Reading 12: Overview of IFRS Standards PDF

Readings Block 2: Competing in a global context Reading 12: Overview of IFRS Standards This reading has been extracted from Pacter, P. (2016) Pocket Guide to IFR...

Readings Block 2: Competing in a global context Reading 12: Overview of IFRS Standards This reading has been extracted from Pacter, P. (2016) Pocket Guide to IFRS Standards: The Global Financial Reporting Language, 2016 edn, London, IFRS Foundation. This section summarises, at a high level and in non-technical language, the main principles in IFRS Standards issued at April 2016. The Board has not approved these summaries, and the summaries should not be relied on for preparing ﬁnancial statements in conformity with IFRS Standards. 1 The conceptual framework for ﬁnancial reporting The Conceptual Framework sets out the concepts that underlie the preparation and presentation of ﬁnancial statements for external users. The Conceptual Framework deals with:. the objective of ﬁnancial reporting (which is to provide ﬁnancial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity);. the qualitative characteristics of useful ﬁnancial information;. the deﬁnition, recognition and measurement of the elements from which ﬁnancial statements are constructed; and. concepts of capital and capital maintenance. 2 IFRS Standards IFRS 1 – First-time adoption of international ﬁnancial reporting standards IFRS 1 requires an entity that is adopting IFRS Standards for the ﬁrst time to prepare a complete set of ﬁnancial statements for its ﬁrst IFRS reporting period and for the immediately preceding year. The entity uses the same accounting policies throughout all periods presented in its ﬁrst IFRS ﬁnancial statements. Those accounting policies shall comply with each Standard effective at the end of its ﬁrst IFRS reporting period. IFRS 1 provides limited exemptions from the requirement to restate prior periods in speciﬁed areas in which the cost of complying with them would be likely to exceed the beneﬁts to users of ﬁnancial statements. IFRS 1 also prohibits retrospective application of IFRS 72 Reading 12: Overview of IFRS Standards Standards in some areas, particularly when retrospective application would require judgements by management about past conditions after the outcome of a particular transaction is already known. The Standard requires disclosures that explain how the transition from previous GAAP to IFRS Standards affected the entity’s reported ﬁnancial position, ﬁnancial performance and cash ﬂows. IFRS 2 – Share-based payment IFRS 2 speciﬁes the ﬁnancial reporting by an entity when it undertakes a share-based payment transaction, including the issue of shares and share options. It requires an entity to recognise share-based payment transactions in its ﬁnancial statements, including transactions with employees or other parties to be settled in cash, other assets or equity instruments of the entity. It also requires an entity to reﬂect in its proﬁt or loss and ﬁnancial position the effects of share-based transactions, including expenses associated with transactions in which share options are granted to employees. IFRS 3 – Business combinations IFRS 3 establishes principles and requirements for how an acquirer in a business combination:. recognises and measures in its ﬁnancial statements the identiﬁable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree;. recognises and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and. determines what information to disclose to enable users of the ﬁnancial statements to evaluate the nature and ﬁnancial effects of the business combination. The core principle in IFRS 3 is that an acquirer of a business recognises the assets acquired and the liabilities assumed at their acquisition-date fair values and discloses information that enables users to evaluate the nature and ﬁnancial effects of the acquisition. IFRS 4 – Insurance contracts IFRS 4 speciﬁes the ﬁnancial reporting for insurance contracts by an entity that issues such contracts until the Board completes its comprehensive project on insurance contracts. An insurance contract is a contract under which one party (the insurer) accepts signiﬁcant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a speciﬁed uncertain future event (the insured event) adversely affects the policyholder. IFRS 4 applies to all insurance contracts (including reinsurance contracts) that an entity issues and to reinsurance contracts that it holds, except for speciﬁed contracts covered by other Standards. It does not apply to other 73 Readings Block 2: Competing in a global context assets and liabilities of an insurer, such as ﬁnancial assets and ﬁnancial liabilities within the scope of IFRS 9. Furthermore, it does not address accounting by policyholders. IFRS 4 exempts an insurer temporarily (i.e. until the comprehensive project is completed) from some requirements of other Standards, including the requirement to consider the Conceptual Framework in selecting accounting policies for insurance contracts. However IFRS4:. prohibits provisions for possible claims under contracts that are not in existence at the end of the reporting period (such as catastrophe and equalisation provisions);. requires a test for the adequacy of recognised insurance liabilities and an impairment test for reinsurance assets; and. requires an insurer to keep insurance liabilities in its statement of ﬁnancial position until they are discharged or cancelled, or expire, and to present insurance liabilities without offsetting them against related reinsurance assets. IFRS 5 – Non-current assets held for sale and discontinued operations IFRS 5 requires:. assets that meet the criteria to be classiﬁed as held for sale to be measured at the lower of the carrying amount and fair value less costs to sell, and depreciation on such assets to cease;. an asset classiﬁed as held for sale and the assets and liabilities included within a disposal group classiﬁed as held for sale to be presented separately in the statement of ﬁnancial position; and. the results of discontinued operations to be presented separately in the statement of comprehensive income. IFRS 5 requires an entity to classify a non-current asset (or disposal group) as held for sale if its carrying amount will be recovered principally through a sale transaction instead of through continuing use. IFRS 6 – Exploration for and evaluation of mineral resources IFRS 6 speciﬁes the ﬁnancial reporting for costs incurred for exploration for and evaluation of mineral resources (for example, minerals, oil, natural gas and similar non-regenerative resources), as well as the costs of determination of the technical feasibility and commercial viability of extracting the mineral resource. IFRS 6:. Permits an entity to develop an accounting policy for exploration and evaluation assets without speciﬁcally considering the requirements of paragraphs 11-12 of IAS 8. Thus, an entity adopting IFRS 6 may continue to use the accounting policies applied immediately before adopting IFRS 6. 74 Reading 12: Overview of IFRS Standards. Requires entities recognising exploration and evaluation assets to perform an impairment test on those assets when facts and circumstances suggest that the carrying amount of the assets may exceed their recoverable amount.. Varies the recognition of impairment from that in IAS 36 Impairment of Assets but measures the impairment in accordance with that Standard once the impairment is identiﬁed. IFRS 7 – Financial instruments: disclosures IFRS 7 requires entities to provide disclosures in their ﬁnancial statements that enable users to evaluate:. The signiﬁcance of ﬁnancial instruments for the entity’s ﬁnancial position and performance.. The nature and extent of risks arising from ﬁnancial instruments to which the entity is exposed during the period and at the end of the reporting period, and how the entity manages those risks. The quantitative disclosures provide information about the extent to which the entity is exposed to risk, based on information provided internally to the entity’s key management personnel. Together, these disclosures provide an overview of the entity’s use of ﬁnancial instruments and the exposures to risks they create. IFRS 7 applies to all entities, including entities that have few ﬁnancial instruments (for example, a manufacturer whose only ﬁnancial instruments are cash, accounts receivable and accounts payable) and those that have many ﬁnancial instruments (for example, a ﬁnancial institution where most of whose assets and liabilities are ﬁnancial instruments). IFRS 8 – Operating segments IFRS 8 requires an entity to disclose information to enable users of its ﬁnancial statements to evaluate the nature and ﬁnancial effects of the different business activities in which it engages and the different economic environments in which it operates. It speciﬁes how an entity should report information about its operating segments in annual ﬁnancial statements and in interim ﬁnancial reports. It also sets out requirements for related disclosures about products and services, geographical areas and major customers. IFRS 9 – Financial instruments IFRS 9 is effective for annual periods beginning on or after 1 January 2018 with early application permitted. IFRS 9 speciﬁes how an entity should classify and measure ﬁnancial assets, ﬁnancial liabilities, and some contracts to buy or sell non-ﬁnancial items. IFRS 9 requires an entity to recognise a ﬁnancial asset or a ﬁnancial liability in its statement of ﬁnancial position when it becomes party to 75 Readings Block 2: Competing in a global context contractual provisions of the instrument. At initial recognition, an entity measures a ﬁnancial asset or a ﬁnancial liability at its fair value plus or minus, in the case of a ﬁnancial asset or a ﬁnancial liability not at fair value through proﬁt or loss, transaction costs that are directly attributable to the acquisition or issue of the ﬁnancial asset or the ﬁnancial liability. Financial assets When an entity ﬁrst recognises a ﬁnancial asset, it classiﬁes it based on the entity’s business model for managing the asset and the asset’s contractual cash ﬂow characteristics, as follows: Amortised cost – A ﬁnancial asset is measured at amortised cost if both of the following conditions are met:. the asset is held within a business model whose objective is to hold assets in order to collect contractual cash ﬂows; and. 