which the loss or credit carryforward can be utilized. [IAS 12.34] Measurement of deferred tax Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, based on tax rates/laws that have been enacted or substantively enacted by the end of the reporting period. [IAS 12.47] The measurement reflects the entity's expectations, at the end of the reporting period, as to the manner in which the carrying amount of its assets and liabilities will be recovered or settled. [IAS 12.51] IAS 12 provides the following guidance on measuring deferred taxes: Where the tax rate or tax base is impacted by the manner in which the entity recovers its assets or settles its liabilities (e.g. whether an asset is sold or used), the measurement of deferred taxes is consistent with the way in which an asset is recovered or liability settled [IAS 12.51A] Where deferred taxes arise from revalued non-depreciable assets (e.g. revalued land), deferred taxes reflect the tax consequences of selling the asset [IAS 12.51B] Deferred taxes arising from investment property measured at fair value under IAS 40 Investment Property reflect the rebuttable presumption that the investment property will be recovered through sale [IAS 12.51C-51D] If dividends are paid to shareholders, and this causes income taxes to be payable at a higher or lower rate, or the entity pays additional taxes or receives a refund, deferred taxes are measured using the tax rate applicable to undistributed profits [IAS 12.52A] Deferred tax assets and liabilities cannot be discounted. [IAS 12.53] Recognition of tax amounts for the period Amount of income tax to recognize The following formula summarizes the amount of tax to be recognized in an accounting 111 CU IDOL SELF LEARNING MATERIAL (SLM)
period: Tax to recognize for the period = Current tax for the period + Movement in deferred tax balances for the period Where to recognize income tax for the period Consistent with the principles underlying IAS 12, the tax consequences of transactions and other events are recognized in the same way as the items giving rise to those tax consequences. Accordingly, current and deferred tax is recognized as income or expense and included in profit or loss for the period, except to the extent that the tax arises from: [IAS 12.58] transactions or events that are recognized outside of profit or loss (other comprehensive income or equity) - in which case the related tax amount is also recognized outside of profit or loss [IAS 12.61A] a business combination - in which case the tax amounts are recognized as identifiable assets or liabilities at the acquisition date, and accordingly effectively taken into account in the determination of goodwill when applying IFRS 3 Business Combinations. [IAS 12.66] IAS 12 provides the following additional guidance on the recognition of income tax for the period: Where it is difficult to determine the amount of current and deferred tax relating to items recognized outside of profit or loss (e.g., where there are graduated rates or tax), the amount of income tax recognized outside of profit or loss is determined on a reasonable pro-rata allocation, or using another more appropriate method [IAS 12.63] In the circumstances where the payment of dividends impacts the tax rate or results in taxable amounts or refunds, the income tax consequences of dividends are considered to be more directly linked to past transactions or events and so are recognized in profit or loss unless the past transactions or events were recognized outside of profit or loss [IAS 12.52B] The impact of business combinations on the recognition of pre-combination deferred tax assets are not included in the determination of goodwill as part of the business combination, but are separately recognized [IAS 12.68] The recognition of acquired deferred tax benefits subsequent to a business combination are treated as 'measurement period' adjustments (see IFRS 3 Business Combinations) if they qualify for that treatment, or otherwise are recognized in profit or loss [IAS 12.68] 112 CU IDOL SELF LEARNING MATERIAL (SLM)
Tax benefits of equity settled share-based payment transactions that exceed the tax effected cumulative remuneration expense are considered to relate to an equity item and are recognized directly in equity. [IAS 12.68C] Presentation Current tax assets and current tax liabilities can only be offset in the statement of financial position if the entity has the legal right and the intention to settle on a net basis. [IAS 12.71] Deferred tax assets and deferred tax liabilities can only be offset in the statement of financial position if the entity has the legal right to settle current tax amounts on a net basis and the deferred tax amounts are levied by the same taxing authority on the same entity or different entities that intend to realize the asset and settle the liability at the same time. [IAS 12.74] The amount of tax expense (or income) related to profit or loss is required to be presented in the statement(s) of profit or loss and other comprehensive income. [IAS 12.77] The tax effects of items included in other comprehensive income can either be shown net for each item, or the items can be shown before tax effects with an aggregate amount of income tax for groups of items (allocated between items that will and will not be reclassified to profit or loss in subsequent periods). [IAS 1.91] Disclosure IAS 12.80 requires the following disclosures: major components of tax expense (tax income) [IAS 12.79] Examples include: current tax expense (income) any adjustments of taxes of prior periods amount of deferred tax expense (income) relating to the origination and reversal of temporary differences amount of deferred tax expense (income) relating to changes in tax rates or the imposition of new taxes amount of the benefit arising from a previously unrecognized tax loss, tax credit or temporary difference of a prior period write down, or reversal of a previous write down, of a deferred tax asset 113 CU IDOL SELF LEARNING MATERIAL (SLM)
amount of tax expense (income) relating to changes in accounting policies and corrections of errors. IAS 12.81 requires the following disclosures: aggregate current and deferred tax relating to items recognized directly in equity tax relating to each component of other comprehensive income explanation of the relationship between tax expense (income) and the tax that would be expected by applying the current tax rate to accounting profit or loss (this can be presented as a reconciliation of amounts of tax or a reconciliation of the rate of tax) changes in tax rates amounts and other details of deductible temporary differences, unused tax losses, and unused tax credits temporary differences associated with investments in subsidiaries, branches and associates, and interests in joint arrangements for each type of temporary difference and unused tax loss and credit, the amount of deferred tax assets or liabilities recognized in the statement of financial position and the amount of deferred tax income or expense recognized in profit or loss tax relating to discontinued operations tax consequences of dividends declared after the end of the reporting period information about the impacts of business combinations on an acquirer's deferred tax assets recognition of deferred tax assets of an acquiree after the acquisition date. Other required disclosures: details of deferred tax assets [IAS 12.82] tax consequences of future dividend payments. [IAS 12.82A] In addition to the disclosures required by IAS 12, some disclosures relating to income taxes are required by IAS 1 Presentation of Financial Statements, as follows: Disclosure on the face of the statement of financial position about current tax assets, current tax liabilities, deferred tax assets, and deferred tax liabilities [IAS 1.54(n) and (o)] Disclosure of tax expense (tax income) in the profit or loss section of the statement of profit or loss and other comprehensive income (or separate statement if presented). [IAS 1.82(d)] 9.5 FINANCIAL INSTRUMENTS IFRS 9 Financial Instruments issued on 24 July 2014 is the IASB's replacement of IAS 39 Financial Instruments: Recognition and Measurement. The Standard includes requirements for recognition and measurement, impairment, derecognition and general hedge accounting. The IASB completed its project to replace IAS 39 in phases, adding to the standard as it completed each phase. The version of IFRS 9 issued in 2014 supersedes all previous versions and is mandatorily 114 CU IDOL SELF LEARNING MATERIAL (SLM)
