IAS 1 Presentation of Financial Statements
This standard provides formats for the statement of profit or loss and other comprehensive income, statement of financial position, and statement of changes in equity.
Accounting policies should be selected so that the financial statements comply with all international standards and interpretations.
IAS 1 requires that other comprehensive income is presented in two categories, namely items that:
will not be reclassified to profit or loss, and
may be reclassified to profit or loss in future periods.
IAS 2 Inventories
Inventories should be valued ‘at the lower of cost and net realisable value’ (IAS 2, para 9).
IAS 2 says that the cost of inventory includes:
Purchase price including import duties, transport and handling costs Direct production costs e.g. direct labour
Direct expenses and subcontracted work
Production overheads (based on the normal levels of activity)
Other overheads, if attributable to bringing the product or service to its present location and condition.
IAS 2 specifies that cost excludes:
Abnormal waste
Storage costs
Indirect administrative overheads
Selling costs.
Some entities can identify individual units of inventory (e.g. vehicles can be identified by a chassis number). Those that cannot should keep track of costs using either the first in, first out (FIFO) or the weighted average cost (AVCO) assumption.
Some entities may use standard costing for valuing inventory. Standard costs may be used for convenience if it is a close approximation to actual cost, and is regularly reviewed and revised.
IAS 7 Statement of Cash Flows
IAS 7 requires a statement of cash flow that shows cash flows generated from:
Operating activities Investing activities Financing activities.
IAS 8 Accounting Policies, Changes in accounting estimates and errors
IAS 8 covers the following issues:
Selection of accounting policies
Changes in accounting policies
Changes in accounting estimates Correction of prior period errors.
Accounting policies
Accounting policies are the ‘principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements’ (IAS 8, para 5).
Changes in accounting policies
Accounting policies should remain the same from period to period in order to allow for consistency of treatment.
A change in accounting policy must be dealt with retrospectively. The opening balance on retained earnings is recalculated on the basis that the new policy had always been in force. The resulting change in the retained earnings brought forward will be shown as a prior period adjustment in the statement of changes in equity and comparatives will be restated as if the new policy had been in force during the previous period.
The change and its effects must be described in the notes to the accounts.
Accounting estimates
Changes in accounting estimates, such as depreciation rates, are recognised in the statement of profit or loss in the same period as the change. If the change is material then it should be disclosed in the notes to the financial statements.
Prior period errors
Prior period errors are ‘omissions from, and misstatements in, the financial statements for one or more prior periods arising from a failure to use, or misuse of, reliable information’ (IAS 8, para 5).
IAS 8 requires that prior period errors are dealt with by:
Restating the opening balance of assets, liabilities and equity as if the error had never occurred, and presenting the necessary adjustment to the opening balance of retained earnings in the statement of changes in equity
Restating the comparative figures presented, as if the error had never occurred.
These adjustments should also be disclosed in the notes.
IAS 10 Events After the Period Definitions
Events after the period are ‘those events, favourable and unfavourable, that occur between the statement of financial position date and the date when the financial statements are authorised for issue‘ (IAS 10, para 3).
Adjusting events after the period are those that ‘provide of conditions that existed at the date’ (IAS10, para 3a).
Non-adjusting events after the period are ‘those that are indicative of conditions that arose after the period’ (IAS 10, para 3b).
Accounting treatment
Adjusting events affect the amounts stated in the financial statements so they must be adjusted.
Non-adjusting events do not concern the position as at the date so the financial statements are not adjusted. If the event is material then the nature and its financial effect must be disclosed.
IAS 12 Income Taxes
Scope of standard
IAS 12 covers both current and deferred tax, but deferred tax is the most examinable and will be reviewed here.
Deferred tax
Deferred tax is recognised on temporary differences between the carrying amount of an asset or liability and its tax base.
Tax base is the ‘amount attributed to an asset or liability for tax purposes’ (IAS 12, para 5).
Temporary differences can be either:
- Taxable temporary differences. This is when the carrying amount of an asset exceeds its tax base, giving rise to a deferred tax liability.
- Deductible temporary differences. This is when the tax base of an asset exceeds the carrying amount of that asset, giving rise to a deferred tax asset.
Deferred tax should be measured by applying the applicable tax rate to the temporary difference. The applicable tax rate is the rates expected to be in force when the temporary differences reverse. This is usually the current tax rate.
Sources of taxable temporary differences
Depreciation of an asset is accelerated for tax purposes.
Development costs that were capitalised and amortised in the accounts, but deducted as incurred for tax purposes.
A revaluation surplus on non-current assets as the carrying amount of the asset increases but the tax base of the asset does not change. Deferred tax is provided on the revaluation.
Interest revenue received in arrears, which is accounted for on an accruals basis in the statement of profit or loss but taxable on a cash basis.
Temporary differences can arise on a business combination if assets or liabilities are increased to fair value but the tax base remains at cost. Deferred tax is recognised on these differences and is included as part of net assets acquired.
Sources of deductible temporary differences
Losses in the statement of profit or loss where tax relief is only available against future profits.
Intra-group profits in inventory that are unrealised for consolidation purposes but taxable in the individual company that made the unrealised profit.
Accumulated depreciation of an asset in the statement of financial position is greater than the cumulative depreciation for tax purposes.