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. Fair value through other comprehensive income – Financial assets are classiﬁed and measured at fair value through other comprehensive income if they are held in a business model whose objective is achieved by both collecting contractual cash ﬂows and selling ﬁnancial assets. When, and only when, an entity changes its business model for managing ﬁnancial assets, it must reclassify all affected ﬁnancial assets. Financial liabilities An entity classiﬁes all ﬁnancial liabilities as subsequently measured at amortised cost using the effective interest method, except for:. ﬁnancial liabilities at fair value through proﬁt or loss – such liabilities, including derivatives that are liabilities, are subsequently measured at fair value;. ﬁnancial liabilities that arise when a transfer of a ﬁnancial asset does not qualify for derecognition or when the continuing involvement approach applies;. ﬁnancial guarantee contracts (for which special accounting is prescribed);. commitments to provide a loan at a below-market interest rate (for which special accounting is prescribed); and. contingent consideration recognised by an acquirer in a business combination to which IFRS 3 applies. However, an entity may, at initial recognition, irrevocably designate a ﬁnancial liability as measured at fair value through proﬁt or loss when permitted or when doing so results in more relevant information. After initial recognition, an entity cannot reclassify any ﬁnancial liability. 76 Reading 12: Overview of IFRS Standards Fair value option An entity may, at initial recognition, irrevocably designate a ﬁnancial instrument that would otherwise have to be measured at amortised cost or fair value through other comprehensive income to be measured at fair value through proﬁt or loss if doing so would eliminate or signiﬁcantly reduce a measurement or recognition inconsistency (sometimes referred to as an ‘accounting mismatch’) or otherwise results in more relevant information. Impairment Impairment of ﬁnancial assets is recognised in stages: Stage 1 – As soon as a ﬁnancial instrument is originated and purchased, 12- month expected credit losses are recognised in proﬁt or loss and a loss allowance is established. This serves as a proxy for the initial expectations of credit losses. For ﬁnancial assets, interest revenue is calculated on the gross carrying amount (i.e. without adjustment for expected credit losses). Stage 2 – If the credit risk increases signiﬁcantly and the resulting credit quality is not considered to be low credit risk, full lifetime expected credit losses are recognised in proﬁt or loss. Lifetime expected credit losses are only recognised if the credit risk increases signiﬁcantly from when the entity originates or purchases the ﬁnancial instrument. The calculation of interest revenue is the same as for Stage 1. Stage 3 – If the credit risk of a ﬁnancial asset increases to the point that it is considered credit-impaired, interest revenue is calculated based on the amortised cost (i.e. the gross carrying amount adjusted for the loss allowance). Financial assets in this stage will generally be individually assessed. Lifetime expected credit losses are recognised on these ﬁnancial assets. Hedge accounting The objective of hedge accounting is to represent, in the ﬁnancial statements, the effect of an entity’s risk management activities that use ﬁnancial instruments to manage exposures arising from particular risks that could affect proﬁt or loss or other comprehensive income. This approach aims to convey the context of hedging instruments for which hedge accounting is applied in order to allow insight into their purpose and effect. Under IFRS 9, hedge accounting is aligned with an entity’s risk management activities. Risk components of both ﬁnancial and non-ﬁnancial items qualify for hedge accounting. Rebalancing (modifying) a hedging relationship after initial designation does not necessarily terminate hedge accounting. Hedge accounting is optional. An entity applying hedge accounting designates a hedging relationship between a hedging instrument and a hedged item. For hedging relationships that meet the qualifying criteria in IFRS 9, an entity accounts for the gain or loss on the hedging instrument and the hedged item in accordance with the special hedge accounting provisions of IFRS 9. 77 Readings Block 2: Competing in a global context IFRS 10 – Consolidated ﬁnancial statements IFRS 10 establishes principles for the presentation and preparation of consolidated ﬁnancial statements when an entity controls one or more other entities. IFRS 10:. requires an entity (the parent) that controls one or more other entities (subsidiaries) to present consolidated ﬁnancial statements;. deﬁnes the principle of control, and establishes control as the basis for consolidation;. sets 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; and. deﬁnes an investment entity and sets out an exception to consolidating particular subsidiaries of an investment entity. Consolidated ﬁnancial statements are the ﬁnancial statements of a group in which the assets, liabilities, equity, income, expenses and cash ﬂows of the parent and its subsidiaries are presented as those of a single economic entity. IFRS 11 – Joint arrangements IFRS 11 establishes principles for ﬁnancial reporting by entities that have an interest in arrangements that are controlled jointly (joint arrangements). A joint arrangement is an arrangement of which two or more parties have joint control. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities (i.e. activities that signiﬁcantly affect the returns of the arrangement) require the unanimous consent of the parties sharing control. IFRS 11 classiﬁes joint arrangements into two types – joint operations and joint ventures:. a joint operation is a joint arrangement whereby the parties that have joint control of the arrangement (i.e. joint operators) have rights to the assets, and obligations for the liabilities, relating to the arrangement; and. a joint venture is a joint arrangement whereby the parties that have joint control of the arrangement (i.e. joint venturers) have rights to the net assets of the arrangement. IFRS 11 requires a joint operator to recognise and measure its share of the assets and liabilities (and recognise the related revenues and expenses) in accordance with relevant Standards applicable to the particular assets, liabilities, revenues and expenses. A joint venturer recognises its interest in the joint venture as an investment in the arrangement using the equity method (see IAS 28). 78 Reading 12: Overview of IFRS Standards IFRS 12 – Disclosure of interests in other entities IFRS 12 requires an entity to disclose information that enables users of its ﬁnancial statements to evaluate:. the nature of, and risks associated with, its interests in other entities; and. the effects of those interests on its ﬁnancial position, ﬁnancial performance and cash ﬂows. IFRS 12 applies to entities that have an interest in a subsidiary, a joint arrangement, an associate or an unconsolidated structured entity. It establishes disclosure objectives and identiﬁes the kind of information an entity must disclose in its ﬁnancial statements about its interests in those other entities. IFRS 13 – Fair value measurement IFRS 13 deﬁnes fair value, sets out a framework for measuring fair value, and requires disclosures about fair value measurements. It applies when another Standard requires or permits fair value measurements or disclosures about fair value measurements (and measurements, such as fair value less costs to sell, based on fair value or disclosures about those measurements), except in speciﬁed circumstances in which other Standards govern. For example, IFRS 13 does not specify the measurement and disclosure requirements for share-based payment transactions, leases or impairment of assets. Nor does it establish disclosure requirements for fair values related to employee beneﬁts and retirement plans. IFRS 13 deﬁnes fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e. an exit price). When measuring fair value, an entity uses the assumption that market participants would use when pricing the asset or the liability under current market conditions, including assumptions about risk. As a result, an entity’s intention to hold an asset or to settle or otherwise fulﬁl a liability is not relevant when measuring fair value. IFRS 14 – Regulatory deferral accounts IFRS 14 describes regulatory deferral account balances as amounts of expense or income that would not be recognised as assets or liabilities in accordance with other Standards, but that qualify to be deferred in accordance with this Standard because the amount is included, or is expected to be included, by the rate regulator in establishing the price(s) that an entity can charge to customers for rate-regulated goods or services. IFRS 14 permits a ﬁrst-time adopter within its scope to continue to account for regulatory deferral account balances in its IFRS ﬁnancial statements in accordance with its previous GAAP when it adopts IFRS Standards. 