International Financial Reporting Standards (IFRSs ) A Briefing for Chief Executives, Audit Committees & Boards of Directors

Transcription

1 2012 International Financial Reporting Standards (IFRSs ) A Briefing for Chief Executives, Audit Committees & Boards of Directors

2 2012 International Financial Reporting Standards (IFRSs ) A Briefing for Chief Executives, Audit Committees & Boards of Directors IFRS Foundation 30 Cannon Street London EC4M 6XH United Kingdom Telephone: +44 (0) Fax: +44 (0) info@ifrs.org Publications Telephone: +44 (0) Publications Fax: +44 (0) Publications publications@ifrs.org Web:

3 This booklet was prepared by IFRS Foundation education staff. It has not been approved by the International Accounting Standards Board (IASB). For more information about the IFRS Education Initiative visit Copyright 2012 IFRS Foundation Please address publication and copyright matters to: IFRS Foundation Publications Department 30 Cannon Street London EC4M 6XH United Kingdom Telephone: +44 (0) Fax: +44 (0) Web: ISBN: The IFRS Foundation, the authors and the publishers do not accept responsibility for loss caused to any person who acts or refrains from acting in reliance on the material in this publication, whether such loss is caused by negligence or otherwise. The IFRS Foundation logo, the IASB logo, the IFRS for SMEs logo, the Hexagon Device, IFRS Foundation, eifrs, IAS, IASB, IASC Foundation, IASCF, IFRS for SMEs, IASs, IFRS, IFRSs, International Accounting Standards and International Financial Reporting Standards are Trade Marks of the IFRS Foundation.

4 Contents Pages Introduction 1 The Conceptual Framework for Financial Reporting 2 International Financial Reporting Standards (IFRSs) IFRS 1 First-time Adoption of International Financial Reporting Standards IFRS 2 Share-based Payment IFRS 3 Business Combinations IFRS 4 Insurance Contracts IFRS 5 Non-current Assets Held for Sale and Discontinued Operations IFRS 6 Exploration for and Evaluation of Mineral Resources IFRS 7 Financial Instruments: Disclosures IFRS 8 Operating Segments IFRS 9 Financial Instruments 21 IFRS 10 Consolidated Financial Statements IFRS 11 Joint Arrangements IFRS 12 Disclosure of Interests in Other Entities IFRS 13 Fair Value Measurement International Accounting Standards (IASs) IAS 1 IAS 2 IAS 7 IAS 8 Presentation of Financial Statements Inventories Statement of Cash Flows Accounting Policies, Changes in Accounting Estimates and Errors IAS 10 Events after the Reporting Period 41 IAS 11 Construction Contracts 43 IAS 12 Income Taxes IAS 16 Property, Plant and Equipment IAS 17 Leases IAS 18 Revenue

5 Contents continued Pages International Accounting Standards (IASs) continued IAS 19 Employee Benefits IAS 20 Accounting for Government Grants and Disclosure of Government Assistance IAS 21 The Effects of Changes in Foreign Exchange Rates IAS 23 Borrowing Costs IAS 24 Related Party Disclosures IAS 26 Accounting and Reporting by Retirement Benefit Plans IAS 27 Separate Financial Statements IAS 28 Investments in Associates and Joint Ventures IAS 29 Financial Reporting in Hyperinflationary Economies IAS 32 Financial Instruments: Presentation IAS 33 Earnings per Share IAS 34 Interim Financial Reporting IAS 36 Impairment of Assets IAS 37 Provisions, Contingent Liabilities and Contingent Assets IAS 38 Intangible Assets IAS 39 Financial Instruments: Recognition and Measurement IAS 40 Investment Property IAS 41 Agriculture IFRS Practice Statement Management Commentary 90 The International Financial Reporting Standard (IFRS) for Small and Medium-sized Entities (SMEs) 92