Pension liabilities that are recognised in the financial statements but only allowable for tax when the contributions are made to the scheme in the future.
Research expenses are recognised as an expense in determining accounting profit but not deductible for tax until a later period.
Income is deferred in the statement of financial position but has already been included in taxable profit.
Accounting treatment
Deferred tax assets can be recognised for all deductible temporary differences to the extent it is probable that taxable profits will be available for these differences to be utilised.
IAS 12 does not permit the discounting of deferred tax liabilities.
The charge for deferred tax is recognised in the statement of profit or loss unless it relates to a gain or loss that has been recognised in other comprehensive income e.g. revaluations, in which case the related deferred tax is also recognised in other comprehensive income.
IAS 16 Property Plant and Equipment
Cost and depreciation of an asset
IAS 16 states that property, plant and equipment is initially recognised at cost.
An asset’s cost is its purchase price, less any trade discounts or rebates, plus any further costs directly attributable to bringing it into working condition for its intended use.
Subsequent expenditure on non-current assets is capitalised if it:
Enhances the economic benefits of the asset e.g. adding a new wing to a building.
Replaces part of an asset that has been separately depreciated and has been fully depreciated; e.g. furnace that requires new linings periodically.
Replaces economic benefits previously consumed, e.g. a major inspection of aircraft.
The aim of depreciation is to spread the cost of the asset over its life in the business.
IAS 16 requires that the depreciation method and useful life of an asset should be reviewed at the end of each year and revised where necessary. This is not a change in accounting policy, but a change of accounting estimate.
If an asset has parts with different lives, (e.g. a building with a flat roof), the component parts should be capitalised and depreciated separately.
Revaluation of property, plant and equipment
Revaluation of PPE is optional. If one asset is revalued, all assets in that class must be revalued.
Valuations should be kept up to date to ensure that the carrying amount does not differ materially from the fair value at each statement of financial position date.
Revaluation gains are credited to other comprehensive income unless the gain reverses a previous revaluation loss of the same asset previously recognised in the statement of profit or loss.
Revaluation losses are debited to the statement of profit or loss unless the loss relates to a previous revaluation surplus, in which case the decrease should be debited to other comprehensive income to the extent of any credit balance existing in the revaluation surplus relating to that asset.
Depreciation is charged on the revalued amount less residual value (if any) over the remaining useful life of the asset.
An entity may choose to make an annual transfer of excess depreciation from revaluation reserve to retained earnings. If this is done, it should be applied consistently each year.
IAS 19 Employee Benefits
IAS 19 deals with accounting for pensions and other employee benefits in the employer’s accounts.
The most complex accounting issue is defined benefit pension schemes. These are where the employer has an obligation to provide an employee will have a specific level of pension on retirement, usually based on a percentage of final salary.
To estimate the fund required, an actuary will have to calculate the contributions required to ensure the scheme has enough funds to pay out its liabilities.
This involves estimating what may happen in the future, such as the age profile of employees, retirement age, etc.
A pension scheme consists of a pool of assets (cash, investments, shares etc.) and a liability for pensions owed to employees when they are at retirement age. The assets are used to pay out the pensions.
Measurement and recognition of defined benefit schemes
| Profit or loss | Other | Statement of |
| comprehensive | Financial Position | |
| income | ||
| Service cost | Remeasurement | Net scheme asset or |
| components: current | component | liability, where assets |
| and past service | are measured at fair | |
| costs, including any | value and liabilities | |
| gains or losses arising | measured at present | |
| on curtailments and | value | |
| settlements | ||
| Net interest | ||
| component | ||
| Definitions |
Current service cost is the increase in the actuarial liability (present value of the defined benefit obligation) resulting from employee service in the current period. This is part of the service cost component.
Past service cost is the increase in the actuarial liability relating to employee service in previous periods but only arising in the current period. Past service costs usually arise because there has been an improvement in the benefits to be provided under the plan. They are part of the service cost component and are recognised when the plan amendments occur.
A curtailment occurs when an entity is demonstrably committed to making a material reduction in the number of employees covered by a plan, or amends the terms of a plan such that a material element of future service by current employees will qualify for no or reduced benefits. This may occur, for example if an entity closes a plant and makes those employees redundant. Any gain or loss on curtailment is part of the service cost component.
A settlement occurs when an entity enters into a transaction to eliminate the obligation for part or all of the benefits under a plan. Any gain or loss on settlement is part of the service cost component.
The Net interest component is computed by applying the discount rate to the net liability (or asset) at the start of the period.
The Remeasurement component results from increases and decreases in the pension asset or liability due to changes in actuarial estimates and assumptions. This component is recognised in other comprehensive income and is not recycled to profit or loss.
IAS 20 Accounting for Government Grants and Disclosure of ……..
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’ (IAS 20, para 3).
Government assistance is ‘action by government designed to provide economic benefit to a specific entity’ (IAS 20, para 3).
Accounting treatment
IAS 20 says that grants are not be recognised until there is reasonable assurance that:
– The conditions attached to the grant will be complied with, and
– The grant will be received.
Grants shall be recognised in the statement of profit or loss so as to match them with the expenditure towards which they are intended to contribute.