effective for periods beginning on or after 1 January 2018 with early adoption permitted (subject to local endorsement requirements). For a limited period, previous versions of IFRS 9 may be adopted early if not already done so provided the relevant date of initial application is before 1 February 2015. IFRS 9 does not replace the requirements for portfolio fair value hedge accounting for interest rate risk (often referred to as the ‘macro hedge accounting’ requirements) since this phase of the project was separated from the IFRS 9 project due to the longer-term nature of the macro hedging project which is currently at the discussion paper phase of the due process. In April 2014, the IASB published a Discussion Paper Accounting for Dynamic Risk management: A Portfolio Revaluation Approach to Macro Hedging. Consequently, the exception in IAS 39 for a fair value hedge of an interest rate exposure of a portfolio of financial assets or financial liabilities continues to apply. The phased completion of IFRS 9 On 12 November 2009, the IASB issued IFRS 9 Financial Instruments as the first step in its project to replace IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 introduced new requirements for classifying and measuring financial assets that had to be applied starting 1 January 2013, with early adoption permitted. Click for IASB Press Release (PDF 101k). On 28 October 2010, the IASB reissued IFRS 9, incorporating new requirements on accounting for financial liabilities, and carrying over from IAS 39 the requirements for derecognition of financial assets and financial liabilities. Click for IASB Press Release (PDF 33k). On 16 December 2011, the IASB issued Mandatory Effective Date and Transition Disclosures (Amendments to IFRS 9 and IFRS 7), which amended the effective date of IFRS 9 to annual periods beginning on or after 1 January 2015, and modified the relief from restating comparative periods and the associated disclosures in IFRS 7. On 19 November 2013, the IASB issued IFRS 9 Financial Instruments (Hedge Accounting and amendments to IFRS 9, IFRS 7 and IAS 39) amending IFRS 9 to include the new general hedge accounting model, allow early adoption of the treatment of fair value changes due to own credit on liabilities designated at fair value through profit or loss and remove the 1 January 2015 effective date. 115 CU IDOL SELF LEARNING MATERIAL (SLM)
On 24 July 2014, the IASB issued the final version of IFRS 9 incorporating a new expected loss impairment model and introducing limited amendments to the classification and measurement requirements for financial assets. This version supersedes all previous versions and is mandatorily effective for periods beginning on or after 1 January 2018 with early adoption permitted (subject to local endorsement requirements). For a limited period, previous versions of IFRS 9 may be adopted early if not already done so provided the relevant date of initial application is before 1 February 2015. Overview of IFRS 9 Initial measurement of financial instruments All financial instruments are initially measured at fair value plus or minus, in the case of a financial asset or financial liability not at fair value through profit or loss, transaction costs. [IFRS 9, paragraph 5.1.1] Subsequent measurement of financial assets IFRS 9 divides all financial assets that are currently in the scope of IAS 39 into two classifications - those measured at amortised cost and those measured at fair value. Where assets are measured at fair value, gains and losses are either recognised entirely in profit or loss (fair value through profit or loss, FVTPL), or recognised in other comprehensive income (fair value through other comprehensive income, FVTOCI). For debt instruments the FVTOCI classification is mandatory for certain assets unless the fair value option is elected. Whilst for equity investments, the FVTOCI classification is an election. Furthermore, the requirements for reclassifying gains or losses recognised in other comprehensive income are different for debt instruments and equity investments. The classification of a financial asset is made at the time it is initially recognised, namely when the entity becomes a party to the contractual provisions of the instrument. [IFRS 9, paragraph 4.1.1] If certain conditions are met, the classification of an asset may subsequently need to be reclassified. Debt instruments 116 CU IDOL SELF LEARNING MATERIAL (SLM)
A debt instrument that meets the following two conditions must be measured at amortised cost (net of any write down for impairment) unless the asset is designated at FVTPL under the fair value option (see below): [IFRS 9, paragraph 4.1.2] Business model test: The objective of the entity's business model is to hold the financial asset to collect the contractual cash flows (rather than to sell the instrument prior to its contractual maturity to realise its fair value changes). Cash flow characteristics test: The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. Assessing the cash flow characteristics also includes an analysis of changes in the timing or in the amount of payments. It is necessary to assess whether the cash flows before and after the change represent only repayments of the nominal amount and an interest rate based on them. The right of termination may for example be in accordance with the cash flow condition if, in the case of termination, the only outstanding payments consist of principal and interest on the principal amount and an appropriate compensation payment where applicable. In October 2017, the IASB clarified that the compensation payments can also have a negative sign. * *Prepayment Features with Negative Compensation (Amendments to IFRS 9); to be applied retrospectively for fiscal years beginning on or after 1 January 2019; early application permitted A debt instrument that meets the following two conditions must be measured at FVTOCI unless the asset is designated at FVTPL under the fair value option (see below): [IFRS 9, paragraph 4.1.2A] Business model test: The financial asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets. Cash flow characteristics test: The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. All other debt instruments must be measured at fair value through profit or loss (FVTPL). 117 CU IDOL SELF LEARNING MATERIAL (SLM)
[IFRS 9, paragraph 4.1.4] Fair value option Even if an instrument meets the two requirements to be measured at amortised cost or FVTOCI, IFRS 9 contains an option to designate, at initial recognition, a financial asset as measured at FVTPL if doing so eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as an 'accounting mismatch') that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases. [IFRS 9, paragraph 4.1.5] Equity instruments All equity investments in scope of IFRS 9 are to be measured at fair value in the statement of financial position, with value changes recognised in profit or loss, except for those equity investments for which the entity has elected to present value changes in 'other comprehensive income'. There is no 'cost exception' for unquoted equities. 'Other comprehensive income' option If an equity investment is not held for trading, an entity can make an irrevocable election at initial recognition to measure it at FVTOCI with only dividend income recognised in profit or loss. [IFRS 9, paragraph 5.7.5] Measurement guidance Despite the fair value requirement for all equity investments, IFRS 9 contains guidance on when cost may be the best estimate of fair value and also when it might not be representative of fair value. Subsequent measurement of financial liabilities IFRS 9 doesn't change the basic accounting model for financial liabilities under IAS 39. Two measurement categories continue to exist: FVTPL and amortised cost. Financial liabilities held for trading are measured at FVTPL, and all other financial liabilities are measured at amortised cost unless the fair value option is applied. [IFRS 9, paragraph 4.2.1] Fair value option IFRS 9 contains an option to designate a financial liability as measured at FVTPL if [IFRS 9, 118 CU IDOL SELF LEARNING MATERIAL (SLM)
paragraph 4.2.2]: doing so eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as an 'accounting mismatch') that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases, or the liability is part or a group of financial liabilities or financial assets and financial liabilities that is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, and information about the group is provided internally on that basis to the entity's key management personnel. A financial liability which does not meet any of these criteria may still be designated as measured at FVTPL when it contains one or more embedded derivatives that sufficiently modify the cash flows of the liability and are not clearly closely related. [IFRS 9, paragraph 4.3.5] IFRS 9 requires gains and losses on financial liabilities designated as at FVTPL to be split into the amount of change in fair value attributable to changes in credit risk of the liability, presented in other comprehensive income, and the remaining amount presented in profit or loss. The new guidance allows the recognition of the full amount of change in the fair value in profit or loss only if the presentation of changes in the liability's credit risk in other comprehensive income would create or enlarge an accounting mismatch in profit or loss. That determination is made at initial recognition and is not reassessed. [IFRS 9, paragraphs 5.7.7- 5.7.8] Amounts presented in other comprehensive income shall not be subsequently transferred to profit or loss, the entity may only transfer the cumulative gain or loss within equity. Derecognition of financial assets The basic premise for the derecognition model in IFRS 9 (carried over from IAS 39) is to determine whether the asset under consideration for derecognition is: [IFRS 9, paragraph 3.2.2] an asset in its entirety or specifically identified cash flows from an asset (or a group of similar financial assets) or a fully proportionate (pro rata) share of the cash flows from an asset (or a group of similar financial assets). or a fully proportionate (pro rata) share of specifically identified cash flows from a financial asset (or a group of similar financial assets) 119 CU IDOL SELF LEARNING MATERIAL (SLM)