6 Introduction The text of this Briefing summarises, at a high level and in non-technical language, the main principles in the consolidated versions of International Financial Reporting Standards (IFRSs) issued at 1 January 2012, including IFRSs required to be applied after 1 January 2012 but not the IFRSs they will replace. The Briefing These concise and easy-to-use Briefing notes are prepared by the IFRS Foundation education staff for Chief Executives, members of Audit Committees, Boards of Directors and others who want a broad overview of International Financial Reporting Standards (IFRSs) and the main judgements and estimates that are made in applying each IFRS. These Briefing notes have not been reviewed by the International Accounting Standards Board (IASB). For the full requirements of IFRSs, reference must be made to the Standards issued by the IASB at 1 January 2012, including IFRSs with an effective date after 1 January 2012 but not the IFRSs they will replace. IFRSs The objective of the IFRS Foundation is to develop, in the public interest, a single set of high quality, understandable, enforceable and globally accepted financial reporting Standards based upon clearly articulated principles. The IASB is the Standard-setting operation of the IFRS Foundation. The IASB is selected, overseen and funded by the IFRS Foundation, and it has complete responsibility for all IASB technical matters including the preparation and issuing of IFRSs. The organisation s objective is achieved primarily by developing and publishing IFRSs and promoting their use in general purpose financial statements. IFRSs set out the recognition, measurement, presentation and disclosure requirements dealing with transactions and events that are important in general purpose financial statements. IFRSs are based on the Conceptual Framework for Financial Reporting (Conceptual Framework) which presents the concepts underlying the information presented in general purpose financial statements. The Conceptual Framework provides the concepts from which principle-based IFRSs are developed. IFRSs are mandatory pronouncements and comprise International Financial Reporting Standards, International Accounting Standards and Interpretations developed by the IFRS Interpretations Committee (formerly called the International Financial Reporting Interpretations Committee (IFRIC)) or the former Standing Interpretations Committee (SIC). In July 2009 the IASB published the International Financial Reporting Standard (IFRS) for Small and Medium-sized Entities (SMEs). This Standard is intended to apply to entities that in many countries are referred to by a variety of terms, including small and medium-sized entities, private entities and non-publicly accountable entities. 1

7 The Conceptual Framework for Financial Reporting The Conceptual Framework The Conceptual Framework sets out concepts underlying the preparation and presentation of financial reporting for external users. The Conceptual Framework assists the International Accounting Standards Board (IASB) in the development of Standards and also assists preparers of financial statements in accounting for transactions and events, particularly when those transactions and events are not specifically covered by an existing International Financial Reporting Standard (IFRS). Consequently, the Conceptual Framework is the starting point for understanding IFRS information. IFRSs and the Conceptual Framework apply to financial reports prepared and presented to external users (existing and potential investors, lenders and other creditors), not management or regulators. Management and regulators have access to the entity s financial information and have the ability to prescribe the form and content of reports to meet their specific needs. The Conceptual Framework specifies the objective of IFRS financial statements and other IFRS reports 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. Sets out the concepts that underlie IFRS financial statements. It is not an IFRS and it does not override the requirements in IFRSs. Those decisions involve buying, selling or holding equity and debt instruments, and providing or settling loans and other forms of credit. Such decisions depend on the returns that investors, lenders and other creditors expect from an investment in those instruments (eg investors usually expect dividends, principal and interest payments or market price increases and lenders usually expect principal and interest payments). Their expectations about returns depend on their assessment of the amount, timing and uncertainty of (the prospects for) future net cash inflows to the entity. Consequently, they need the appropriate information to help them assess the prospects for those inflows. The Conceptual Framework also states that IFRS financial statements do not and cannot provide all information to external users. IFRS financial statements are not designed to show the value of the entity, but provide information to external users for them to make their own estimate of the value of the entity. Other aspects of the Conceptual Framework a reporting entity concept, the qualitative characteristics of, and the constraint on, useful financial information, the elements of financial statements, recognition, measurement, presentation and disclosure flow logically from the objective. For example, to be useful, financial information must be relevant (ie capable of making a difference in the decisions made by users) and it should faithfully represent what it purports to represent (ie financial information should be complete, neutral and free from error). The usefulness of financial information is enhanced if it is comparable, verifiable, timely and understandable to users who have a reasonable knowledge of business and economic activities and who review and analyse the information diligently. continued 2