– Income grants given to subsidise expenditure should be matched to the related costs.
– Income grants given to help achieve a non-financial goal (such as job creation) should be matched to the costs incurred to meet that goal.
– Grants for purchases of non-current assets should be recognised over the expected useful lives of the related assets.
There are two acceptable accounting treatments for grants related to non-current assets:
Deduct the grant from the cost of the asset and depreciate the net cost, or
Treat the grant as deferred income and release it to the statement of profit or loss over the life of the asset.
Grants that become repayable
A government grant that becomes repayable shall be accounted for as a change in accounting estimate.
IAS 21 The Effects of Changes in Foreign Exchange Rates
IAS 21 provides guidance on accounting for foreign currency transactions.
Functional and presentation currencies
A company must determine both its functional and presentation currency.
Functional currency is ‘the currency of the primary economic environment in which the entity operates’ (IAS 21, para 8).
IAS 21 says that presentation currency is the currency in which the entity presents its financial statements.
In determining functional currency, IAS 21 specifies that an entity should consider the following:
The currency that influences its sales prices for its goods and services.
The currency that influences the costs associated with providing its goods and services.
If the company is a foreign-owned subsidiary then it will have the same functional currency as its parent if it operates with little autonomy.
Once determined, functional currency should not be changed.
Presentation currency can be any currency and can be different from functional currency.
This is particularly the case if the company is foreign-controlled as the presentation currency may be that of the parent. If the presentation currency is different from the functional currency, then the financial statements must be translated into the presentation currency.
Individual transactions in foreign currency
If a company enters into foreign currency transactions the results of these transactions should be translated and recorded in the accounting records in the functional currency:
At the rate on the date the transaction occurred, or
Using an average rate over a period of time providing the exchange rate has not fluctuated significantly.
At subsequent statement of financial position dates, the following process must be applied.
Foreign currency monetary items (receivables, payables, cash, loans) must be translated using the closing rate. The closing rate is the exchange rate at the statement of financial position date.
Foreign currency non-monetary items (non-current assets, investments, inventory) are not retranslated. They are left at the exchange rate that was used at the date of the transaction (called the historic rate).
Exchange differences on settlement of monetary items or on retranslating monetary items are recognised in the statement of profit or loss.
Foreign subsidiaries
If a company has foreign subsidiaries whose functional currency is their local currency, their financial statements must be translated into the parent’s presentation currency.
All assets and liabilities are translated into the parent’s presentation currency at the closing rate at the statement of financial position date.
Goodwill is calculated in the functional currency of the subsidiary, and translated at each date at the closing rate into the presentation currency of the parent.
Income and expenses in the statement of profit or loss must be translated at the average rate for the period.
Exchange differences arising on consolidation are recognised in other comprehensive income until disposal of the subsidiary when they are part of the gain or loss on disposal reported in profit or loss for the year.
Exchange differences arise from:
– Retranslation of the opening net assets using the closing rate.
– Retranslation of the profit for the year from the average rate (used in the statement of profit or loss) to the closing rate (for inclusion in the statement of financial position).
IAS 23 Borrowing Costs
IAS 23 requires finance costs to be capitalised providing they are directly attributable to the asset being constructed. Capitalisation commences when construction expenditure is being incurred and ceases when the asset is ready for use.
Capitalised borrowing costs are those actually incurred, although this may be estimated if the entity is financing the cost out of general borrowings.
Borrowing costs incurred after the asset has been completed or while work is suspended must be expensed in the statement of profit or loss.
IAS 24 Related Party Disclosures
A related party is a person or entity that is related to the entity that is preparing its financial statements. IAS 24 gives the following rules which should be used to determine the existence of related party relationships:
- ‘A person or a close member of that person’s family is related to a entity if that person:
- has control or joint control of the entity
- has significant influence over the entity
- Is a member of the key management personnel of the entity or of a parent of the
- An entity is related to a entity if any of the following conditions apply:
- The entity and the 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 entity or an entity related to the If the entity is itself such a plan, the sponsoring employers are also related to the entity.
- The entity is controlled or jointly controlled by a person identified in (a).
- A person identified in (a)(i) has significant influence over the entity or is a member of the key management personnel of the entity (or of a parent of the entity).
- The entity, or any member of a group of which it is a part, provides key management personnel services to the entity or to the parent of the entity’ (IAS 24, para 9).
A related party transaction is ‘the transfer of resources, services or obligations between related parties regardless of whether a price is charged’ (IAS 24, para 9).
Disclosures
Relationships between parents and subsidiaries irrespective of whether there have been transactions between the parties.
The name of the parent and the ultimate controlling party (if different).
Key management personnel compensation in total and for each short term employee benefits, post-employment benefits, other long term benefits, termination benefits and share based payment.
For related party transactions that have occurred, the nature of the relationship and detail of the transactions and outstanding balances.
The disclosure should be made for each category of related parties stated above and include:
- The amount of the transactions
- The amount of outstanding balances and their terms
- Allowances for doubtful debts relating to the outstanding balances
- The expense recognised in the period in respect of irrecoverable or doubtful debts due from related parties.
IAS 27 Separate Financial Statements
This standard applies when an entity has interests in subsidiaries, joint ventures or associates and either elects to, or is required to, prepare separate non-consolidated financial statements.