Once the asset under consideration for derecognition has been determined, an assessment is made as to whether the asset has been transferred, and if so, whether the transfer of that asset is subsequently eligible for derecognition. An asset is transferred if either the entity has transferred the contractual rights to receive the cash flows, or the entity has retained the contractual rights to receive the cash flows from the asset, but has assumed a contractual obligation to pass those cash flows on under an arrangement that meets the following three conditions: [IFRS 9, paragraphs 3.2.4-3.2.5] the entity has no obligation to pay amounts to the eventual recipient unless it collects equivalent amounts on the original asset the entity is prohibited from selling or pledging the original asset (other than as security to the eventual recipient), the entity has an obligation to remit those cash flows without material delay Once an entity has determined that the asset has been transferred, it then determines whether or not it has transferred substantially all of the risks and rewards of ownership of the asset. If substantially all the risks and rewards have been transferred, the asset is derecognised. If substantially all the risks and rewards have been retained, derecognition of the asset is precluded. [IFRS 9, paragraphs 3.2.6(a)-(b)] If the entity has neither retained nor transferred substantially all of the risks and rewards of the asset, then the entity must assess whether it has relinquished control of the asset or not. If the entity does not control the asset then derecognition is appropriate; however, if the entity has retained control of the asset, then the entity continues to recognise the asset to the extent to which it has a continuing involvement in the asset. [IFRS 9, paragraph 3.2.6(c)] These various derecognition steps are summarised in the decision tree in paragraph B3.2.1. Derecognition of financial liabilities A financial liability should be removed from the balance sheet when, and only when, it is extinguished, that is, when the obligation specified in the contract is either discharged or cancelled or expires. [IFRS 9, paragraph 3.3.1] Where there has been an exchange between an existing borrower and lender of debt instruments with substantially different terms, or there has been a substantial modification of the terms of an existing financial liability, this transaction is accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability. A gain or loss from extinguishment of the original financial liability is recognised in profit or loss. [IFRS 9, paragraphs 3.3.2-3.3.3] 120 CU IDOL SELF LEARNING MATERIAL (SLM)
Derivatives All derivatives in scope of IFRS 9, including those linked to unquoted equity investments, are measured at fair value. Value changes are recognised in profit or loss unless the entity has elected to apply hedge accounting by designating the derivative as a hedging instrument in an eligible hedging relationship. Embedded derivatives An embedded derivative is a component of a hybrid contract that also includes a non- derivative host, with the effect that some of the cash flows of the combined instrument vary in a way similar to a stand-alone derivative. A derivative that is attached to a financial instrument but is contractually transferable independently of that instrument, or has a different counterparty, is not an embedded derivative, but a separate financial instrument. [IFRS 9, paragraph 4.3.1] The embedded derivative concept that existed in IAS 39 has been included in IFRS 9 to apply only to hosts that are not financial assets within the scope of the Standard. Consequently, embedded derivatives that under IAS 39 would have been separately accounted for at FVTPL because they were not closely related to the host financial asset will no longer be separated. Instead, the contractual cash flows of the financial asset are assessed in their entirety, and the asset as a whole is measured at FVTPL if the contractual cash flow characteristics test is not passed (see above). The embedded derivative guidance that existed in IAS 39 is included in IFRS 9 to help preparers identify when an embedded derivative is closely related to a financial liability host contract or a host contract not within the scope of the Standard (e.g., leasing contracts, insurance contracts, contracts for the purchase or sale of a non-financial items). Reclassification For financial assets, reclassification is required between FVTPL, FVTOCI and amortised cost, if and only if the entity's business model objective for its financial assets changes so its previous model assessment would no longer apply. [IFRS 9, paragraph 4.4.1] If reclassification is appropriate, it must be done prospectively from the reclassification date which is defined as the first day of the first reporting period following the change in business 121 CU IDOL SELF LEARNING MATERIAL (SLM)
model. An entity does not restate any previously recognised gains, losses, or interest. IFRS 9 does not allow reclassification: for equity investments measured at FVTOCI, or where the fair value option has been exercised in any circumstance for a financial assets or financial liability. Hedge accounting The hedge accounting requirements in IFRS 9 are optional. If certain eligibility and qualification criteria are met, hedge accounting allows an entity to reflect risk management activities in the financial statements by matching gains or losses on financial hedging instruments with losses or gains on the risk exposures they hedge. The hedge accounting model in IFRS 9 is not designed to accommodate hedging of open, dynamic portfolios. As a result, for a fair value hedge of interest rate risk of a portfolio of financial assets or liabilities an entity can apply the hedge accounting requirements in IAS 39 instead of those in IFRS 9. [IFRS 9 paragraph 6.1.3] In addition, when an entity first applies IFRS 9, it may choose as its accounting policy choice to continue to apply the hedge accounting requirements of IAS 39 instead of the requirements of Chapter 6 of IFRS 9 [IFRS 9 paragraph 7.2.21] Qualifying criteria for hedge accounting A hedging relationship qualifies for hedge accounting only if all of the following criteria are met: the hedging relationship consists only of eligible hedging instruments and eligible hedged items. at the inception of the hedging relationship there is formal designation and documentation of the hedging relationship and the entity’s risk management objective and strategy for undertaking the hedge. the hedging relationship meets all of the hedge effectiveness requirements (see below) [IFRS 9 paragraph 6.4.1] Hedging instruments Only contracts with a party external to the reporting entity may be designated as hedging instruments. [IFRS 9 paragraph 6.2.3] 122 CU IDOL SELF LEARNING MATERIAL (SLM)
A hedging instrument may be a derivative (except for some written options) or non-derivative financial instrument measured at FVTPL unless it is a financial liability designated as at FVTPL for which changes due to credit risk are presented in OCI. For a hedge of foreign currency risk, the foreign currency risk component of a non-derivative financial instrument, except equity investments designated as FVTOCI, may be designated as the hedging instrument. [IFRS 9 paragraphs 6.2.1-6.2.2] IFRS 9 allows a proportion (e.g., 60%) but not a time portion (e.g., the first 6 years of cash flows of a 10-year instrument) of a hedging instrument to be designated as the hedging instrument. IFRS 9 also allows only the intrinsic value of an option, or the spot element of a forward to be designated as the hedging instrument. An entity may also exclude the foreign currency basis spread from a designated hedging instrument. [IFRS 9 paragraph 6.2.4] IFRS 9 allows combinations of derivatives and non-derivatives to be designated as the hedging instrument. [IFRS 9 paragraph 6.2.5] Combinations of purchased and written options do not qualify if they amount to a net written option at the date of designation. [IFRS 9 paragraph 6.2.6] Hedged items A hedged item can be a recognised asset or liability, an unrecognised firm commitment, a highly probable forecast transaction or a net investment in a foreign operation and must be reliably measurable. [IFRS 9 paragraphs 6.3.1-6.3.3] An aggregated exposure that is a combination of an eligible hedged item as described above and a derivative may be designated as a hedged item. [IFRS 9 paragraph 6.3.4] The hedged item must generally be with a party external to the reporting entity, however, as an exception the foreign currency risk of an intragroup monetary item may qualify as a hedged item in the consolidated financial statements if it results in an exposure to foreign exchange rate gains or losses that are not fully eliminated on consolidation. In addition, the foreign currency risk of a highly probable forecast intragroup transaction may qualify as a hedged item in consolidated financial statements provided that the transaction is denominated in a currency other than the functional currency of the entity entering into that transaction and the foreign currency risk will affect consolidated profit or loss. [IFRS 9 paragraphs 6.3.5 - 6.3.6] 123 CU IDOL SELF LEARNING MATERIAL (SLM)