79 Readings Block 2: Competing in a global context However, IFRS 14 introduces limited changes to some previous GAAP accounting practices for regulatory deferral account balances, which are primarily related to the presentation of these accounts. IFRS 15 – Revenue from contracts with customers IFRS 15 is effective for annual reporting periods beginning on or after 1 January 2018, with earlier application permitted. IFRS 15 establishes the principles that an entity applies when reporting information about the nature, amount, timing and uncertainty of revenue and cash ﬂows from a contract with a customer. The core principle is that a company recognises revenue to depict the transfer of promised goods or services to the customer in an amount that reﬂects the consideration to which the company expects to be entitled in exchange for those goods or services. To recognise revenue under IFRS 15, an entity applies the following ﬁve steps:. Identify the contract(s) with a customer.. Identify the performance obligations in the contract. Performance obligations are promises in a contract to transfer to a customer goods or services that are distinct.. Determine the transaction price. The transaction price is the amount of consideration to which a company expects to be entitled in exchange for transferring promised goods or services to a customer. If the consideration promised in a contract includes a variable amount, an entity must estimate the amount of consideration to which it expects to be entitled in exchange for transferring the promised goods or services to a customer.. Allocate the transaction price to each performance obligation on the basis of the relative stand-alone selling prices of each distinct good or service promised in the contract.. Recognise revenue when a performance obligation is satisﬁed by transferring a promised good or service to a customer (which is when the customer obtains control of that good or service). A performance obligation may be satisﬁed at a point in time (typically for promises to transfer goods to a customer) or over time (typically for promises to transfer services to a customer). For a performance obligation satisﬁed over time, an entity would select an appropriate measure of progress to determine how much revenue should be recognised as the performance obligation is satisﬁed. IFRS 16 – Leases IFRS 16 is effective for annual reporting periods beginning on or after 1 January 2019, with earlier application permitted (as long as IFRS 15 is also applied). 80 Reading 12: Overview of IFRS Standards The objective of IFRS 16 is to report information that (a) faithfully represents lease transactions and (b) provides a basis for users of ﬁnancial statements to assess the amount, timing and uncertainty of cash ﬂows arising from leases. To meet that objective, a lessee should recognise assets and liabilities arising from a lease. IFRS 16 introduces a single lessee accounting model and requires a lessee to recognise assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. A lessee is required to recognise a right-of-use asset representing its obligation to make lease payments. A lessee measures right-of-use assets similarly to other non-ﬁnancial assets (such as property, plant and equipment) and lease liabilities similarly to other ﬁnancial liabilities. As a consequence, a lessee recognises depreciation of the right-of-use asset and interest on the lease liability. The depreciation would usually be on a straight-line basis. In the statement of cash ﬂows, a lessee separates the total amount of cash paid into principal (presented within ﬁnancing activities) and interest (presented within either operating or ﬁnancing activities) in accordance with IAS 7. Assets and liabilities arising from a lease are initially measured on a present value basis. The measurement includes non-cancellable lease payments (including inﬂation-linked payments), and also includes payments to be made in optional periods if the lessee is reasonably certain to exercise an option to extend the lease, or not to exercise an option to terminate the lease. The initial lease asset equals the lease liability in most cases. The lease asset is the right to use the underlying asset as is presented in the statement of ﬁnancial position either as part of property, plant and equipment or as its own line item. IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17. Accordingly, a lessor continues to classify its leases as operating leases or ﬁnance leases, and to account for those types of leases differently. IFRS 16 replaces IAS 17 effective 1 January 2019, with earlier application permitted. IFRS 16 has the following transition provisions:. Existing ﬁnance leases: continue to be treated as ﬁnance leases.. Existing operating leases: option for full or limited retrospective restatement to reﬂect the requirement of IFRS 16. 3 IAS Standards IAS 1 – Presentation of ﬁnancial statements IAS 1 sets out overall requirements for the presentation of ﬁnancial statements, guidelines for their structure and minimum requirements for their content. It requires an entity to present a complete set of ﬁnancial statements at least annually, with comparative amounts for the preceding year (including comparative amounts in the notes). 81 Readings Block 2: Competing in a global context A complete set of ﬁnancial statements comprises:. a statement of ﬁnancial position as at the end of the period;. a statement of proﬁt and loss and other comprehensive income for the period;. a statement of changes in equity for the period;. a statement of cash ﬂows for the period;. notes, compromising a summary of signiﬁcant accounting policies and other explanatory information; and. a statement of ﬁnancial position as at the beginning of the preceding comparative period when an entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its ﬁnancial statements, or when it reclassiﬁes items in its ﬁnancial statements. An entity whose ﬁnancial statements comply with IFRS Standards must make an explicit and unreserved statement of such compliance in the notes. An entity must not describe ﬁnancial statements as complying with IFRS Standards unless they comply with all the requirements of the Standards. The application of IFRS Standards, with additional disclosure when necessary, is presumed to result in ﬁnancial statements that achieve a fair presentation. IAS 1 also deals with going concern issues, offsetting and changes in presentation or classiﬁcation. IAS 2 – Inventories IAS 2 provides guidance for determining the cost of inventories and the subsequent recognition of the cost as an expense, including any write-down to net realisable value. It also provides guidance on the cost formulas that are used to assign costs to inventories. Inventories are measured at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs necessary to make the sale. The cost of inventories includes all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. The cost of inventories is assigned by:. speciﬁc identiﬁcation of cost for items of inventory that are individually signiﬁcant; and. the ﬁrst-in, ﬁrst-out or weighted average cost formula for large quantities of individually insigniﬁcant items. When inventories are sold, the carrying amount of those inventories is recognised as an expense in the period in which the related revenue is recognised. The amount of any write-down of inventories to net realisable value and all losses of inventories is recognised as an expense in the period the write-down or loss occurs. 82 Reading 12: Overview of IFRS Standards IAS 7 – Statement of cash ﬂows IAS 7 prescribes how to present information about historical changes in an entity’s cash and cash equivalents in a statement of cash ﬂows. Cash comprises cash on hand and demand deposits. Cash equivalents are short- term, highly liquid investments that are readily convertible to known amounts of cash and that are subject to an insigniﬁcant risk of changes in value. The statement classiﬁes cash ﬂows during a period into cash ﬂows from operating, investing and ﬁnancing activities:. Operating activities are the principal revenue-producing activities of the entity and other activities that are not investing or ﬁnancing activities. An entity reports cash ﬂows from operating activities using either: ◦ the direct method, whereby major classes of gross cash receipts and gross cash payments are disclosed; or ◦ the indirect method, whereby proﬁt or loss is adjusted for the effects of transactions of a non-cash nature, any deferrals or accruals of past or future operating cash receipts or payments, and items of income or expense associated with investing or ﬁnancing cash ﬂows.. Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents. The aggregate cash ﬂows arising from obtaining and losing control of subsidiaries or other businesses are presented as investing activities. Financing activities are activities that result in changes in the size and composition of the contributed equity and borrowings of the entity. Investing and ﬁnancing transactions that do not require the use of cash or cash equivalents are excluded from a statement of cash ﬂows but separately disclosed. IAS 7 requires an entity to disclose the components of cash and cash equivalents and present a reconciliation of the amounts in its statement of cash ﬂows with the equivalent items reported in the statement of ﬁnancial position. IAS 8 – Accounting policies, changes in accounting estimates and errors IAS 8 prescribes the criteria for selecting and changing accounting policies, together with the accounting treatment and disclosure of changes in accounting policies, changes in accounting estimates and corrections of errors. Accounting policies are the speciﬁc principles, bases, conventions, rules and practices applied by an entity in preparing and presenting ﬁnancial statements. When an IFRS Standard or IFRS Interpretation speciﬁcally applies to a transaction, other event or condition, an entity must apply that Standard. In the absence of an IFRS Standard that speciﬁcally applies to a transaction, other event or condition, management uses its judgement in developing and applying an accounting policy that results in information that is relevant and reliable. In making that judgement management refers to the following sources in descending order: 83 Readings Block 2: Competing in a global context. the requirements and guidance in IFRS Standards dealing with similar and related issues; and. the deﬁnitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the Conceptual Framework. An entity changes an accounting policy only if the change is required by an IFRS Standard or it improves the relevance and reliability of information in the ﬁnancial statements. An entity accounts for a change in an accounting policy resulting from the initial application of an IFRS Standard in accordance with the speciﬁc transitional provisions, if any, in that Standard. Other changes in an accounting policy are applied retrospectively except to the extent that it is impracticable to determine either the period-speciﬁc effects or the cumulative effect of the change. Changes in accounting estimates result from new information or new developments and, accordingly, are not corrections of errors. The effect of a change in an accounting estimate is recognised prospectively by including it in proﬁt or loss in:. the period of the change, if the change affects that period only; or. the period of the change and future periods, if the change affects both. Prior period errors are omissions from, and misstatements in, the entity’s ﬁnancial statements for one or more prior periods arising from a failure to use, or misuse of, available reliable information. Unless it is impracticable to determine either the period-speciﬁc effects or the cumulative effect of the error, an entity corrects material prior period errors retrospectively by restating the comparative amounts for the prior period(s) presented in which the error occurred. IAS 10 – Events after the reporting period IAS 10 prescribes:. when an entity should adjust its ﬁnancial statements for events after the reporting period; and. the disclosures that an entity should give about the date when the ﬁnancial statements were authorised for issue and about events after the reporting period. Events after the reporting period are those events, favourable and unfavourable, that occur between the end of the reporting period and the date when the ﬁnancial statements are authorised for issue. The two types of events are:. those that provide evidence of conditions that existed at the end of the reporting period (adjusting events); and. those that are indicative of conditions that arose after the reporting period (non-adjusting events). 84 Reading 12: Overview of IFRS Standards An entity adjusts the amounts recognised in its ﬁnancial statements to reﬂect adjusting events, but it does not adjust the amounts recognised in its ﬁnancial statements to reﬂect non-adjusting events. If non-adjusting events after the reporting period are material, IAS 10 prescribes disclosures. IAS 11 – Construction contracts Will be superseded by IFRS 15. IAS 11 prescribes the contractor’s accounting treatment of revenue and cost associated with construction contracts. Work under a construction contract is usually performed in two or more accounting periods. Consequently, the primary accounting issue is the allocation of contract revenue and contract costs to the accounting periods in which construction work is performed. IAS 11 requires:. when the outcome of a construction contract can be estimated reliably, contract revenue and contract costs associated with the construction contract are recognised as revenue and expenses respectively by reference to the stage of completion of the contract activity at the end of the reporting period; and. when the outcome of a construction contract cannot be estimated reliably: ◦ revenue is recognised only to the extent of contract cost incurred that it is probable will be recoverable; and ◦ contract costs are recognised as an expense in the period in which they are incurred. When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognised as an expense immediately. IAS 12 – Income taxes IAS 12 prescribes the accounting treatment for income taxes. Income taxes include all domestic and foreign taxes that are based on taxable proﬁts. The principal issue in accounting for income taxes is how to account for the current and future tax consequences of:. the future recovery (settlement) of the carrying amount of assets (liabilities) that are recognised in an entity’s statement of ﬁnancial position; and. transactions and other events of the current period that are recognised in an entity’s ﬁnancial statements. Current tax for current and prior periods is, to the extent that it is unpaid, recognised as a liability. Overpayment of current tax is recognised as an asset. Current tax liabilities (assets) for the current and prior periods are measured at the amount expected to be paid to (recovered from) the taxation authorities, using the tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. 85 Readings Block 2: Competing in a global context A deferred tax asset is recognised for the carryforward of unused tax losses and unused tax credits to the extent that it is probable that future taxable proﬁt will be available against which the unused tax losses and unused tax credits can be utilised. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax liabilities and deferred tax assets reﬂects the tax consequences that would follow from the manner in which the entity expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities. Deferred tax assets and liabilities are not discounted. IAS 16 – Property, plant and equipment IAS 16 establishes principles for recognising property, plant and equipment as assets, measuring their carrying amounts, and measuring the depreciation charges and impairment losses to be recognised in relation to them. Property, plant and equipment are tangible items that:. are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and. are expected to be used during more than one period. The cost of an item of property, plant and equipment is recognised as an asset if, and only if:. it is probable that future economic beneﬁts associated with the item will ﬂow to the entity; and. the cost of the item can be measured reliably. An item of property, plant and equipment that qualiﬁes for recognition as an asset is initially measured at its cost. Cost includes:. its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates;. any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management; and. the estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurs either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period. After recognition, an entity chooses either the cost model or the revaluation model as its accounting policy and applies that policy to an entire class of property, plant and equipment:. Under the cost model, an item of property, plant and equipment is carried at its cost less any accumulated depreciation and any accumulated impairment losses. 86 Reading 12: Overview of IFRS Standards. Under the revaluation model, an item of property, plant and equipment whose fair value can be measured reliably is carried out at a revalued amount, which is its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Revaluation increases are recognised in other comprehensive income and accumulated in equity, except that an increase is recognised in proﬁt or loss except to the extent of a credit balance existing in the revaluation surplus, in which case the decrease is recognised in other comprehensive income. Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. Depreciable amount is the cost of an asset, or other amount substituted for cost, less its residual value. Each part of an item of property, plant and equipment with a cost that is signiﬁcant in relation to the total cost of the item is depreciated separately. The depreciation charge for each period is recognised in proﬁt or loss unless it is included in the carrying amount of another asset. The depreciation method used reﬂects the pattern in which the asset’s future economic beneﬁts are expected to be consumed by the entity. To determine whether an item of property, plant and equipment is impaired, an entity applies IAS 36. IAS 17 – Leases Will be superseded by IFRS 16. IAS 17 classiﬁes leases into two types:. a ﬁnance lease if it transfers substantially all the risks and rewards incidental to ownership; and. an operating lease if it does not transfer substantially all the risks and rewards incidental to ownership. IAS 17 prescribes lessee and lessor accounting policies for the two types of leases, as well as disclosures. Leases in the ﬁnancial statements of lessees – operating leases Lease payments under operating leases are recognised as an expense on a straight-line basis over the lease term unless another systematic basis is more representative of the time pattern of the user’s beneﬁt. Leases in the ﬁnancial statements of lessees – ﬁnance leases At the commencement of the lease term, lessees recognise ﬁnance leases as assets and liabilities in their statements of ﬁnancial position at amounts equal to the fair value of the leased property or, if lower, the present value of the minimum lease payments, each determined at the inception of the lease. Any initial direct costs of the lessee are added to the amount recognised as an asset. Minimum lease payments are apportioned between the ﬁnance charge and the reduction of the outstanding liability. The ﬁnance charge is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Contingent rents are charged as expenses in the periods in which they are 87 Readings Block 2: Competing in a global context incurred. A ﬁnance lease gives rise to depreciation expense for depreciable assets as well as ﬁnance expense for each accounting period. Leases in the ﬁnancial statements of lessors – operating leases Lessors present assets subject to operating leases in their statements of ﬁnancial position according to the nature of the asset. Lessors depreciate the leased assets in accordance with IAS 16 and IAS 38 Intangible Assets. Lease income from operating leases is recognised in income on a straight- line basis over the lease term, unless another systematic basis is more representative of the time pattern in which the beneﬁt derived from the leased asset is diminished. Leases in the ﬁnancial statements of lessors – ﬁnance leases Lessors recognise assets held under a ﬁnance lease in their statements of ﬁnancial position and present them as a receivable at an amount equal to the net investment in the lease. The recognition of ﬁnance income is based on a pattern reﬂecting a constant periodic rate of return on the lessor’s net investment in the ﬁnance lease. Manufacturer or dealer lessors recognise selling proﬁt or loss in accordance with the policy followed by the entity for outright sales. IAS 18 – Revenue Will be superseded by IFRS 15. IAS 18 addresses when to recognise and how to measure revenue. Revenue is the gross inﬂow of economic beneﬁts during the period arising in the course of the ordinary activities of an entity when those inﬂows result in increases in equity, other than increases relating to contributions from equity participants. IAS 18 applies to accounting for revenue arising from the following transactions and events:. the sale of goods;. the rendering of services; and. the use by others of entity assets yielding interest, royalties and dividends. Revenue is recognised when it is probable that future economic beneﬁts will ﬂow to the entity and those beneﬁts can be measured reliably. IAS 18 identiﬁes the circumstances in which these criteria will be met and, therefore, revenue will be recognised. It also provides practical guidance on the application of these criteria. Revenue is measured at the fair value of the consideration received or receivable. IAS 19 – Employee beneﬁts IAS 19 prescribes the accounting for all types of employee beneﬁts except share-based payment, to which IFRS 2 applies. Employee beneﬁts are all forms of consideration given by an entity in exchange for service rendered 88 Reading 12: Overview of IFRS Standards by employees or for the termination of employment. IAS 19 requires an entity to recognise:. a liability when an employee has provided service in exchange for employee beneﬁts to be paid in the future; and. an expense when the entity consumes the economic beneﬁt arising from the service provided by an employee in exchange for employee beneﬁts. Short-term employee beneﬁts (to be settled within 12 months, other than termination beneﬁts) These are recognised when the employee has rendered the service and measured at the undiscounted amount of beneﬁts expected to be paid in exchange for that service. Post-employment beneﬁts (other than termination beneﬁts and short-term employee beneﬁts) that are payable after the completion of employment These plans are classiﬁed as either deﬁned contribution plans or deﬁned beneﬁt plans, depending on the economic substance of the plan as derived from its principal terms and conditions:. Deﬁned contribution plans: When an employee has rendered service to an entity during a period, the entity recognises the contribution payable to a deﬁned contribution plan in exchange for that service as a liability (accrued expense) and as an expense, unless another Standard requires or permits the inclusion of the contribution in the cost of an asset.. Deﬁned beneﬁt plans: An entity uses an actuarial technique (the projected unit credit method) to make a reliable estimate of the ultimate cost to the entity of the beneﬁt that employees have earned in return for their service in the current and prior periods; discounts that beneﬁt in order to determine the present value of the deﬁned beneﬁt obligation and the current service cost; deducts the fair value of any plan assets from the present value of the deﬁned beneﬁt obligation; determines the amount of the deﬁcit or surplus; and determines the amount to be recognised in proﬁt and loss and other comprehensive income in the current period. Those measurements are updated each period. Other long-term beneﬁts These are all employee beneﬁts other than short-term employee beneﬁts, postemployment beneﬁts and termination beneﬁts. Measurement is similar to deﬁned beneﬁt plans. Termination beneﬁts Termination beneﬁts are employee beneﬁts provided in exchange for the termination of an employee’s employment. An entity recognises a liability an expense for termination beneﬁts at the earlier of the following dates:. when the entity can no longer withdraw the offer of those beneﬁts; and 89 Readings Block 2: Competing in a global context. when the entity recognises costs for a restructuring that is within the scope of IAS 37 and involves the payment of termination beneﬁts. IAS 20 – Accounting for government grants and disclosure of government assistance Government grants are assistance by government in the form of transfers of resources to an entity in return for past or future compliance with certain conditions relating to the operating activities of the entity. Government assistance is action by government designed to provide an economic beneﬁt that is speciﬁc to an entity or range of entities qualifying under certain criteria. An entity recognises government grants only when there is reasonable assurance that the entity will comply with the conditions attached to them and the grants will be received. Government grants are recognised in proﬁt or loss on a systematic basis over the periods in which the entity recognises as expenses the related costs for which the grants are intended to compensate. A government grant that becomes receivable as compensation for expenses or losses already incurred or for the purpose of giving immediate ﬁnancial support to the entity with no future related costs is recognised in proﬁt or loss of the period in which it becomes receivable. Government grants related to assets, including non-monetary grants at fair value, are presented in the statement of ﬁnancial position either by setting up the grant as deferred income or by deducting the grant in arriving at the carrying amount of the asset. Grants related to income are sometimes presented as a credit in the statement of comprehensive income, either separately or under a general heading such as ‘Other income’: alternatively, they are deducted in reporting the related expense. A government grant that becomes repayable is accounted for as a change in accounting estimate (see IAS 8). IAS 21 – The effects of changes in foreign exchange rates An entity may carry on foreign activities in two ways. It may have transactions in foreign currencies or it may have foreign operations. In addition, an entity may present its ﬁnancial statements in a foreign currency. IAS 21 prescribes 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. 