If separate financial statements are produced, investments in subsidiaries, associates or joint ventures can be measured:
at cost
using the equity method
in accordance with IFRS 9 Financial Instruments.
IAS 28 Investments in Associates and Joint Ventures Joint ventures
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’ (IAS 28, para 3). This will normally be established in the form of a separate entity to conduct the joint venture activities.
Associates
An associate is defined as an entity ‘over which the investor has significant influence’ (IAS 28, para 3).
Significant influence is the ‘power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies’ (IAS 28, para 3).
It is normally assumed that significant influence exists if the holding company has a shareholding of 20% to 50%.
Equity accounting
In the consolidated financial statements of a group, an investment in an associate or joint venture is accounted for using the equity method.
The consolidated statement of profit or loss will show a single figure in respect of the associate or joint venture. This is calculated as the investor’s share of the associate or joint venture’s profit for the period.
In the consolidated statement of financial position, the ‘investment in the associate/joint venture’ is presented in non-current assets. It is calculated as the initial cost of the investment plus/(minus) the investor’s share of the post-acquisition reserve increase/(decrease).
Associates and joint ventures are not part of the group. Therefore transactions and balances between group companies and the associate or joint venture are not eliminated from the consolidated financial statements.
IAS 32 Financial instruments: Presentation
IAS 32 Financial Instruments: Presentation classifies financial instruments as a financial liability (debt) or equity according to the substance of the contractual arrangement.
IAS 32 says that a financial instrument is classified as debt if the issuer has a contractual obligation either to deliver cash or another financial asset to the holder or to exchange another financial asset/liability with the holder under conditions that are potentially unfavourable to the issuer.
A financial instrument is classified as equity if it does not give rise to such a contractual obligation.
For example, preference shares are classified as:
Equity if they are irredeemable
Debt if they are redeemable.
Compound instruments
A compound instrument is one which has both a liability and an equity component. An example would be a convertible bond that can be redeemed in cash or a fixed number of the entity’s own ordinary shares.
Compound instruments must be ‘split’ into a liability element and an equity element. The liability is initially measured as the present value of the repayments. The difference between the proceeds and the liability element is the equity element.
IAS 33 Earnings Per Share
IAS 33 applies to all listed companies. Private companies must follow the standard if they disclose an EPS figure.
Basic earnings per share is:
Profit or loss for the period attributable to the equity shareholders
Weighted average number of equity shares outstanding in the period
The weighted average number of equity shares takes into account when the shares were issued in the year.
Diluted earnings per share
IAS 33 requires diluted earnings per share to be disclosed as well as basic EPS.
Diluted EPS shows the effect on the current EPS if all the potential equity shares had been issued under the greatest possible dilution.
Potential equity shares consist of:
Convertible loan stock
Share options
Rights granted under employee share schemes
Rights to equity shares that are contingent upon future events.
IAS 36 Impairment of Assets
Impairment is measured by comparing the carrying amount of an asset or cash generating unit with its recoverable amount.
If the carrying amount exceeds the recoverable amount, the asset is impaired and must be written down.
Indicators of impairment
Unless an impairment review is required by another standard (e.g. IAS 38 Intangible Assets or IFRS 3 Business Combinations), then impairment reviews are required where there is an indicator of impairment.
Examples of impairment indicators
Internal indicators include:
Physical damage to the asset.
Management committed to reorganisation of the business. Obsolete assets.
Idle assets.
Major loss of key employees.
Operating losses in the business where the assets are used. External indicators include:
Competitor actions.
Increasing interest rates (affect value in use). Market values of assets falling.
Change in the business or market where assets are used (e.g. govt action).
Cash-generating units (CGU)
A cash-generating unit, per IAS 36, is the smallest identifiable group of assets that generates external cash inflows.
It will not always be possible to base the impairment review on individual assets as an individual asset may not generate a distinguishable cash flow. In this case the impairment calculations should be based on a CGU.
The impairment calculation is performed by comparing the carrying value of the CGU to the recoverable amount of the CGU. This is achieved by allocating an entity’s assets including goodwill, to CGUs.
Impairment losses are allocated to assets with specific impairments first, then allocated in the following order:
- Goodwill
- Remaining assets on a pro rata basis. Assets cannot be written down below the higher of fair value less costs to sell, value in use and zero.
Recognition of impairment losses
Assets held at cost: The amount of the impairment is charged to the statement of profit or loss for the period in which the impairment occurs.
Revalued assets: The impairment is charged first to OCI to reverse any previous surplus on that asset in the same way as a downward revaluation. Any further impairment is charged to the statement of profit or loss.
IAS 37 Provisions, Contingent Liabilities and Contingent Assets IAS 37 provides the following definitions:
A provision is ‘a liability of uncertain timing or amount’ (IAS 37, para 10).
A contingent liability is a possible obligation arising from past events whose existence will only be confirmed by an uncertain future event outside of the entity’s control.
A contingent asset is a possible asset that arises from past events and whose existence will only be confirmed by an uncertain future event outside of the entity’s control.
Contingent liabilities should not be recognised. They should be disclosed unless the possibility of a transfer of economic benefits is remote.
Contingent assets should not be recognised. If the possibility of an inflow of economic benefits is probable they should be disclosed.