An entity may designate an item in its entirety or a component of an item as the hedged item. The component may be a risk component that is separately identifiable and reliably measurable; one or more selected contractual cash flows; or components of a nominal amount. [IFRS 9 paragraph 6.3.7] A group of items (including net positions is an eligible hedged item only if: it consists of items individually, eligible hedged items; the items in the group are managed together on a group basis for risk management purposes; and in the case of a cash flow hedge of a group of items whose variabilities in cash flows are not expected to be approximately proportional to the overall variability in cash flows of the group: it is a hedge of foreign currency risk; and the designation of that net position specifies the reporting period in which the forecast transactions are expected to affect profit or loss, as well as their nature and volume [IFRS 9 paragraph 6.6.1] For a hedge of a net position whose hedged risk affects different line items in the statement of profit or loss and other comprehensive income, any hedging gains or losses in that statement are presented in a separate line from those affected by the hedged items. [IFRS 9 paragraph 6.6.4] Accounting for qualifying hedging relationships There are three types of hedging relationships: Fair value hedge: a hedge of the exposure to changes in fair value of a recognised asset or liability or an unrecognised firm commitment, or a component of any such item, that is attributable to a particular risk and could affect profit or loss (or OCI in the case of an equity instrument designated as at FVTOCI). [IFRS 9 paragraphs 6.5.2(a) and 6.5.3] For a fair value hedge, the gain or loss on the hedging instrument is recognised in profit or loss (or OCI, if hedging an equity instrument at FVTOCI and the hedging gain or loss on the hedged item adjusts the carrying amount of the hedged item and is recognised in profit or loss. However, if the hedged item is an equity instrument at FVTOCI, those amounts remain in OCI. When a hedged item is an unrecognised firm commitment the cumulative hedging gain or loss is recognised as an asset or a liability with a corresponding gain or loss recognised in profit or loss. [IFRS 9 paragraph 6.5.8] If the hedged item is a debt instrument measured at amortised cost or FVTOCI any hedge adjustment is amortised to profit or loss based on a recalculated effective interest rate. Amortisation may begin as soon as an adjustment exists and shall begin no later than when 124 CU IDOL SELF LEARNING MATERIAL (SLM)
the hedged item ceases to be adjusted for hedging gains and losses. [IFRS 9 paragraph 6.5.10] Cash flow hedge: a hedge of the exposure to variability in cash flows that is attributable to a particular risk associated with all, or a component of, a recognised asset or liability (such as all or some future interest payments on variable-rate debt) or a highly probable forecast transaction, and could affect profit or loss. [IFRS 9 paragraph 6.5.2(b)] For a cash flow hedge the cash flow hedge reserve in equity is adjusted to the lower of the following (in absolute amounts): the cumulative gain or loss on the hedging instrument from inception of the hedge; and the cumulative change in fair value of the hedged item from inception of the hedge. The portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognised in OCI and any remaining gain or loss is hedge ineffectiveness that is recognised in profit or loss. If a hedged forecast transaction subsequently results in the recognition of a non-financial item or becomes a firm commitment for which fair value hedge accounting is applied, the amount that has been accumulated in the cash flow hedge reserve is removed and included directly in the initial cost or other carrying amount of the asset or the liability. In other cases, the amount that has been accumulated in the cash flow hedge reserve is reclassified to profit or loss in the same period(s) as the hedged cash flows affect profit or loss. [IFRS 9 paragraph 6.5.11] When an entity discontinues hedge accounting for a cash flow hedge, if the hedged future cash flows are still expected to occur, the amount that has been accumulated in the cash flow hedge reserve remains there until the future cash flows occur; if the hedged future cash flows are no longer expected to occur, that amount is immediately reclassified to profit or loss [IFRS 9 paragraph 6.5.12] A hedge of the foreign currency risk of a firm commitment may be accounted for as a fair value hedge or a cash flow hedge. [IFRS 9 paragraph 6.5.4] Hedge of a net investment in a foreign operation (as defined in IAS 21), including a hedge of a monetary item that is accounted for as part of the net investment, is accounted for similarly to cash flow hedges: 125 CU IDOL SELF LEARNING MATERIAL (SLM)
the portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognised in OCI; and the ineffective portion is recognised in profit or loss. [IFRS 9 paragraph 6.5.13] The cumulative gain or loss on the hedging instrument relating to the effective portion of the hedge is reclassified to profit or loss on the disposal or partial disposal of the foreign operation. [IFRS 9 paragraph 6.5.14] Hedge effectiveness requirements In order to qualify for hedge accounting, the hedge relationship must meet the following effectiveness criteria at the beginning of each hedged period: there is an economic relationship between the hedged item and the hedging instrument; the effect of credit risk does not dominate the value changes that result from that economic relationship; and the hedge ratio of the hedging relationship is the same as that actually used in the economic hedge [IFRS 9 paragraph 6.4.1(c)] Rebalancing and discontinuation If a hedging relationship ceases to meet the hedge effectiveness requirement relating to the hedge ratio but the risk management objective for that designated hedging relationship remains the same, an entity adjusts the hedge ratio of the hedging relationship (i.e., rebalances the hedge) so that it meets the qualifying criteria again. [IFRS 9 paragraph 6.5.5] An entity discontinues hedge accounting prospectively only when the hedging relationship (or a part of a hedging relationship) ceases to meet the qualifying criteria (after any rebalancing). This includes instances when the hedging instrument expires or is sold, terminated or exercised. Discontinuing hedge accounting can either affect a hedging relationship in its entirety or only a part of it (in which case hedge accounting continues for the remainder of the hedging relationship). [IFRS 9 paragraph 6.5.6] Time value of options When an entity separates the intrinsic value and time value of an option contract and designates as the hedging instrument only the change in intrinsic value of the option, it recognises some or all of the change in the time value in OCI which is later removed or reclassified from equity as a single amount or on an amortised basis (depending on the nature of the hedged item) and ultimately recognised in profit or loss. [IFRS 9 paragraph 6.5.15] This reduces profit or loss volatility compared to recognising the change in value of time value directly in profit or loss. 126 CU IDOL SELF LEARNING MATERIAL (SLM)
Forward points and foreign currency basis spreads When an entity separates the forward points and the spot element of a forward contract and designates as the hedging instrument only the change in the value of the spot element, or when an entity excludes the foreign currency basis spread from a hedge the entity may recognise the change in value of the excluded portion in OCI to be later removed or reclassified from equity as a single amount or on an amortised basis (depending on the nature of the hedged item) and ultimately recognised in profit or loss. [IFRS 9 paragraph 6.5.16] This reduces profit or loss volatility compared to recognising the change in value of forward points or currency basis spreads directly in profit or loss. Credit exposures designated at FVTPL If an entity uses a credit derivative measured at FVTPL to manage the credit risk of a financial instrument (credit exposure) it may designate all or a proportion of that financial instrument as measured at FVTPL if: the name of the credit exposure matches the reference entity of the credit derivative (‘name matching’); and the seniority of the financial instrument matches that of the instruments that can be delivered in accordance with the credit derivative. An entity may make this designation irrespective of whether the financial instrument that is managed for credit risk is within the scope of IFRS 9 (for example, it can apply to loan commitments that are outside the scope of IFRS 9). The entity may designate that financial instrument at, or subsequent to, initial recognition, or while it is unrecognised and shall document the designation concurrently. [IFRS 9 paragraph 6.7.1] If designated after initial recognition, any difference in the previous carrying amount and fair value is recognised immediately in profit or loss [IFRS 9 paragraph 6.7.2] An entity discontinues measuring the financial instrument that gave rise to the credit risk at FVTPL if the qualifying criteria are no longer met and the instrument is not otherwise required to be measured at FVTPL. The fair value at discontinuation becomes its new carrying amount. [IFRS 9 paragraphs 6.7.3 and 6.7.4] Impairment The impairment model in IFRS 9 is based on the premise of providing for expected losses. Scope 127 CU IDOL SELF LEARNING MATERIAL (SLM)