8 The Conceptual Framework for Financial Reporting continued The Conceptual Framework also defines the elements of financial statements. The following elements are relevant to the financial position: An asset is a resource controlled by an entity as a result of past events. Future economic benefits are expected from this resource. A liability is a present obligation of the entity arising from past events. Settlement of the obligation is expected to result in an outflow of economic benefits from the entity. Equity is the residual interest in the assets after deducting all liabilities. Information about the nature and amounts of a reporting entity s economic resources (assets) and claims (liabilities and equity) can help users to identify the reporting entity s financial strengths and weaknesses. That information can help users to assess the reporting entity s liquidity and solvency, its needs for additional financing, and how successful it is likely to be in obtaining that financing. Information about the priorities and payment requirements of existing claims helps users to predict how future cash flows will be distributed among those with a claim against the reporting entity. An asset or a liability is recognised in the financial statements only if it is probable that there will be future economic benefits flowing to or from the entity, and if its cost or value can be reliably measured. Information about a reporting entity s financial performance during a period, as reflected by changes in its economic resources (assets) and claims other than changes that result from obtaining additional resources directly from investors and creditors (liabilities), is useful in assessing the entity s past and future ability to generate net cash inflows increases in assets and decreases in liabilities (other than contributions from equity participants) are income. Conversely, decreases in assets and increases in liabilities (other than distributions to equity participants) are expenses. Information about income and expenses indicates the extent to which the reporting entity has increased its available economic resources, and thus its capacity for generating net cash inflows through its operations instead of by obtaining additional resources directly from investors and creditors. Information about a reporting entity s financial performance during a period may also indicate the extent to which events, such as changes in market prices or interest rates, have increased or decreased the entity s economic resources and claims, thereby affecting the entity s ability to generate net cash inflows. The Conceptual Framework is not an IFRS. It does not define Standards and does not override specific Standards or Interpretations. Nevertheless, the Conceptual Framework provides the basis for a thorough understanding of IFRSs and also serves as a basis for judgement in applying them. Judgements and estimates In the absence of an IFRS 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 that faithfully represents that transaction, other event or condition. In making that judgement, management first considers the requirements in IFRSs dealing with similar and related issues. If management cannot analogise to another IFRS, it considers the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the Conceptual Framework. Management may also, in parallel, consider the most recent pronouncements of other standard-setting bodies that use a similar conceptual framework to develop accounting standards, as well as other accounting literature and accepted industry practices, to the extent that these do not conflict with IFRSs and the Conceptual Framework. 3

9 IFRS 1 First-time Adoption of International Financial Reporting Standards The Standard This Standard applies when an entity first adopts IFRSs in its annual financial statements. The first IFRS financial statements must include an explicit and unreserved statement of compliance with IFRSs. The Standard also applies to interim financial reports for any part of the period covered by the entity s first IFRS financial statements. In order to present relevant information to existing and potential investors, lenders and other creditors that most faithfully represents the entity s financial position, financial performance and cash flows in accordance with IFRSs, IFRS 1 has the following general principle a first-time adopter recognises and measures all assets and liabilities in its first IFRS financial statements as if it had always applied IFRSs (this is known as retrospective application of IFRSs). The entity uses those versions of IFRSs that are effective at the end of its first IFRS reporting period (ie the latest period covered by the entity s first IFRS financial statements). However, to provide a suitable starting point for IFRS accounting that can be generated at a cost that does not exceed the benefits, IFRS 1 specifies some mandatory exceptions, and some optional exemptions, from the general principle of retrospective application of IFRSs. Aims to ensure that the information in an entity s first IFRS financial statements and interim reports is transparent and comparable over all the periods presented. Provides a starting point for financial reporting in accordance with IFRSs. Financial statements include comparative information for one or more prior periods. The date of transition to IFRSs is the beginning of the earliest period for which full comparative information in accordance with IFRSs is presented. For example, assume that an entity presents comparative information for one year and that its first IFRS financial statements are for the year ended 31 December Its date of transition to IFRSs is 1 January 2011 (equivalent to close of business on 31 December 2010). Consequently, in the first IFRS financial statements, except for the effects of all mandatory exceptions and those optional exemptions that management have elected to follow, the entity is required to apply the IFRSs effective for periods ending on 31 December 2012 when: presenting the opening IFRS statement of financial position at 1 January 2011; and presenting the statement of financial position for 31 December 2012 (including comparative amounts for 2011), statement of comprehensive income, statement of changes in equity and statement of cash flows for the year to 31 December 2012 (including comparative amounts for 2011) and disclosures (including comparative information for 2011). The first IFRS financial statements include only those assets, liabilities, equity, revenue and expenses that qualify for recognition under IFRSs as at 31 December Similarly, subject to the exceptions and elected exemptions those recognised assets, liabilities, equity, revenue and expenses are measured in accordance with IFRSs as at 31 December continued 4