IAS 38 Intangible Assets
IAS 38 says that an intangible asset is ‘an identifiable non-monetary asset without physical substance’ (IAS 38, para 8).
Initial recognition
IAS 38 states that an intangible asset is initially recognised at cost if all of the following criteria are met.
- It is identifiable – it could be disposed of without disposing of the business at the same time.
- It is controlled by the entity – the entity has the power to obtain economic benefits from it, for example patents and copyrights give legal rights to future economic benefits.
- It will generate probable future economic benefits for the entity – this could be by a reduction in costs or increasing revenues
- The cost can be measured reliably.
If an intangible does not meet the recognition criteria, then it should be charged to the statement of profit or loss as expenditure is incurred. Items that do not meet the criteria are internally generated goodwill, brands, mastheads, publishing titles, customer lists, research, advertising, start-up costs and training.
Subsequent treatment
Intangible assets should be amortised over their useful lives.
If it can be demonstrated that the useful life is indefinite no amortisation should be charged, but an annual impairment review must be carried out.
Intangible assets can be revalued but fair values must be determined with reference to an active market. Active markets have homogenous products, willing buyers and sellers at all times and published prices. In practical terms, most intangible assets are likely to be valued using the cost model.
Research and development
The recognition of internally generated intangible assets is split into a research phase and a development phase.
Costs incurred in the research phase must be charged to the statement of profit or loss as they are incurred.
IAS 38 says that costs incurred in the development phase should be recognised as an intangible asset if they meet the following criteria:
- The project is technically feasible
- The asset will be completed then used or sold
- The entity is able to use or sell the asset
- The asset will generate future economic benefits (either because of internal use or because there is a market for it)
- The entity has adequate technical, financial and other resources to complete the project
- The expenditure on the project can be reliably measured.
Amortisation of development costs will occur over the period that benefits are expected.
IAS 40 Investment Property
IAS 40 defines investment property as property or land held to earn rentals or for capital appreciation or both.
Investment property is not:
Owner occupied property (dealt with under IAS 16 Property, Plant and Equipment)
Property held for sale in the normal course of business (dealt with under IAS 2 Inventories)
Property being constructed for third parties (dealt with under IFRS 15 Revenue from Contracts with Customers)
Property leased to another entity under a finance lease (dealt with under IFRS 16 Leases).
Accounting treatment
An entity can choose either the cost model or the fair value model.
The cost model in IAS 40 is the same as the cost model in IAS 16 Property, Plant and Equipment.
The fair value model requires that investment properties are recognised in the statement of financial position at fair value. Gains and losses on revaluation when using the fair value model are recognised in the statement of profit or loss.
IAS 41 Agriculture
A biological asset is ‘a living plant or animal’ (IAS 41, para 5).
Agricultural produce is ‘the harvested product of the entity’s biological assets’ (IAS 41, para 5).
Biological assets should be valued at fair value less estimated costs to sell and revalued each year-end. Any changes in fair value should be recognised in the statement of profit or loss.
At the date of harvest, agricultural produce should be recognised and measured at fair value less estimated costs to sell. It is then accounted for under IAS 2 Inventories.
IFRS 1 First-time Adoption of International Standards
IFRS 1 sets out the procedures to follow when an entity adopts IFRS
Standards in its published financial statements for the first time.
The date of transition is ‘the beginning of the earliest period for which an entity presents full comparative information under IFRS Standards in its first IFRS financial statements’ (IFRS 1, App A).
IFRS 1 requires entities to prepare an opening IFRS statement of financial position at the date of transition. This statement must:
Recognise all assets and liabilities required by IFRS Standards.
Not recognise assets and liabilities not permitted by IFRS Standards.
Reclassify all assets, liabilities and equity components in accordance with IFRS Standards.
Measure all assets and liabilities in accordance with IFRS Standards.
Any gains or losses arising on the adoption of IFRS Standards are recognised in retained earnings.
IFRS 2 Share Based Payments
A share based payment transaction is one where an entity obtains goods or services from other parties with payment taking the form of shares or share options issued by the entity.
There are two types of share based payment transactions:
- Equity-settled share based payment transactions where an entity receives goods or services in exchange for equity instruments (e.g. shares or share options).
- Cash-settled share based payment transactions, where an entity receives goods and services in exchange for a cash amount paid based on its share price.
Accounting
If an entity issues share options (e.g. to employees), the fair value of the option at the grant date should be used as the cost of the services received.
For cash settled share based payments, the fair value of goods and services is measured and a liability recognised. The liability is re-measured at each statement of financial position date until it is settled with changes in value being taken to the statement of profit or loss.
The expense in relation to the share based transaction must be recognised over the period in which the services are rendered or goods are received (vesting period).
Grant date: the date a share based-payment transaction is entered into.
Vesting date: the date on which the cash or equity instruments can be received by the other party to the agreement.
Example:
A company grants share options of 5000 shares due to vest in 5 years’ time. The fair value of the option at the grant date is $3.
Assuming that 5000 shares are expected to vest, the cost to the company will be 5000 × $3 = $15,000 which is spread over the vesting period. Therefore $3,000 is charged to the statement of profit and loss.