IFRS 9 requires that the same impairment model apply to all of the following: [IFRS 9 paragraph 5.5.1] Financial assets measured at amortised cost; Financial assets mandatorily measured at FVTOCI; Loan commitments when there is a present obligation to extend credit (except where these are measured at FVTPL); Financial guarantee contracts to which IFRS 9 is applied (except those measured at FVTPL); Lease receivables within the scope of IAS 17 Leases; and Contract assets within the scope of IFRS 15 Revenue from Contracts with Customers (i.e., rights to consideration following transfer of goods or services). General approach With the exception of purchased or originated credit impaired financial assets (see below), expected credit losses are required to be measured through a loss allowance at an amount equal to: [IFRS 9 paragraphs 5.5.3 and 5.5.5] the 12-month expected credit losses (expected credit losses that result from those default events on the financial instrument that are possible within 12 months after the reporting date); or full lifetime expected credit losses (expected credit losses that result from all possible default events over the life of the financial instrument). A loss allowance for full lifetime expected credit losses is required for a financial instrument if the credit risk of that financial instrument has increased significantly since initial recognition, as well as to contract assets or trade receivables that do not constitute a financing transaction in accordance with IFRS 15. [IFRS 9 paragraphs 5.5.3 and 5.5.15] Additionally, entities can elect an accounting policy to recognise full lifetime expected losses for all contract assets and/or all trade receivables that do constitute a financing transaction in accordance with IFRS 15. The same election is also separately permitted for lease receivables. [IFRS 9 paragraph 5.5.16] For all other financial instruments, expected credit losses are measured at an amount equal to the 12-month expected credit losses. [IFRS 9 paragraph 5.5.5] 128 CU IDOL SELF LEARNING MATERIAL (SLM)
Significant increase in credit risk With the exception of purchased or originated credit-impaired financial assets (see below), the loss allowance for financial instruments is measured at an amount equal to lifetime expected losses if the credit risk of a financial instrument has increased significantly since initial recognition, unless the credit risk of the financial instrument is low at the reporting date in which case it can be assumed that credit risk on the financial instrument has not increased significantly since initial recognition. [IFRS 9 paragraphs 5.5.3 and 5.5.10] The Standard considers credit risk low if there is a low risk of default, the borrower has a strong capacity to meet its contractual cash flow obligations in the near term and adverse changes in economic and business conditions in the longer term may, but will not necessarily, reduce the ability of the borrower to fulfil its contractual cash flow obligations. The Standard suggests that ‘investment grade’ rating might be an indicator for a low credit risk. [IFRS 9 paragraphs B5.5.22 – B5.5.24] The assessment of whether there has been a significant increase in credit risk is based on an increase in the probability of a default occurring since initial recognition. Under the Standard, an entity may use various approaches to assess whether credit risk has increased significantly (provided that the approach is consistent with the requirements). An approach can be consistent with the requirements even if it does not include an explicit probability of default occurring as an input. The application guidance provides a list of factors that may assist an entity in making the assessment. Also, whilst in principle the assessment of whether a loss allowance should be based on lifetime expected credit losses is to be made on an individual basis, some factors or indicators might not be available at an instrument level. In this case, the entity should perform the assessment on appropriate groups or portions of a portfolio of financial instruments. The requirements also contain a rebuttable presumption that the credit risk has increased significantly when contractual payments are more than 30 days past due. IFRS 9 also requires that (other than for purchased or originated credit impaired financial instruments) if a significant increase in credit risk that had taken place since initial recognition and has reversed by a subsequent reporting period (i.e., cumulatively credit risk is not significantly higher than at initial recognition) then the expected credit losses on the financial instrument revert to being measured based on an amount equal to the 12-month expected credit losses. [IFRS 9 paragraph 5.5.11] 129 CU IDOL SELF LEARNING MATERIAL (SLM)
Purchased or originated credit-impaired financial assets Purchased or originated credit-impaired financial assets are treated differently because the asset is credit-impaired at initial recognition. For these assets, an entity would recognise changes in lifetime expected losses since initial recognition as a loss allowance with any changes recognised in profit or loss. Under the requirements, any favourable changes for such assets are an impairment gain even if the resulting expected cash flows of a financial asset exceed the estimated cash flows on initial recognition. [IFRS 9 paragraphs 5.5.13 – 5.5.14] Credit-impaired financial asset Under IFRS 9 a financial asset is credit-impaired when one or more events that have occurred and have a significant impact on the expected future cash flows of the financial asset. It includes observable data that has come to the attention of the holder of a financial asset about the following events: [IFRS 9 Appendix A] significant financial difficulty of the issuer or borrower; a breach of contract, such as a default or past-due event; the lenders for economic or contractual reasons relating to the borrower’s financial difficulty granted the borrower a concession that would not otherwise be considered; it becoming probable that the borrower will enter bankruptcy or other financial reorganisation; the disappearance of an active market for the financial asset because of financial difficulties; or the purchase or origination of a financial asset at a deep discount that reflects incurred credit losses. Basis for estimating expected credit losses Any measurement of expected credit losses under IFRS 9 shall reflect an unbiased and probability-weighted amount that is determined by evaluating the range of possible outcomes as well as incorporating the time value of money. Also, the entity should consider reasonable and supportable information about past events, current conditions and reasonable and supportable forecasts of future economic conditions when measuring expected credit losses. [IFRS 9 paragraph 5.5.17] The Standard defines expected credit losses as the weighted average of credit losses with the respective risks of a default occurring as the weightings. [IFRS 9 Appendix A] Whilst an entity does not need to consider every possible scenario, it must consider the risk or probability that a credit loss occurs by considering the possibility that a credit loss occurs and the possibility that no credit loss occurs, even if the probability of a credit loss occurring is 130 CU IDOL SELF LEARNING MATERIAL (SLM)
low. [IFRS 9 paragraph 5.5.18] In particular, for lifetime expected losses, an entity is required to estimate the risk of a default occurring on the financial instrument during its expected life. 12-month expected credit losses represent the lifetime cash shortfalls that will result if a default occurs in the 12 months after the reporting date, weighted by the probability of that default occurring. An entity is required to incorporate reasonable and supportable information (i.e., that which is reasonably available at the reporting date). Information is reasonably available if obtaining it does not involve undue cost or effort (with information available for financial reporting purposes qualifying as such). For applying the model to a loan commitment an entity will consider the risk of a default occurring under the loan to be advanced, whilst application of the model for financial guarantee contracts an entity considers the risk of a default occurring of the specified debtor. [IFRS 9 paragraphs B5.5.31 and B5.5.32] An entity may use practical expedients when estimating expected credit losses if they are consistent with the principles in the Standard (for example, expected credit losses on trade receivables may be calculated using a provision matrix where a fixed provision rate applies depending on the number of days that a trade receivable is outstanding). [IFRS 9 paragraph B5.5.35] To reflect time value, expected losses should be discounted to the reporting date using the effective interest rate of the asset (or an approximation thereof) that was determined at initial recognition. A “credit-adjusted effective interest” rate should be used for expected credit losses of purchased or originated credit-impaired financial assets. In contrast to the “effective interest rate” (calculated using expected cash flows that ignore expected credit losses), the credit-adjusted effective interest rate reflects expected credit losses of the financial asset. [IFRS 9 paragraphs B5.5.44-45] Expected credit losses of undrawn loan commitments should be discounted by using the effective interest rate (or an approximation thereof) that will be applied when recognising the financial asset resulting from the commitment. If the effective interest rate of a loan commitment cannot be determined, the discount rate should reflect the current market assessment of time value of money and the risks that are specific to the cash flows but only if, 131 CU IDOL SELF LEARNING MATERIAL (SLM)