10 IFRS 1 First-time Adoption of International Financial Reporting Standards continued The same accounting policies are used throughout all periods presented in the first IFRS financial statements. The accounting policies may differ from those that were used in the previous GAAP that was applied immediately before adopting IFRSs. When adjustments arise from events and transactions before the date of transition to IFRSs, they are recognised directly in retained earnings at the date of transition to IFRSs. The financial statements must explain how the transition from previous GAAP to IFRSs affected the entity s reported financial position, financial performance and cash flows. The following practicalities should be considered when adopting IFRSs for the first time: IFRS adoption requires planning the transition to IFRSs the requirements of IFRSs might be significantly different from those of the entity s previous GAAP. Consequently, planning the transition and collecting the information necessary for preparing an entity s first IFRS financial statements may require significant effort, including information systems changes and training. Management must review all of the entity s accounting policies and disclosure practices to ensure that they comply with IFRSs in the light of the changes from previous GAAP, consider what effects IFRS adoption might have on contracts (eg loan covenants) and agreements (eg remuneration agreements). Communication of the financial effects of IFRS adoption (including significant judgements and estimates) to the market (eg analysts). Judgements and estimates A first-time adopter must develop its accounting policies to provide relevant financial information to users (existing and potential investors, lenders and other creditors) to use in making decisions about providing resources to the entity. That information must faithfully represent, at the end of its first IFRS reporting period, the transactions that the entity has entered into (and other events and conditions to which the entity is subject), in accordance with IFRSs. Developing and applying those accounting policies often involves using judgements and making estimates, which are described in the judgements and estimates section for the description of each IFRS in these Briefing notes. Other judgements and estimates are unique to IFRS 1. For example, at the date of transition to IFRSs an entity can elect to measure an item of property, plant and equipment: (i) at deemed cost (either fair value on the date of transition or with reference to a previous GAAP revaluation); or (ii) in accordance with IAS 16 Property, Plant and Equipment applicable at the end of the entity s first IFRS reporting period (ie using the general principle). 5

11 IFRS 2 Share-based Payment The Standard IFRS 2 requires an entity to recognise share-based payment transactions in its financial statements. Equity-settled share-based payment transactions are generally those in which shares, share options or other equity instruments are granted to employees or other parties in return for goods or services. Cash-settled share-based payment transactions are generally those that are to be settled in cash or other assets. They are share-based because the payment amount is based on the price of the entity s shares. The scope of IFRS 2 is broader than employee share options. It applies to transactions in which shares or other equity instruments are issued in return for goods or services, and those in which the payment amount is based on the fair value of the entity s shares. However, IFRS 3 Business Combinations (rather than IFRS 2) applies to equity instruments (eg shares) that are issued as consideration in a business combination. The share-based payment transaction is recognised when the entity obtains the goods or services. Goods or services received are recognised as assets or expenses as appropriate. When the goods or services are received, the transaction is recognised in equity (if equity-settled) or as a liability (if cash-settled). Recognition of the goods or services received by an entity in a share-based payment transaction improves the usefulness of financial statements by providing transparent information that is relevant to predicting an entity s future returns and cash flows. Before this Standard was issued, share-based remuneration was often not recognised in the financial statements, or, if recognised, it was not measured at fair value. Consequently, expenses associated with granting share options were often omitted from or understated in financial statements, reducing the relevance and faithful representation of accounting information. Equity-settled share-based payment transactions are measured at the fair value of the goods or services received. There is a rebuttable presumption that the fair value of the goods or services received can be estimated reliably. For employee and similar services, it is difficult to estimate reliably the fair value of the services received by the entity. Consequently, the fair value of the equity instruments measured at grant date is used to estimate the fair value of the services (this is called the grant date fair value ). As employees provide services, the grant date fair value is recognised as an expense in profit or loss. If the identifiable consideration received is less than the fair value of the equity instruments granted or the liability incurred, the unidentifiable goods or services are measured by reference to the difference between the fair value of the equity instruments granted (or liability incurred) and the fair value of the goods or services received at grant date. Cash-settled share-based payments are measured at the fair value of the liability. The liability is remeasured at the end of each reporting period and at the date of settlement. Changes in fair value are recognised in profit or loss. Equity-settled share-based payments are not remeasured after the date the awards are first granted. continued 6