Each year the cost should be remeasured and any adjustment taken through the SPL with a corresponding credit to equity. If it is expected that only 4000 shares are expected to vest, the cost would be 4000 × $3
- $12,000 with a cost per year of $2,400. Therefore, at the end of year 2 a total cost of $4,800 needs to be recognised. As $3,000 was charged in year 1, the charge for year 2 needs to be $1,800.
Assuming no further changes in the number of shares expected to vest, $2,400 will be charged to the SPL in year’s 3 to 5.
IFRS 3 Business Combinations
On acquisition of a subsidiary, the purchase consideration transferred and the identifiable net assets acquired are recorded at fair value.
Fair value is ‘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’ (IFRS 13, para 9).
Purchase consideration
Purchase consideration is measured at fair value. Note that:
Deferred cash consideration should be discounted to present value using a rate at which the acquirer could obtain similar borrowing.
The fair value of the acquirer’s own shares is the market price at the acquisition date.
Contingent consideration is included as part of the consideration at its fair value, even if payment is not probable.
Goodwill and the non-controlling interest
The non-controlling interest (NCI) at acquisition is measured at either:
Fair value, or
The NCI’s proportionate share of the fair value of the subsidiary’s identifiable net assets.
Gain on bargain purchase
If the net assets acquired exceed the fair value of consideration, then a gain on bargain purchase (negative goodwill) arises.
After checking that the calculations have been done correctly, the gain on bargain purchase is credited to profit or loss.
Other adjustments
Other consolidation adjustments need to be made in order to present the parent its subsidiaries as a single economic entity. Transactions that require adjustment include:
Interest on intragroup loans
Intragroup management charges
Intragroup sales, purchases and unrealised profit in inventory.
Intragroup transfer of non-current assets and unrealised profit on transfer.
Intragroup receivables, payables and loans.
IFRS 5 Non-current Assets Held for Sale & Discontinued
A discontinued operation is a ‘component of an entity that either has been disposed of, or is classified as held for sale; and
Represents a separate major line of business or geographical area of operations
Is part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations
Is a subsidiary acquired exclusively with a view to resale’ (IFRS 5, App A).
IFRS 5 says that a non-current asset or a disposal group is classified as held for sale if its carrying amount will be recovered primarily through a sale rather than continued use in the business.
A disposal group is a group of assets, and associated liabilities, which will be sold together in a single transaction.
Assets can only be classified as held for sale (and therefore a discontinued operation) if they meet all of the criteria below:
Management commits itself to a plan to sell.
The asset (or disposal group) is available for immediate sale in its present condition.
Sale is highly probable and is expected to be completed within a year from date of classification.
The asset (or disposal group) is being actively marketed for sale at a reasonable price compared to its fair value.
It is unlikely that significant changes will be made to the plan or it will be withdrawn.
If the criteria are met after the statement of financial position date but before the accounts are authorised for issue, the assets should not be classed as held for sale but the information should be disclosed.
Measurement
A non-current asset (or disposal group) classified as held for sale should be measured at the lower of its carrying amount and fair value less costs to sell.
Assets classified as held for sale should not be depreciated, regardless of whether they are still in use by the entity.
Presentation
IFRS 5 says that information about discontinued operations should be presented on the face of the statement of profit or loss as a single amount. This comprises:
Profit or loss from the discontinued operations.
Gain or loss on the measurement to fair value less costs to sell or on the disposal of the discontinued operation.
IFRS 7 Financial Instruments: Disclosures
IFRS 7 requires two main categories of disclosures in relation to financial instruments:
- Information about the significance of financial instruments
- Information about the nature and extent of risks arising from financial instruments.
Qualitative disclosures must describe:
Risk exposures for each type of financial instrument
Management’s objectives, policies, and processes for managing those risks
Changes from the prior period.
Quantitative disclosures include:
Summary quantitative data about exposure to each risk at the date
Disclosures about credit risk, liquidity risk, and market risk Concentrations of risk.
IFRS 8 Operating Segments
IFRS 8 requires an entity to disclose information about each of its operating segments.
An operating segment is defined as a component of an entity:
that engages in business activities from which it may earn revenues and incur expenses
whose results are reviewed by the entity’s chief operating decision maker(s)
for which financial information is available.
thresholds
IFRS 8 requires that an entity separately reports information about any operating segment that meets one of the following quantitative thresholds:
Sales are 10 per cent or more of the combined revenues of all operating segments, both international and external sales revenues.
Its reported profit or loss is 10 per cent or more of the greater, in absolute amount, of:
– The combined reported profit of all operating segments that did not report a loss, and
– The combined reported loss of all operating segments that reported a loss.
Its assets are 10 per cent or more of the combined assets of all operating segments.
At least 75% of the entity’s external revenue should be included in reportable segments. If the quantitative test results in segmental disclosure of less than this, other reportable segments should be identified until this 75% is reached.
Disclosures
For each reportable segment IFRS 8 requires an entity to disclose:
A measure of profit or loss A measure of total assets
A measure of total liabilities (if such an amount is regularly used in decision making).
IFRS 9 Financial Instruments Financial assets Investments in equity
Investments in equity instruments (such as an investment in the ordinary shares of another entity) are normally measured at fair value through profit or loss. It is possible to designate an equity instrument as fair value through other comprehensive income, provided that the following conditions are complied with:
The equity instrument must not be held for trading, and
There must have been an irrevocable choice for this designation upon initial recognition of the asset.