and to the extent that, such risks are not taken into account by adjusting the discount rate. This approach shall also be used to discount expected credit losses of financial guarantee contracts. [IFRS 9 paragraphs B5.5.47] Presentation Whilst interest revenue is always required to be presented as a separate line item, it is calculated differently according to the status of the asset with regard to credit impairment. In the case of a financial asset that is not a purchased or originated credit-impaired financial asset and for which there is no objective evidence of impairment at the reporting date, interest revenue is calculated by applying the effective interest rate method to the gross carrying amount. [IFRS 9 paragraph 5.4.1] In the case of a financial asset that is not a purchased or originated credit-impaired financial asset but subsequently has become credit-impaired, interest revenue is calculated by applying the effective interest rate to the amortised cost balance, which comprises the gross carrying amount adjusted for any loss allowance. [IFRS 9 paragraph 5.4.1] In the case of purchased or originated credit-impaired financial assets, interest revenue is always recognised by applying the credit-adjusted effective interest rate to the amortised cost carrying amount. [IFRS 9 paragraph 5.4.1] The credit-adjusted effective interest rate is the rate that discounts the cash flows expected on initial recognition (explicitly taking account of expected credit losses as well as contractual terms of the instrument) back to the amortised cost at initial recognition. [IFRS 9 Appendix A] Consequential amendments of IFRS 9 to IAS 1 require that impairment losses, including reversals of impairment losses and impairment gains (in the case of purchased or originated credit-impaired financial assets), are presented in a separate line item in the statement of profit or loss and other comprehensive income. Disclosures IFRS 9 amends some of the requirements of IFRS 7 Financial Instruments: Disclosures including adding disclosures about investments in equity instruments designated as at FVTOCI, disclosures on risk management activities and hedge accounting and disclosures on credit risk management and impairment. 132 CU IDOL SELF LEARNING MATERIAL (SLM)
Interaction with IFRS 4 On 12 September 2016, the IASB issued amendments to IFRS 4 providing two options for entities that issue insurance contracts within the scope of IFRS 4: an option that permits entities to reclassify, from profit or loss to other comprehensive income, some of the income or expenses arising from designated financial assets; this is the so-called overlay approach; an optional temporary exemption from applying IFRS 9 for entities whose predominant activity is issuing contracts within the scope of IFRS 4; this is the so-called deferral approach. An entity choosing to apply the overlay approach retrospectively to qualifying financial assets does so when it first applies IFRS 9. An entity choosing to apply the deferral approach does so for annual periods beginning on or after 1 January 2018. The application of both approaches is optional and an entity is permitted to stop applying them before the new insurance contracts standard is applied. 9.6 SUMMARY 9.7 KEYWORDS IFRIC – International Financial Reporting Interpretations Committee SIC – Standing Interpretations Committee. NFRA – National Financial Reporting Authority. IFIAR – International Forum of Independent Audit Regulators. IASB – International Accounting Standards Board. XBRL – eXtensible Business Reporting Language. 9.8 LEARNING ACTIVITY 1. Learn more about NFRA and record your observation, for implementation of NFRA in full scale. ___________________________________________________________________________ ______________________________________________________________ 2. Lean about XBRL reporting in context of Indian companies. 133 CU IDOL SELF LEARNING MATERIAL (SLM)
___________________________________________________________________________ _______________________________________________________________ 9.9 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. What is Exposure Draft? 2. What is Discussion Paper? 3. Examine the applicability of IFRS in United States of America. 4. What are the advantages of Taxonomies? 5. Which class of companies is NFRA applicable? Long Questions 1. Explain in detail the standard setting process. 2. Discuss the need for NFRA. 3. Having uniform reporting framework increases comparability. Critically Analyse. 4. Explain International Harmonization. 5. Distinguish between Exposure Draft and Discussion Paper. B. Multiple ChoiceQuestions 1. XBRL Means? a. Xtensible Business Result List b. Xtra Business Report List c. eXtensible Business Reporting Language d. eXtraordinary Business Reporting Language 2. Section 132 of Companies Act, 2013 speaks about a. Accounting Standards b. National Financial Reporting Authority c. Annual Auditing Requirements d. Accounting Principles and Double entry System 3. ________ is an international independent audit regulator. 134 CU IDOL SELF LEARNING MATERIAL (SLM)
a. IFIAR. b. IASB c. FASB d. IFRS Foundation. 4. _________ makes information computer readable. a. XBRL b. IFRS c. Taxonomy d. Tagging 5. Standard setting process has _________ number of phases? a. Three b. Two c. Four d. Six Answers 1 – c, 2 – b, 3 – a, 4 – d, 5 – a 9.9 REFERENCES Textbooks: Doupnik, T. and Perera, H., International Accounting, McGraw-Hill. International Financial Reporting Standards, Vol. I & II, Taxman Publications. Reference Books: Nobes, C. and Parker, R., Comparative International Accounting, Prentice Hall. Rathore, S., International Accounting, Prentice Hall India. Saudagaran, S. M. International Accounting: A User Perspective, CCH, Inc. Website: www.ifrs.org 135 CU IDOL SELF LEARNING MATERIAL (SLM)
www.mca.gov.in www.icai.org 136 CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT – 10 IAS RELATING TO GROUP ACCOUNTS Structure 10.0. LearningObjectives 10.1. Introduction 10.2. Regulatory framework 10.3. consolidated statement of financial position 10.4. consolidated statement of comprehensive income, investment in associates,interests in joint ventures 10.5. the effects of changes in foreign exchange rates 10.6. Summary 10.7. Keywords 10.8. Learning Activity 10.9. Unit End Questions 10.10. References 10.0 LEARNING OBJECTIVES After studying this unit, you will be able to: Identify qualifying asset for capitalization. Explain components of borrowing cost. Learn about Lease. Evaluate Intangible Assets Explain about Investment Properties. 10.1 INTRODUCTION In this unit we shall learn about Regulatory framework, consolidated statement of financial position, consolidated statement of comprehensive income, investment in associates, interests in joint ventures, the effects of changes in foreign exchange rates 10.2. REGULATORY FRAMEWORK Global accounting standards for listed companies, known as International Financial Reporting Standards (IFRSs), are developed by an international organisation under civil law, 137 CU IDOL SELF LEARNING MATERIAL (SLM)
IFRS Foundation, and its two bodies, the International Accounting Standards Board (IASB) and the IFRS Interpretations Committee (IFRS IC). The financial reporting regulatory framework is incorporated into EU legislation via a separate committee procedure. IFRSs adopted by the European Commission are binding on listed companies. Key actors in the approval of IFRSs at European level are the European Financial Reporting Advisory Group (EFRAG) and the Accounting Regulatory Committee (ARC). EFRAG assists the European Commission in deciding whether a standard issued by the IASB or an interpretation given by the IFRS IC can be approved as EU legislation. Subsequently, the ARC, consisting of representatives of Member States’ ministries, proposes approval or rejection of the standard or interpretation to the Commission. The European Securities Markets Authority (ESMA) has observer status in both EFRAG and ARC, whereas the European Banking Authority (EBA) only participates in the latter as an observer. Both supervisory authorities (ESMA and EBA) seek to influence regulations and interpretations concerning financial reporting, particularly when IASB or IFRS IC submits a proposal for a new standard or interpretation or proposes amendments to those issued earlier. The FIN-FSA participates regularly in both ESMA’s and EBA’s working groups that draft comments to IFRSs. Even though the working groups emphasise the supervisory aspect in their comments, they also discuss financial reporting-related issues raised by companies. 10.3. CONSOLIDATED STATEMENT OF FINANCIAL POSITION IFRS 10 Consolidated Financial Statements outlines the requirements for the preparation and presentation of consolidated financial statements, requiring entities to consolidate entities it controls. Control requires exposure or rights to variable returns and the ability to affect those returns through power over an investee. IFRS 10 was issued in May 2011 and applies to annual periods beginning on or after 1 January 2013. Objective The objective of IFRS 10 is to establish principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities. [IFRS 10:1] 138 CU IDOL SELF LEARNING MATERIAL (SLM)