12 IFRS 2 Share-based Payment continued In some cases, the entity or the other party may choose whether the transaction is settled in cash or by issuing equity instruments. The accounting treatment (ie cash- or equity-settled) depends on whether the entity or the counterparty has the choice regarding settlement. Judgements and estimates In some cases, distinguishing equity-settled from cash-settled share-based payment transactions requires judgement (eg when there are choices relating to settlement within the arrangement). That classification of the transaction is important, because the subsequent accounting is different for equity-settled and cash-settled share-based payment transactions. Requires the effects of share-based payment transactions, including employee share options, to be recognised in profit or loss and the statement of financial position. When market prices for the good or service received involved in a share-based payment transaction are not available, the entity estimates the fair value of the good or service received indirectly by reference to the equity instruments granted. Judgements and estimates made in measuring the grant date fair value of equity instruments include selecting the appropriate valuation model and determining the inputs used in applying the model to estimate what the price of those equity instruments would have been on measurement date in an arm s length transaction between knowledgeable, willing parties. That process involves incorporating all the factors and assumptions that market participants would consider in setting the price. For example, estimating the fair value of an option frequently requires the use of valuation models (such as Black-Scholes, Binomial or Monte Carlo), which contain several judgemental inputs and assumptions. First-time adoption Unlike IFRSs, many previous GAAPs do not require the recognition of an expense for employee equity compensation schemes. For share-based payment transactions, there are no specific mandatory exceptions from the general principle in IFRS 1 First-time Adoption of International Financial Reporting Standards to recognise and measure all assets and liabilities in an entity s first IFRS financial statements as if it had always applied IFRSs. An entity is not required to apply IFRS 2 to share-based payment transactions that were entered into on or before 7 November

13 IFRS 3 Business Combinations The Standard A business combination is a transaction or other event in which a reporting entity (the acquirer) obtains control of one or more businesses (the acquiree). Any transaction or event in which a reporting entity obtains control of one or more businesses, including those referred to as true mergers or mergers of equals, is a business combination to which IFRS 3 applies. An entity controls a business when it is exposed, or has rights, to variable returns from its involvement with the business and has the ability to affect those returns through its power over the business. In a business combination, an entity (the acquirer) obtains control over one or more businesses net assets and recognises in its financial statements the assets acquired and liabilities assumed, including, in some circumstances, those that may not previously have been recognised by the acquiree. Consequently, users of financial statements are better able to assess the initial investments made and the subsequent performance of those investments and compare them with the performance of other entities. Aims to improve the relevance, reliability and comparability of the information about business combinations and their effects. In addition, by initially recognising almost all of the assets acquired and liabilities assumed at their fair values, the acquisition method includes in the financial statements more information about the market s expectation of the value of the future cash flows associated with those assets and liabilities, which enhances the relevance of that information. However, IFRS 3 contains exceptions to those principles for the recognition or measurement, or both, of some identifiable assets and liabilities. Particular requirements apply to contingent liabilities, income taxes, employee benefits, indemnification assets, reacquired rights, share-based payment awards and assets held for sale. Goodwill is measured indirectly as the difference between the consideration transferred in the transaction and the fair value of the acquiree s identifiable assets and liabilities. If that difference is negative because the value of the acquired identifiable assets and liabilities exceeds the consideration transferred, the acquirer recognises a gain from a bargain purchase in profit or loss. When calculating goodwill, the acquirer measures the consideration transferred at its fair value at the acquisition date. The fair value of the consideration transferred includes the fair value of an obligation of the acquirer to transfer additional assets or equity interests to the former owners of an acquiree if specified events occur or specified conditions are met, for example the meeting of an earnings target (contingent consideration). continued 8