Investments in debt
IFRS 9 requires that financial assets that are debt instruments are measured in one of three ways:
- Amortised cost
An investment in a debt instrument is measured at amortised cost if:
– The financial asset is held within a business model whose aim is to collect the contractual cash flows.
– 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
An investment in a debt instrument is measured at fair value through other comprehensive income if:
– The financial asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets.
– 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 profit or loss
An investment in a debt instrument that is not measured at amortised cost or fair value through other comprehensive income will be measured at fair value through profit or loss.
Financial liabilities
Financial liabilities held for trading are measured at fair value through profit or loss.
Most financial liabilities are measured at amortised cost.
IFRS 9 allows measurement of a financial liability at fair value rather than amortised cost of doing so will eliminate or reduce an accounting mismatch. Where this is the case, the change in the fair value of the financial liability due to own credit risk is recorded in other comprehensive income, and the balance of any change in fair value is recorded in profit or loss.
Impairments of financial assets Definitions
Credit loss: The difference between the contractual cash flows and the cash flows that the entity expects to receive (i.e. all cash shortfalls), discounted at the original effective interest rate.
Lifetime expected credit losses: The expected credit losses that result from all possible default events over the expected life of a financial instrument.
12 month expected credit losses: The expected credit losses that result from default events possible within 12 months of the date.
Loss allowances
Loss allowances must be recognised for financial assets that are debt instruments and which are measured at amortised cost or at fair value through other comprehensive income:
If the credit risk on the financial asset has not increased significantly since initial recognition, the loss allowance should be equal to 12-month expected credit losses.
If the credit risk on the financial asset has increased significantly since initial recognition then the loss allowance should be equal to the lifetime expected credit losses.
Adjustments to the loss allowance are charged (or credited) to the statement of profit or loss.
Measuring expected losses
An entity’s estimate of expected credit losses must be:
Unbiased and probability-weighted Discounted to present value
Based on information about past events, current conditions and forecasts of future economic conditions.
Receivables
The loss allowance should always be measured at an amount equal to lifetime credit losses for trade receivables that do not have a significant financing component.
Derivatives
IFRS 9 defines a derivative as a financial instrument with all three of the following characteristics:
- Its value changes in response to the change in a specified interest rate, security price, commodity price, foreign exchange rate or similar variable.
- It requires little or no initial investment.
- It is settled at a future date.
Derivatives which are not part of a hedging arrangement are classified to be measured as fair value through profit or loss.
Hedge accounting
Hedge accounting is an optional accounting treatment where the gains or losses on the hedging instruments are recognised in the same performance statement and in the same period as the offsetting gains or losses on the hedged items.
In order to follow the hedge accounting rules in IFRS 9 the following criteria need to be met:
The hedging relationship consists only of eligible hedging instruments and hedged items.
At the inception of the hedge there must be formal documentation identifying the hedged item and the hedging instrument.
The hedging relationship is effective.
If the hedged item is a forecast transaction, then the transaction must be highly probable.
Accounting treatment of a fair value hedge
At the date:
The hedging instrument will be remeasured to fair value.
The carrying amount of the hedged item will be adjusted for the change in fair value since the inception of the hedge.
The gain (or loss) on the hedging instrument and the loss (or gain) on the hedged item will be recorded:
in profit or loss in most cases, but
in other comprehensive income if the hedged item is an investment in equity that is measured at fair value through other comprehensive income.
Accounting treatment of a cash flow hedge
For cash flow hedges, the hedging instrument will be remeasured to fair value at the date. The gain or loss is recognised in other comprehensive income.
However, if the gain or loss on the hedging instrument since the inception of the hedge is greater than the loss or gain on the hedged item then the excess gain or loss on the instrument must be recognised in profit or loss.
IFRS 10 Consolidated Financial Statements
IFRS 10 states that consolidated financial statements must be prepared if one company controls another company.
Control, according to IFRS 10, consists of three components:
- Power over the investee: this is normally exercised through the majority of voting rights, but could also arise through other contractual arrangements.
- Exposure or rights to variable returns (positive and/or negative), and
- The ability to use power to affect the investor’s returns.
It is normally assumed that control exists when one company owns more than half of the ordinary shares in another company.
IFRS 11 Joint Arrangements
A joint arrangement is a contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint control.
IFRS 11 says that joint arrangements may take one of two forms:
Joint operations: the parties that have joint control have rights to the assets and obligations for the liabilities. Normally, there will not be a separate entity established to conduct joint operations.
Joint ventures: the parties that have joint control of the arrangement have rights to the net assets of the arrangement. This will normally be established in the form of a separate entity to conduct the joint venture activities.
IFRS 11 requires that:
Joint operators recognise their share of assets, liabilities, revenues and expenses of the joint operation.
Joint ventures are accounted for using the equity method.
IFRS 12 Disclosure of Interests in Other Entities
IFRS 12 details disclosure requirements for entities that have an interest in subsidiaries, joint arrangements and associates, i.e. where there is control, joint control or significant influence.