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. An entity’s functional currency is the currency of the primary economic environment in which the entity operates (i.e. the environment in which it primarily generates and expends cash). A foreign currency transaction is recorded, on initial recognition in the functional currency, by applying to 90 Reading 12: Overview of IFRS Standards the foreign currency amount the spot exchange rate between the functional currency and the foreign currency at the date of the transaction. At the end of each reporting period:. foreign currency monetary items are translated using the closing rate;. non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction; and. non-monetary items that are measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was measured. Exchange differences are recognised in proﬁt or loss in the period in which they arise. However, exchange differences arising on a monetary item that forms part of a reporting entity’s net investment in a foreign operation are recognised in proﬁt or loss in the separate ﬁnancial statements of the reporting entity or the individual ﬁnancial statements of that foreign operation, as appropriate. In the ﬁnancial statements that include the foreign operation and the reporting entity (for example, consolidated ﬁnancial statements when the foreign operation is a subsidiary), such exchange differences are recognised initially in other comprehensive income and reclassiﬁed from equity to proﬁt or loss on disposal of the net investment. IAS 21 permits an entity to present its ﬁnancial statements in any currency (or currencies). If the presentation currency differs from the entity’s functional currency, the entity must translate its results and ﬁnancial position into the presentation currency. IAS 23 – Borrowing costs Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset form part of the cost of that asset. Other borrowing costs are recognised as an expense. Borrowing costs are interest and other costs that an entity incurs in connection with the borrowing of funds. IAS 23 provides guidance on how to measure borrowing costs, particularly when the costs of acquisition, construction or production are funded by an entity’s general borrowings. IAS 24 – Related party disclosures The objective of IAS 24 is to ensure that an entity’s ﬁnancial statements contain the disclosures necessary to draw attention to the possibility that its ﬁnancial position and proﬁt or loss may have been affected by the existence of related parties and by transactions and outstanding balances, including commitments, with such parties. A related party is a person or an entity that is related to the reporting entity.. A person or a close member of that person’s family is related to a reporting entity if that person: ◦ has control or joint control of the reporting entity; ◦ has signiﬁcant inﬂuence over the reporting entity; or 91 Readings Block 2: Competing in a global context ◦ is a member of the key management personnel of the reporting entity or of a parent of the reporting entity.. An entity is related to a reporting entity if any of the following conditions applies: ◦ The entity and the reporting entity are members of the same group (which means that each parent, subsidiary and fellow subsidiary is related to the others). ◦ One entity is an associate or joint venture of the other entity (or an associate or joint venture of a member of a group of which the other entity is a member). ◦ Both entities are joint ventures of the same third party. ◦ One entity is a joint venture of a third entity and the other entity is an associate of the third entity. ◦ The entity is a post-employment beneﬁt plan for the beneﬁt of employees of either the reporting entity or an entity related to the reporting entity. If the reporting entity is itself such a plan, the sponsoring employers are also related to the reporting entity. ◦ The entity is controlled or jointly controlled by a person who is a related party. ◦ A person who is a related party has signiﬁcant inﬂuence over the entity or is a member of the key management personnel. ◦ The entity, or any member of a group of which it is a part, provides key management personnel services to the reporting entity or the parent of the reporting entity. A related party transaction is a transfer of resources, services or obligations between a reporting entity and a related party, regardless of whether a price is charged. If an entity has had related party transactions during the periods covered by the ﬁnancial statements, IAS 24 requires it to disclose the nature of the related party relationship as well as information about those transactions and outstanding balances, including commitments, necessary for users to understand the potential effect of the relationship on the ﬁnancial statements. IAS 24 requires an entity to disclose key management personnel compensation in total and by category as deﬁned in the Standard. IAS 26 – Accounting and reporting by retirement beneﬁt plans IAS 26 prescribes the minimum content of the ﬁnancial statements of retirement beneﬁt plans. It requires that the ﬁnancial statements of a deﬁned beneﬁt plan must contain either:. a statement that shows the net assets available for beneﬁts; the actuarial present value or promised retirement beneﬁts, distinguishing between vested beneﬁts and non-vested beneﬁts; and the resulting excess or deﬁcit; or 92 Reading 12: Overview of IFRS Standards. a statement of net assets available for beneﬁts including either a note disclosing the actuarial present value of promised vested and non-vested retirement beneﬁts or a reference to this information in an accompanying actuarial report. IAS 27 – Separate ﬁnancial statements IAS 27 prescribes the accounting and disclosure requirements for investments in subsidiaries, joint ventures and associates when an entity elects, or is required by local regulations, to present separate ﬁnancial statements. Separate ﬁnancial statements are those presented in addition to consolidated ﬁnancial statements of an investor that does not have investments in subsidiaries but has investments in associates or joint ventures or joint ventures that are required by IAS 28 to be accounted for using the equity method. In separate ﬁnancial statements, an investor accounts for investments in subsidiaries, joint ventures and associates either at cost, or in accordance with IFRS 9, or using the equity method as described in IAS 28. IAS 28 – Investments in associates and joint ventures IAS 28 requires an investor to account for its investment in associates using the equity method. IFRS 11 requires an investor to account for its investments in joint ventures using the equity method (with some limited exceptions). IAS 28 sets out the requirements for the application of the equity method when accounting for investments in associates and joint ventures. An associate is an entity over which the investor has signiﬁcant inﬂuence. Signiﬁcant inﬂuence is the power to participate in the ﬁnancial and operating policy decisions on the investee but is not control or joint control of these policies. A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement. Under the equity method, on initial recognition the investment in an associate or a joint venture is recognised at cost, and the carrying amount is increased or decreased to recognise the investor’s share of the proﬁt or loss of the investee after the date of the acquisition. The investor’s share of the investee’s proﬁt or loss is recognised in the investor’s proﬁt or loss. Distributions received from an investee reduce the carrying amount of the investment. Adjustments to the carrying amount may also be necessary for changes in the investor’s proportionate interest in the investee arising from changes in the investee’s other comprehensive income. Such changes include those arising from the revaluation of property, plant and equipment and from foreign exchange in translation differences. The investor’s share of those changes is recognised in the investor’s other comprehensive income. 93 Readings Block 2: Competing in a global context IAS 29 – Financial reporting in hyperinﬂationary economies IAS 29 applies to any entity whose functional currency is the currency of a hyperinﬂationary economy. Functional currency is the currency of the primary economic environment in which the entity operates. Hyperinﬂation is indicated by factors such as prices, interest and wages linked to a price index, and cumulative inﬂation over three years of around 100 per cent or more. In a hyperinﬂationary environment, ﬁnancial statements, including comparative information, must be expressed in units of the functional currency current as at the end of the reporting period. Restatement to current units of currency is made using the charge in a general price index. The gain or loss on the net monetary position must be included in proﬁt or loss for the period and must be separately disclosed. An entity must disclose the fact that the ﬁnancial statements have been restated; the price index used for restatement; and whether the ﬁnancial statements are prepared on the basis of historical costs or current costs. An entity must measure its results and ﬁnancial position in its functional currency. However, after restatement, the ﬁnancial statements may be presented in any currency by translating the results and ﬁnancial position in accordance with IAS 21. IAS 32 – Financial instruments: presentation IAS 32 speciﬁes presentation for ﬁnancial instruments. The recognition and measurement and the disclosure of ﬁnancial instruments are the subjects of IFRS 9 or IAS 39 and IFRS 7 respectively. For presentation, ﬁnancial instruments are classiﬁed into ﬁnancial assets, ﬁnancial liabilities and equity instruments. Differentiation between a ﬁnancial liability and equity depends on whether an entity has an obligation to deliver cash (or some other ﬁnancial asset). However, exceptions apply. When a transaction will be settled in the issuer’s own shares, classiﬁcation depends on whether the number of shares to be issued is ﬁxed or variable. A compound ﬁnancial instrument, such as a convertible note, is split into equity and liability components. When the instrument is issued, the equity component is measured as the difference between the fair value of the compound instrument and the fair value of the liability component. Financial assets and ﬁnancial liabilities are offset only when the entity has a legally enforceable right to set off the recognised amounts, and intends either to settle on a net basis or realise the asset and settle the liability simultaneously. 