14 IFRS 3 Business Combinations continued The receipt of contingent consideration leads to the acquirer recognising an asset, a liability or equity. Acquisitionrelated costs, except particular costs to issue debt or equity securities, are accounted for as expenses. If the acquirer acquires less than 100 per cent of the equity interests of another entity in a business combination, it recognises a non-controlling interest. A non-controlling interest is equity in a subsidiary that is not attributable, directly or indirectly, to the acquirer. The acquirer may choose, for each business combination, to measure a non-controlling interest in the acquiree either at fair value or at the non-controlling interest s proportionate share of the acquiree s identifiable net assets. An acquirer sometimes obtains control of an acquiree in which it held an equity interest immediately before the business combination. In such a step acquisition, an acquirer remeasures any equity interest that it holds in the acquiree immediately before achieving control at its fair value and recognises the resulting gain or loss, if any, in profit or loss. The acquirer subsequently accounts for assets and liabilities acquired in a business combination in accordance with other IFRSs. However, IFRS 3 contains requirements for the subsequent measurement of reacquired rights, contingent liabilities and indemnification assets. Contingent consideration is subsequently measured in accordance with other IFRSs. IAS 36 Impairment of Assets provides requirements for the subsequent measurement of goodwill. According to those requirements, goodwill is not amortised but is tested for impairment at least annually. IFRS 3 does not apply to: the formation of a joint venture; the acquisition of an asset or a group of assets that does not constitute a business; and a combination of entities or businesses under common control. Judgements and estimates The accounting for business combinations is complex and requires valuation estimates and other judgements. Consequently, even though IFRS 3 does not mandate the use of external advisers, many acquirers will need to seek professional assistance to account for a business combination. IFRS 3 applies only to the acquisition of a business. In some cases, determining whether a particular set of assets and activities acquired is a business requires judgement. For each business combination that combines two or more entities, one of the combining entities must be identified as the acquirer. Identifying the acquirer requires the assessment of all rights, powers, facts and circumstances. In some cases, identifying the acquirer involves significant judgement. When equity instruments are issued as consideration in a business combination, the entity issuing the instruments is usually, but not always, the acquirer. For example, in a reverse acquisition, as a consequence of issuing shares in the business combination, the legal acquirer (the entity issuing the shares) comes under the control of the legal acquiree. Consequently, in a reverse acquisition the legal acquiree is, for the purposes of applying IFRS 3, the acquirer. continued 9

15 IFRS 3 Business Combinations continued Accounting for a business combination requires broad use of fair value measurement the consideration transferred, the assets acquired and the liabilities assumed are all measured at fair value. Measuring the fair value of items that are not traded in an active market requires significant judgement (see IFRS 13 Fair Value Measurement). The acquiree s identifiable intangible assets at the acquisition date are recognised separately (ie not included within the amount recognised as goodwill) if their fair value can be measured reliably. Such intangible assets might include in-process research and development that had not been recognised before the acquisition by the acquiree. First-time adoption Unlike IFRSs, some previous GAAPs permit the use of the pooling of interests or merger method of accounting for business combinations. For business combinations there are no mandatory exceptions from the general principle in IFRS 1 First-time Adoption of International Financial Reporting Standards to recognise and measure all assets and liabilities in an entity s first IFRS financial statements as if it had always applied IFRSs applicable at the end of its first IFRS reporting period (ie the latest period covered by the entity s first IFRS financial statements). However, a first-time adopter may, subject to specified conditions, elect not to apply IFRS 3 retrospectively to business combinations that the entity recognised before the date of its transition to IFRSs (or before an earlier date chosen by the first-time adopter). Consequently, with limited exceptions, a first-time adopter may leave unchanged its accounting for business combinations that it recognised in accordance with its previous GAAP. Irrespective of any elections, the entity must test any goodwill in the opening IFRS statement of financial position for impairment. 10