The Standard: [IFRS 10:1] requires a parent entity (an entity that controls one or more other entities) to present consolidated financial statements defines the principle of control, and establishes control as the basis for consolidation set out how to apply the principle of control to identify whether an investor controls an investee and therefore must consolidate the investee sets out the accounting requirements for the preparation of consolidated financial statements defines an investment entity and sets out an exception to consolidating particular subsidiaries of an investment entity*. 10.4 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME, INVESTMENT IN ASSOCIATES, INTERESTS IN JOINT VENTURES IAS 28 Investments in Associates and Joint Ventures (as amended in 2011) outlines how to apply, with certain limited exceptions, the equity method to investments in associates and joint ventures. The standard also defines an associate by reference to the concept of \"significant influence\", which requires power to participate in financial and operating policy decisions of an investee (but not joint control or control of those polices). IAS 28 was reissued in May 2011 and applies to annual periods beginning on or after 1 January 2013. Objective of IAS 28 The objective of IAS 28 (as amended in 2011) is to prescribe the accounting for investments in associates and to set out the requirements for the application of the equity method when accounting for investments in associates and joint ventures. [IAS 28(2011).1] Scope of IAS 28 IAS 28 applies to all entities that are investors with joint control of, or significant influence over, an investee (associate or joint venture). [IAS 28(2011).2] Significant influence Where an entity holds 20% or more of the voting power (directly or through subsidiaries) on an investee, it will be presumed the investor has significant influence unless it can be clearly demonstrated that this is not the case. If the holding is less than 20%, the entity will be presumed not to have significant influence unless such influence can be clearly demonstrated. A substantial or majority ownership by another investor does not necessarily preclude an entity from having significant influence. [IAS 28(2011).5] 139 CU IDOL SELF LEARNING MATERIAL (SLM)
The existence of significant influence by an entity is usually evidenced in one or more of the following ways: [IAS 28(2011).6] representation on the board of directors or equivalent governing body of the investee; participation in the policy-making process, including participation in decisions about dividends or other distributions; material transactions between the entity and the investee; interchange of managerial personnel; or provision of essential technical information The existence and effect of potential voting rights that are currently exercisable or convertible, including potential voting rights held by other entities, are considered when assessing whether an entity has significant influence. In assessing whether potential voting rights contribute to significant influence, the entity examines all facts and circumstances that affect potential rights [IAS 28(2011).7, IAS 28(2011).8] An entity loses significant influence over an investee when it loses the power to participate in the financial and operating policy decisions of that investee. The loss of significant influence can occur with or without a change in absolute or relative ownership levels. [IAS 28(2011).9] The equity method of accounting Basic principle. Under the equity method, on initial recognition the investment in an associate or a joint venture is recognized at cost, and the carrying amount is increased or decreased to recognize the investor's share of the profit or loss of the investee after the date of acquisition. [IAS 28(2011).10] 10.5 THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES Overview IAS 21 The Effects of Changes in Foreign Exchange Rates outlines how to account for foreign currency transactions and operations in financial statements, and also how to translate financial statements into a presentation currency. An entity is required to determine a functional currency (for each of its operations if necessary) based on the primary economic environment in which it operates and generally records foreign currency transactions using the spot conversion rate to that functional currency on the date of the transaction. IAS 21 was reissued in December 2003 and applies to annual periods beginning on or after 1 January 2005. 140 CU IDOL SELF LEARNING MATERIAL (SLM)
Objective of IAS 21 The objective of IAS 21 is to prescribe how to include foreign currency transactions and foreign operations in the financial statements of an entity and how to translate financial statements into a presentation currency. [IAS 21.1] The principal issues are which exchange rate(s) to use and how to report the effects of changes in exchange rates in the financial statements. [IAS 21.2] Key definitions [IAS 21.8] Functional currency: the currency of the primary economic environment in which the entity operates. (The term 'functional currency' was used in the 2003 revision of IAS 21 in place of 'measurement currency' but with essentially the same meaning.) Presentation currency: the currency in which financial statements are presented. Exchange difference: the difference resulting from translating a given number of units of one currency into another currency at different exchange rates. Foreign operation: a subsidiary, associate, joint venture, or branch whose activities are based in a country or currency other than that of the reporting entity. Basic steps for translating foreign currency amounts into the functional currency Steps apply to a stand-alone entity, an entity with foreign operations (such as a parent with foreign subsidiaries), or a foreign operation (such as a foreign subsidiary or branch). 1. the reporting entity determines its functional currency 2. the entity translates all foreign currency items into its functional currency 3. the entity reports the effects of such translation in accordance with paragraphs 20-37 [reporting foreign currency transactions in the functional currency] and 50 [reporting the tax effects of exchange differences]. 10.6 SUMMARY 141 CU IDOL SELF LEARNING MATERIAL (SLM)
10.7 KEYWORDS IFRIC – International Financial Reporting Interpretations Committee SIC – Standing Interpretations Committee. NFRA – National Financial Reporting Authority. IFIAR – International Forum of Independent Audit Regulators. IASB – International Accounting Standards Board. XBRL – eXtensible Business Reporting Language. 10.8 LEARNING ACTIVITY 1. Learn more about NFRA and record your observation, for implementation of NFRA in full scale. ___________________________________________________________________________ _______________________________________________________________ 2. Lean about XBRL reporting in context of Indian companies. ___________________________________________________________________________ _______________________________________________________________ 10.8 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. What is Exposure Draft? 2. What is Discussion Paper? 3. Examine the applicability of IFRS in United States of America. 4. What are the advantages of Taxonomies? 5. Which class of companies is NFRA applicable? Long Questions 1. Explain in detail the standard setting process. 2. Discuss the need for NFRA. 3. Having uniform reporting framework increases comparability. Critically Analyse. 142 CU IDOL SELF LEARNING MATERIAL (SLM)
4. Explain International Harmonization. 143 5. Distinguish between Exposure Draft and Discussion Paper. B. Multiple ChoiceQuestions 1. XBRL Means? a. Xtensible Business Result List b. Xtra Business Report List c. eXtensible Business Reporting Language d. eXtraordinary Business Reporting Language 2. Section 132 of Companies Act, 2013 speaks about a. Accounting Standards b. National Financial Reporting Authority c. Annual Auditing Requirements d. Accounting Principles and Double entry System 3. ________ is an international independent audit regulator. a. IFIAR. b. IASB c. FASB d. IFRS Foundation. 4. _________ makes information computer readable. a. XBRL b. IFRS c. Taxonomy d. Tagging 5. Standard setting process has _________ number of phases? a. Three CU IDOL SELF LEARNING MATERIAL (SLM)