94 Reading 12: Overview of IFRS Standards IAS 33 – Earnings per share IAS 33 deals with the calculation and presentation of earnings per share (EPS). It applies to entities whose ordinary shares or potential ordinary shares (for example, convertibles, options and warrants) are publicly traded. It does not apply to non-public entities. An entity must present basic EPS and diluted EPS with equal prominence in the statement of comprehensive income. When an entity presents consolidated ﬁnancial statements, EPS measures are based on the consolidated proﬁt or loss attributable to ordinary equity holders of the parent. Dilution is a potential reduction in EPS or a potential increase in loss per share resulting from the assumption that convertible instruments are converted, options or warrants are exercised, or ordinary shares are issued upon the satisfaction of speciﬁed conditions. When the entity also discloses proﬁt or loss from continuing operations, basic EPS and diluted EPS must be presented in respect of continuing operations. Furthermore, an entity that reports a discontinued operation must present basic and diluted amounts per share for the discounted operation either in the statement of comprehensive income or in the notes. IAS 33 sets out principles for determining the denominator (the weighted average number of shares outstanding for the period) and the numerator (‘earnings’) in basic EPS and diluted EPS calculations. Those principles enhance the comparability of an entity’s basic and diluted EPS measures through time. The denominators used in the basic EPS and diluted EPS calculation might be affected by: share issues during the year; shares to be issued upon conversion of a convertible instrument; contingently issuable or returnable shares; bonus issues; share splits and share consolidation; the exercise of options and warrants; contracts that may be settled in shares; and contracts that require an entity to repurchase its own shares (written put options). The numerators used in the calculation of basic and diluted EPS must be reconciled to proﬁt or loss attributable to the ordinary equity holders of the parent. The denominators in the calculations of basic EPS and diluted EPS must be reconciled to each other. IAS 34 – Interim ﬁnancial reporting An interim ﬁnancial report is a complete or condensed set of ﬁnancial statements for a period shorter than a ﬁnancial year. IAS 34 does not specify which entities must publish an interim ﬁnancial report. That is generally a matter for laws and government regulations. IAS 34 applies if an entity publishes an interim ﬁnancial report. IAS 34 prescribes the minimum content of an interim ﬁnancial report. It also speciﬁes the accounting recognition and measurement principles applicable to an interim ﬁnancial report. 95 Readings Block 2: Competing in a global context The minimum content is a set of condensed ﬁnancial statements for the current period and comparative prior period information, i.e. statement of ﬁnancial position, statement of comprehensive income, statement of cash ﬂows, statement of changes in equity, and selected explanatory notes. In some cases, a statement of ﬁnancial position at the beginning of the prior period is also required. Generally, information available in the entity’s most recent annual report is not repeated or updated in the interim report. The interim report deals with changes since the end of the last annual reporting period. The same accounting policies are applied in the interim report as in the most recent annual report, or special disclosures are required if an accounting policy is changed. Assets and liabilities are recognised and measured for interim reporting on the basis of information available on a year-to-date basis. While measurements in both annual ﬁnancial statements and interim ﬁnancial reports are often based on reasonable estimates, the preparation of interim ﬁnancial reports will generally require a greater use of estimation methods than annual ﬁnancial statements. IAS 36 – Impairment of assets The core principle in IAS 36 is that an asset must not be carried in the ﬁnancial statements at more than the highest amount to be recovered through its use or sale. If the carrying amount exceeds the recoverable amount, the asset is described as impaired. The entity must reduce the carrying amount of the asset to its recoverable amount, and recognise an impairment loss. IAS 36 also applies to groups of assets that do not generate cash ﬂows individually (known as cash-generating units). The recoverable amount of the following assets must be assessed each year: intangible assets with indeﬁnite useful lives; intangible assets not yet available for use; and goodwill acquired in a business combination. The recoverable amount of other assets is assessed only when there is an indication that the asset may be impaired. Recoverable amount is the higher of fair value less costs to sell and value in use. Fair value less costs to sell is the arm’s length sale price between knowledgeable willing parties less costs of disposal. The value in use of an asset is the expected future cash ﬂows that the asset in its current condition will produce, discounted to present value using an appropriate pre-tax discount rate. The value in use of an individual asset cannot sometimes be determined. In this case, recoverable amount is determined for the smallest group of assets that generates independent cash ﬂows (cash-generating unit). The impairment of goodwill is assessed by considering the recoverable amount of the cash-generating unit(s) to which it is allocated. An impairment loss is recognised immediately in proﬁt or loss (or in comprehensive income if it is a revaluation decrease under IAS 16 or IAS 38). The carrying amount of the asset (or cash-generating unit) is reduced. 96 Reading 12: Overview of IFRS Standards In a cash-generating unit, goodwill is reduced ﬁrst, then other assets are reduced pro rata. The depreciation (amortisation) charge is adjusted in future periods to allocate the asset’s revised carrying amount over its remaining useful life. An impairment loss for goodwill is never revised. For other assets, when the circumstances that caused the impairment loss are favourably resolved, the reversal of the impairment loss is recognised immediately in proﬁt or loss (or in comprehensive income if the asset is revalued under IAS 16 or IAS 38). On reversal, the asset’s carrying amount is increased, but it must not exceed the amount that it would have been, had there been no impairment loss in prior years. Depreciation (amortisation) is adjusted in future periods. IAS 37 – Provisions, contingent liabilities and contingent assets IAS 37 distinguishes between provisions and contingent liabilities. A provision is included in the statement of ﬁnancial position at the best estimate of the expenditure required to settle the obligation at the end of the reporting period. A contingent liability is not recognised in the statement of ﬁnancial position. However, unless the possibility of an outﬂow of economic resources is remote, a contingent liability is disclosed in the notes. Provisions A provision is a liability of uncertain timing or amount. A liability may be a legal obligation or a constructive obligation. A constructive obligation arises from the entity’s actions, through which it has indicated to others that it will accept certain responsibilities, and as a result has created an expectation that it will discharge those responsibilities. Examples of provisions may include: warranty obligations; legal or constructive obligations to clean up contaminated land or restore facilities; and obligations caused by a retailer’s policy to refund customers. A provision is measured at the amount that the entity would rationally pay to settle the obligation at the end of the reporting period or to transfer it to a third party at that time. Risks and uncertainties are taken into account in the measurement of a provision. A provision is discounted to its present value. IAS 37 elaborates on the application of the recognition and measurement requirements for three speciﬁc cases:. future operating losses – a provision cannot be recognised because there is no obligation at the end of the reporting period;. an onerous contract gives rise to a provision; and. a provision for restructuring costs is recognised only when the entity has a constructive obligation because the main features of the detailed restructuring plan have been announced to those affected by it. 97 Readings Block 2: Competing in a global context Contingent liabilities and contingent assets Contingent liabilities are possible obligations whose existence will be conﬁrmed by uncertain future events that are not wholly within the control of the entity. (Contingent liabilities also include obligations that are not recognised because their amount cannot be measured reliably or settlement