16 IFRS 4 Insurance Contracts The Standard IFRS 4 specifies accounting for insurance contracts issued by any entity. It also specifies accounting for reinsurance contracts issued or held by an insurer. The Standard applies to these contracts, irrespective of whether the entity is regulated as an insurer and whether the contract is regarded as an insurance contract for legal purposes. 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. Insurance risk does not include financial risk (eg risk of changes in market prices or interest rates). IFRS 4 has been issued as a temporary measure to fill a gap in IFRSs. It makes only limited improvement to accounting practices for insurance contracts and, in the absence of IFRS 4, entities would be required to account for insurance contracts following precedents in other Standards, and the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the Conceptual Framework. For many entities, applying the other Standards and the Conceptual Framework would have resulted in changes from the way in which they accounted for the items. Specifies financial reporting for insurance contracts issued by any entity. In most respects, IFRS 4 allows an entity to continue to account for insurance contracts in terms of its previous accounting policies. The following are some of the limited improvements that the Standard makes to accounting for insurance contracts: Catastrophe provisions and equalisation provisions are not permitted. They are not liabilities. The adequacy of insurance liabilities must be tested at the end of each reporting period. The liability adequacy test is based on current estimates of future cash flows and any deficiency is recognised in profit or loss. Furthermore, reinsurance assets are tested for impairment. Insurance liabilities are presented without offsetting them against related reinsurance assets. Discretionary participation features (as found in with-profits and participating contracts) must be reported as liabilities or as equity (or split into liability and equity components). They may not be reported separately from liabilities and equity. Some insurance contracts contain both an insurance component and a deposit component. In some cases the entity must unbundle the components and account for them separately. This requirement is particularly relevant for financial reinsurance. The IFRS restricts accounting policy changes. Any changes in accounting for insurance contracts must result in information that is more relevant and no less reliable, or more reliable and no less relevant, than previous accounting. continued 11

17 IFRS 4 Insurance Contracts continued A significant review of accounting for insurance contracts is being considered by the IASB in phase II of its project on insurance contracts. Meanwhile, an entity must not introduce (but may continue) the following practices: Measuring insurance liabilities on an undiscounted basis. Measuring contractual rights to future investment management fees at an amount that exceeds fair value (as implied by current fees charged in the market). Using non-uniform accounting policies for insurance liabilities of subsidiaries. Measuring insurance liabilities with excessive prudence. Except in unusual cases, using a discount rate that reflects returns on assets held rather than the characteristics of the insurance liabilities. Judgements and estimates Some contracts that have the legal form of insurance contracts, or are described for other purposes as insurance contracts, may not be insurance contracts as defined in IFRS 4. If such contracts create financial assets and financial liabilities (deposits) IFRS 9 Financial Instruments and IAS 39 Financial Instruments: Recognition and Measurement apply. Financial assets are measured in accordance with IFRS 9 and IAS 39 and measurement is often at fair value. To avoid an accounting mismatch, an entity is permitted to change its accounting policy for insurance liabilities, so that both assets and liabilities reflect changes in market conditions (particularly interest rates). First-time adoption For insurance contracts there are no specific mandatory exceptions from the general principle in IFRS 1 First-time Adoption of International Financial Reporting Standards to recognise and measure all assets and liabilities in an entity s first IFRS financial statements as if it had always applied the IFRSs that are applicable at the end of its first IFRS reporting period (ie the latest period covered by the entity s first IFRS financial statements). However, a first-time adopter may apply the transitional provisions in IFRS 4. IFRS 4 restricts changes in accounting policies for insurance contracts, including changes made by a first-time adopter. Senior management should consider how best to satisfy the high level disclosure principles in IFRS 4. Implementing these principles may require a review of systems and additional data collection. 12