b. Two c. Four d. Six Answers 1 – c, 2 – b, 3 – a, 4 – d, 5 – a 10.9 REFERENCES Textbooks: Doupnik, T. and Perera, H., International Accounting, McGraw-Hill. International Financial Reporting Standards, Vol. I & II, Taxman Publications. Reference Books: Nobes, C. and Parker, R., Comparative International Accounting, Prentice Hall. Rathore, S., International Accounting, Prentice Hall India. Saudagaran, S. M. International Accounting: A User Perspective, CCH, Inc. Website: www.ifrs.org www.mca.gov.in www.icai.org 144 CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT – 11 IAS RELATING TO DISCLOSURE AND ANALYSIS I Structure 11.0. LearningObjectives 11.1. Introduction 11.2. Earnings per share 11.3. Statement of cash flows, operating segments 11.4. Non-current assets held for sale and Discontinued operations Summary. 11.5. Summary 11.6. Keywords 11.7. Learning Activity 11.8. Unit End Questions 11.9. References 11.0 LEARNING OBJECTIVES After studying this unit, you will be able to: Identify qualifying asset for capitalization. Explain components of borrowing cost. Learn about Lease. Evaluate Intangible Assets Understand about Investment Properties. 11.1 INTRODUCTION In this unit we shall learn about Earnings per share, statement of cash flows, operating segments, and non-current assets held for sale and discontinued operations. 11.2. EARNINGS PER SHARE Overview IAS 33 Earnings Per Share sets out how to calculate both basic earnings per share (EPS) and diluted EPS. The calculation of Basic EPS is based on the weighted average number of ordinary shares outstanding during the period, whereas diluted EPS also includes dilutive 145 CU IDOL SELF LEARNING MATERIAL (SLM)
potential ordinary shares (such as options and convertible instruments) if they meet certain criteria. IAS 33 was reissued in December 2003 and applies to annual periods beginning on or after 1 January 2005. 11.3 STATEMENT OF CASH FLOWS, OPERATING SEGMENTS Overview IAS 7 Statement of Cash Flows requires an entity to present a statement of cash flows as an integral part of its primary financial statements. Cash flows are classified and presented into operating activities (either using the 'direct' or 'indirect' method), investing activities or financing activities, with the latter two categories generally presented on a gross basis. IAS 7 was reissued in December 1992, retitled in September 2007, and is operative for financial statements covering periods beginning on or after 1 January 1994. Objective of IAS 7 The objective of IAS 7 is to require the presentation of information about the historical changes in cash and cash equivalents of an entity by means of a statement of cash flows, which classifies cash flows during the period according to operating, investing, and financing activities. Fundamental principle in IAS 7 All entities that prepare financial statements in conformity with IFRSs are required to present a statement of cash flows. [IAS 7.1] The statement of cash flows analyses changes in cash and cash equivalents during a period. Cash and cash equivalents comprise cash on hand and demand deposits, together with short- term, highly liquid investments that are readily convertible to a known amount of cash, and that are subject to an insignificant risk of changes in value. Guidance notes indicate that an investment normally meets the definition of a cash equivalent when it has a maturity of three months or less from the date of acquisition. Equity investments are normally excluded, unless they are in substance a cash equivalent (e.g., preferred shares acquired within three months of their specified redemption date). Bank overdrafts which are repayable on demand and which form an integral part of an entity's cash management are also included as a component of cash and cash equivalents. [IAS 7.7-8] 146 CU IDOL SELF LEARNING MATERIAL (SLM)
Presentation of the Statement of Cash Flows Cash flows must be analysed between operating, investing and financing activities. [IAS 7.10] Key principles specified by IAS 7 for the preparation of a statement of cash flows are as follows: operating activities are the main revenue-producing activities of the entity that are not investing or financing activities, so operating cash flows include cash received from customers and cash paid to suppliers and employees [IAS 7.14] investing activities are the acquisition and disposal of long-term assets and other investments that are not considered to be cash equivalents [IAS 7.6] financing activities are activities that alter the equity capital and borrowing structure of the entity [IAS 7.6] interest and dividends received and paid may be classified as operating, investing, or financing cash flows, provided that they are classified consistently from period to period [IAS 7.31] cash flows arising from taxes on income are normally classified as operating, unless they can be specifically identified with financing or investing activities [IAS 7.35] for operating cash flows, the direct method of presentation is encouraged, but the indirect method is acceptable [IAS 7.18] The direct method shows each major class of gross cash receipts and gross cash payments. The indirect method adjusts accrual basis net profit or loss for the effects of non-cash transactions. 11.4 NON-CURRENT ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS IFRS 5 Non-current Assets Held for Sale and Discontinued Operations outlines how to account for non-current assets held for sale (or for distribution to owners). In general terms, assets (or disposal groups) held for sale are not depreciated, are measured at the lower of carrying amount and fair value less costs to sell, and are presented separately in the statement of financial position. Specific disclosures are also required for discontinued operations and disposals of non-current assets. IFRS 5 was issued in March 2004 and applies to annual periods beginning on or after 1 January 2005. Background IFRS 5 achieves substantial convergence with the requirements of US SFAS 144 Accounting for the Impairment or Disposal of Long-Lived Assets with respect to the timing of the classification of operations as discontinued operations and the presentation of such 147 CU IDOL SELF LEARNING MATERIAL (SLM)
operations. With respect to long-lived assets that are not being disposed of, the impairment recognition and measurement standards in SFAS 144 are significantly different from those in IAS 36 Impairment of Assets. However, those differences were not addressed in the short- term IASB-FASB convergence project. 11.5 SUMMARY International Financial Reporting Standards, commonly called IFRS, are accounting standards issued by the IFRS Foundation and the International Accounting Standards Board (IASB) The Accounting Standards are issued for brings a standardized way of reporting the company’s financial performance and position. International Harmonization of Accountancy means enhancing the degree of agreement in accounting standards and practices between participating nations in IFRS Convergence. The International Forum of Independent Audit Regulators (IFIAR) is a globally constituted organization comprising independent audit regulators from 54 Countries. National Financial Reporting Authority (NFRA) is an independent regulator to supervise the Accounting Profession and Accounting Standards in India under Companies Act 2013 11.6 KEYWORDS IFRIC – International Financial Reporting Interpretations Committee SIC – Standing Interpretations Committee. NFRA – National Financial Reporting Authority. IFIAR – International Forum of Independent Audit Regulators. IASB – International Accounting Standards Board. XBRL – eXtensible Business Reporting Language. 11.7 LEARNING ACTIVITY 1. Learn more about NFRA and record your observation, for implementation of NFRA in full scale. ___________________________________________________________________________ ______________________________________________________________ 2. Lean about XBRL reporting in context of Indian companies. 148 CU IDOL SELF LEARNING MATERIAL (SLM)
___________________________________________________________________________ _______________________________________________________________ 11.8 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. What is Exposure Draft? 2. What is Discussion Paper? 3. Examine the applicability of IFRS in United States of America. 4. What are the advantages of Taxonomies? 5. Which class of companies is NFRA applicable? Long Questions 1. Explain in detail the standard setting process. 2. Discuss the need for NFRA. 3. Having uniform reporting framework increases comparability. Critically Analyse. 4. Explain International Harmonization. 5. Distinguish between Exposure Draft and Discussion Paper. B. Multiple ChoiceQuestions 1. XBRL Means? a. Xtensible Business Result List b. Xtra Business Report List c. eXtensible Business Reporting Language d. eXtraordinary Business Reporting Language 2. Section 132 of Companies Act, 2013 speaks about a. Accounting Standards b. National Financial Reporting Authority c. Annual Auditing Requirements d. Accounting Principles and Double entry System 3. ________ is an international independent audit regulator. 149 CU IDOL SELF LEARNING MATERIAL (SLM)
a. IFIAR. b. IASB c. FASB d. IFRS Foundation. 4. _________ makes information computer readable. a. XBRL b. IFRS c. Taxonomy d. Tagging 5. Standard setting process has _________ number of phases? a. Three b. Two c. Four d. Six Answers 1 – c, 2 – b, 3 – a, 4 – d, 5 – a 11.9 REFERENCES Textbooks: Doupnik, T. and Perera, H., International Accounting, McGraw-Hill. International Financial Reporting Standards, Vol. I & II, Taxman Publications. Reference Books: Nobes, C. and Parker, R., Comparative International Accounting, Prentice Hall. Rathore, S., International Accounting, Prentice Hall India. Saudagaran, S. M. International Accounting: A User Perspective, CCH, Inc. Website: www.ifrs.org 150 CU IDOL SELF LEARNING MATERIAL (SLM)
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