is not probable.) An example of a contingent liability is litigation against the entity when the assessment of any wrongdoing by the entity is uncertain. Contingent assets are possible assets whose existence will be conﬁrmed by the occurrence or non-occurrence of uncertain future events that are not wholly within the control of the entity. Contingent assets are generally not recognised, but they are disclosed when it is more likely than not that an inﬂow of beneﬁts will occur. However, when the inﬂow of beneﬁts is virtually certain, an asset is recognised in the statement of ﬁnancial position, because that asset is no longer considered to be contingent. IAS 38 – Intangible assets IAS 38 sets out the criteria for recognising and measuring intangible assets and requires disclosures about them. An intangible asset is an identiﬁable non-monetary asset without physical substance. Such an asset is identiﬁable when it is separable, or when it arises from contractual or other legal rights. Separable assets can be sold, transferred, licensed, etc. Examples of intangible assets include computer software, licences, trademarks, patents, ﬁlms, copyrights and import quotas. Goodwill acquired in a business combination is accounted for in accordance with IFRS 3 and is outside the scope of IAS 38. Internally generated goodwill is within the scope of IAS 38 but is not recognised as an asset because it is not an identiﬁable resource. Expenditure for an intangible item is recognised as an expense, unless the item meets the deﬁnition of an intangible asset, and:. it is probable that there will be future economic beneﬁts from the asset; and. the cost of the asset can be reliably measured. The cost of generating an intangible asset internally is often difﬁcult to distinguish from the cost of maintaining or enhancing the entity’s operations or goodwill. For this reason, internally generated brands, mastheads, publishing titles, customer lists and similar items are not recognised as intangible assets. The costs of generating other internally generated intangible assets are classiﬁed into a research phase and a development phase. Research expenditure is recognised as an expense. Development expenditure that meets speciﬁed criteria is recognised as an intangible asset. Fair value can be determined by reference to an active market. If an intangible asset is revalued, all assets within that class of intangible assets must be revalued. Valuations must be updated regularly. If an intangible asset’s carrying amount is increased as a result of a revaluation, the increase is recognised in other comprehensive income. 98 Reading 12: Overview of IFRS Standards An intangible asset with a ﬁnite useful life is amortised. An intangible asset with an indeﬁnite useful life is not amortised, but is tested annually for impairment. When an intangible asset is disposed of, the gain or loss on disposal is included in proﬁt or loss. IAS 39 – Financial instruments: recognition and measurement Will be superseded by IFRS 9. IAS 39 establishes principles for recognising and measuring ﬁnancial assets, ﬁnancial liabilities and some contracts to buy or sell non-ﬁnancial items. It also prescribes principles for derecognising ﬁnancial instruments and for hedge accounting. The presentation and the disclosure of ﬁnancial instruments are the subjects of IAS 32 and IFRS 7 respectively. Recognition and derecognition A ﬁnancial instrument is recognised in the ﬁnancial statements when the entity becomes a party to the ﬁnancial instrument contract. An entity removes a ﬁnancial liability from its statement of ﬁnancial position when its obligation is extinguished. An entity removes a ﬁnancial asset from its statement of ﬁnancial position when its contractual rights to the asset’s cash ﬂows expire; when it has transferred the asset and substantially all the risks and rewards of ownership; or when it has transferred the asset, and has retained some substantial risks and rewards of ownership, but the other party may sell the asset. The risks and rewards retained are recognised as an asset. Measurement A ﬁnancial asset or ﬁnancial liability is measured initially at fair value. Subsequent measurement depends on the category of ﬁnancial instrument. Some categories are measured at amortised cost, and some at fair value. In limited circumstances other measurement bases apply, for example, certain ﬁnancial guarantee contracts. The following are measured at amortised cost:. held to maturity – non derivative ﬁnancial assets that the entity has the positive intention and ability to hold to maturity;. loans and receivables – non-derivative ﬁnancial assets with ﬁxed or determinable payments that are not quoted in an active market; and. ﬁnancial liabilities that are not carried at fair value through proﬁt or loss or otherwise required to be measured in accordance with another measurement basis. The following are measured at fair value:. At fair value through proﬁt or loss – This category includes ﬁnancial assets and ﬁnancial liabilities held for trading, including derivatives not designated as hedging instruments and ﬁnancial assets and ﬁnancial 99 Readings Block 2: Competing in a global context liabilities that the entity has designated for measurement at fair value. All changes in fair value are reported in proﬁt or loss.. Available for sale – All ﬁnancial assets that do not fall within one of the other categories. These are measured at fair value. Unrealised changes in fair value are reported in other comprehensive income. Realised changes in fair value (from sale or impairment) are reported in proﬁt or loss at the time of realisation.. IAS 39 sets out the conditions where special hedge accounting is permitted, and the procedures for doing hedge accounting. IAS 40 – Investment property Investment property is land or a building (including part of a building) or both that is:. held to earn rentals or for capital appreciation or both;. not owner-occupied. not used in production or supply of goods and services, or for administration; and. not property that is for sale in the ordinary course of business. Investment property may include investment property that is being redeveloped. An investment property is measured initially at cost. The cost of an investment property interest held under a lease is measured in accordance with IAS 17 at the lower of the fair value of the property interest and the present value of the minimum lease payments. For subsequent measurement an entity must adopt either the fair value model or the cost model for all investment properties. All entities must determine fair value for measurement (if the entity uses the fair value model) or disclosure (if it uses the cost model). Fair value reﬂects market conditions at the end of the reporting period. Under the fair value model, investment property is remeasured at the end of each reporting period. Changes in fair value are recognised in proﬁt or loss as they occur. Fair value is the price at which the property could be exchanged between knowledgeable, willing parties in an arm’s length transaction, without deducting transaction costs. Under the cost model, investment property is measured at cost less accumulated depreciation and any accumulated impairment losses. Gains and losses on disposal are recognised in proﬁt or loss. IAS 41 – Agriculture IAS 41 prescribes the accounting treatment, ﬁnancial statement presentation and disclosures related to agricultural activity. Agricultural activity is the management of the biological transformation of living animals or plants 100 Reading 12: Overview of IFRS Standards (biological assets) and harvest of biological assets for sale or for conversion into agricultural produce or into additional biological assets. IAS 41 establishes the accounting treatment for biological assets during their growth, degeneration, production and procreation, and for the initial measurement of agricultural produce at the point of harvest. It does not deal with processing of agricultural produce after harvest (for example, processing grapes into wine, or wool into yarn). IAS 41 contains the following accounting requirements:. bearer plants are accounted for by IAS 16;. other biological assets are measured at fair value less costs to sell;. agricultural produce at the point of harvest is also measured at fair value less costs to sell;. changes in the value of biological assets are included in proﬁt or loss; and. biological assets that are attached to land (for example, trees in a plantation forest) are measured separately from the land. The fair value of a biological asset or agricultural produce is its market price less any costs to get the asset to the market. Costs to sell include commissions, levies, and transfer taxes and duties. IAS 41 differs from IAS 20 with regard to recognition of government grants. Unconditional grants related to biological assets measured at fair value less costs to sell are recognised as income when the grant becomes receivable. Conditional grants are recognised as income only when the conditions attaching to the grant are met. 4 The IFRS Standard for small and medium-sized entities (IFRS for SMEs Standard) The IFRS for SMEs Standard is a small (250-page) Standard that is tailored for small companies. It focuses on the information needs of lenders, creditors, and other users of SME ﬁnancial statements who are primarily interest

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