IFRS 12 is designed to provide relevant information to users of financial statements. It requires disclosure of:
Details relating to the composition of the group
Details of non-controlling interests within the group
Identification and evaluation of risks associated with any interests held in other entities which give rise to control, joint control or significant influence.
IFRS 13 Fair Value Measurement
The objective of IFRS 13 is to provide a single source of guidance for fair value measurement.
Note that IFRS 13 does not apply to IFRS 2 Share-based Payment and IFRS 16 Leases.
Fair value is defined 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’ (IFRS 13, para 9).
In order to increase comparability between entities, IFRS 13 establishes a hierarchy that categorises the inputs used when measuring fair value:
Level 1 inputs comprise quoted prices (‘observable’) in active markets for identical assets and liabilities at the measurement date.
Level 2 inputs are observable inputs, other than those included within Level 1. Level 2 inputs include quoted prices for similar (not identical) asset or liabilities in active markets, or prices for identical assets and liabilities in inactive markets.
Level 3 inputs are unobservable inputs for an asset or liability. IFRS 13 gives priority to level 1 inputs.
IFRS 15 Revenue from Contracts with Customers
IFRS 15 outlines a five step process for revenue recognition.
- Identify the contract
A contract is an agreement between two or more parties that creates rights and obligations.
- Identify the separate performance obligations within a contract Performance obligations are, essentially, promises made to a customer.
- Determine the transaction price
The transaction price is the amount the entity expects to be entitled in exchange for satisfying all performance obligations. Amounts collected on behalf of third parties (such as sales tax) are excluded.
- Allocate the transaction price to the performance obligations in the contract
The total transaction price should be allocated to each performance obligation in proportion to stand-alone selling prices.
- Recognise revenue when (or as) a performance obligation is satisfied
For each performance obligation an entity must determine whether it satisfies the performance obligation over time or at a point in time.
An entity satisfies a performance obligation over time if one of the following criteria is met:
- ‘The customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs.
- The entity’s performance creates or enhances an asset (for example, work in progress) that the customer controls as the asset is created or enhanced, or
- The entity’s performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date’ (IFRS 15, para 35).
For a performance obligation satisfied over time, an entity recognises revenue based on progress towards satisfaction of that performance obligation.
If a performance obligation is not satisfied over time then it is satisfied at a point in time. The entity must determine the point in time at which a customer obtains control of the promised asset.
IFRS 16 Leases
Identifying a lease
Lessees are required to recognise an asset and a liability for all leases, unless they are short-term or of a minimal value. As such, it is vital to assess whether a contract contains a lease, or whether it is simply a contract for a service.
A contract contains a lease if it ‘conveys the right to control the use of an identified asset for a period of time in exchange for consideration’ (IFRS 16, para 9).
Lessee accounting
If the lease is short-term (less than 12 months at the inception date) or of a low value the lessee can choose to recognise the lease payments in profit or loss on a straight line basis.
In all other cases, IFRS 16 requires that the lessee recognises a lease liability and a right-of-use asset at the commencement of the lease:
The right-of-use asset is initially recognised at cost. This will be the initial value of the lease liability, plus any lease payments made at or before the commencement of the lease, as well as any direct costs.
The right-of-use asset is subsequently measured at cost less accumulated depreciation and impairment losses (unless another measurement model is chosen).
The lease liability is initially measured at the present value of the lease payments that have not yet been paid.
The carrying amount of the lease liability is increased by the interest charge, which is also recorded in the statement of profit or loss. Cash repayments reduce the carrying amount of the lease liability.
Lessor accounting
The lessor must assess whether the lease is a finance lease or an operating lease. A finance lease is a lease where the risks and rewards of ownership substantially transfer to the lessee. Key indicators of a finance lease, according to IFRS 16, are:
Ownership of the asset transfers to the lessee at the end of the lease term.
The lessee has the option to purchase the asset at the end of the
lease term, or to continue to lease it, for less than fair value.
The lease term is for the major part of the asset’s economic life.
The present value of the lease payments amounts to substantially all of the asset’s fair value.
If the lease is a finance lease then the lessor will:
Derecognise the asset.
Recognise a lease receivable equal to the net investment in the lease (the present value of the payments).
Interest income arising on the lease receivable is recorded in profit or loss.
If the lease is an operating lease then the lessor recognises the lease income in profit or loss on a straight line basis over the lease term.
Sale and leaseback
The treatment of a sale and leaseback depends on whether the ‘sale’ represents the satisfaction of a performance obligation (as per IFRS 15 Revenue from Contracts with Customers).
| Transfer is not a | Transfer is a sale | ||
| sale | |||
| Seller – lessee | Continue to recognise | Derecognise the asset. | |
| asset. | Recognise a right-of-use | ||
| Recognise a financial | asset as the proportion | ||
| liability equal to | of the asset’s previous | ||
| proceeds received. | carrying amount that | ||
| relates to the rights | |||
| retained. | |||
| Recognise a lease | |||
| liability. | |||
| A profit or loss on | |||
| disposal will arise. | |||
| Buyer – lessor | Do not recognise the | Account for the asset | |
| asset. | purchase. | ||
| Recognise a financial | Account for the lease by | ||
| asset equal to transfer | applying lessor | ||
| proceeds. | accounting requirements. | ||