18 IFRS 5 Non-current Assets Held for Sale and Discontinued Operations The Standard Non-current assets held for sale and discontinued operations must be disclosed separately in the financial statements. Information about an entity s non-current assets held for sale and its discontinued operations assists existing and potential investors, lenders and other creditors to assess the amount, timing and uncertainty of (the prospects for) future net cash flows of the entity, which is useful to them when making decisions about providing resources to the entity. For example, by separating non-current assets held for sale from other fixed assets, a user can readily identify those fixed assets that are to be recovered through sale rather than use. Non-current assets held for sale Non-current assets are reclassified as current assets when they are held for sale. A non-current asset is regarded as held for sale if its carrying amount will be recovered principally through a sale transaction, rather than through continuing use. To be classified as a non-current asset held for sale: the asset must be available for immediate sale in its present condition; and the sale must be highly probable. This requires management commitment to the sale, and to active marketing of the asset at a reasonable price. The sale must be expected to be completed within one year from the classification date. Specifies the accounting for non-current assets and groups of assets and liabilities whose carrying amount will be recovered principally through a sale transaction, and the presentation and disclosure of discontinued operations. Consequently, assets that are to be abandoned may not be classified as held for sale. Non-current assets held for sale are not depreciated. They are measured at the lower of fair value less costs to sell and carrying amount (prior to reclassification as held for sale) and presented separately on the statement of financial position consistently with the nature of the economic benefits that are expected to flow to the entity through the sale of the underlying resource (ie the asset). Similar requirements for measurement and presentation apply to groups of assets and liabilities when they are regarded as held for sale. Discontinued operations 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 co-ordinated plan to dispose of a separate major line of business or geographical area of operations; or is a subsidiary acquired with the exclusive aim of reselling it. Discontinued operations are presented separately within profit or loss in the statement of comprehensive income. An analysis of the amount must be shown either in the notes or in the statement of comprehensive income. The net cash flows attributable to the operating, investing and financing activities of the discontinued operations must be presented in the notes or in the statement of cash flows. Separate presentation of discontinued operations assists existing and potential investors, lenders and other creditors to assess earnings continuation and to estimate future cash flows. continued 13

19 IFRS 5 Non-current Assets Held for Sale and Discontinued Operations continued Judgements and estimates The classification of an asset as held for sale is based on actions taken by management at or before the end of the reporting period and management s expectation (and judgement) that the asset is available for immediate sale and that a sale will be completed. The assessment of the asset s availability for sale requires judgement of what represents usual and customary timing and other terms for the disposal of an asset. Determining whether the sale is highly probable might require an assessment of the likelihood of obtaining shareholder approval, when applicable, and judging what constitutes sufficient evidence of management s commitment to sell. Measuring assets held for sale requires measuring fair value and estimating costs to sell. See IFRS 13 Fair Value Measurement for the judgements and estimates relating to the measurement of fair value. First-time adoption For non-current assets held for sale and discontinued operations, there are no specific mandatory exceptions or optional exemptions from the general principle in IFRS 1 First-time Adoption of International Financial Reporting Standards to recognise and measure all assets and liabilities in an entity s first IFRS financial statements as if it had always applied IFRSs that were applicable at the end of its first IFRS reporting period (ie the latest period covered by the entity s first IFRS financial statements). IFRS 5 presentation and disclosure requirements might be significantly different from those required by an entity s previous GAAP. Collecting the necessary information for an entity s first IFRS financial statements may require significant time and effort, as well as changes to reporting and information gathering systems, and staff training. 14

20 IFRS 6 Exploration for and Evaluation of Mineral Resources The Standard IFRS 6 specifies the financial reporting for expenditures incurred in exploration for, and evaluation of, mineral resources before the technical feasibility and commercial viability of extracting the mineral resources is demonstrable. It does not specify the financial reporting for the development of mineral resources. Exploration and evaluation expenditures and mineral rights assets are excluded from the scope of the Standards dealing with intangible assets and property, plant and equipment. IFRS 6 has limited scope and has been issued as an interim measure to fill a gap in IFRSs. In the absence of IFRS 6, entities would have been required to account for exploration and evaluation expenditures in accordance with Standards dealing with similar items, and the definitions, recognition criteria and measurement concepts for assets and expenses in the Conceptual Framework. For most entities, applying the other Standards and the Conceptual Framework would have resulted in changes from the way in which they accounted for those items under previous GAAP. In most respects, an entity may continue to account for exploration and evaluation expenditures using the same accounting policies that it applied immediately before adopting IFRS 6. The following are some of the limited improvements that the Standard makes to accounting for exploration and evaluation expenditures: The entity must determine accounting policies specifying which exploration and evaluation expenditures are to be recognised as assets, and how such assets are to be measured. On recognition, exploration and evaluation assets are measured initially at cost. They are subsequently measured using either the cost model or the revaluation model. Exploration and evaluation assets are classified as either tangible or intangible assets according to their nature. An exploration and evaluation asset is tested for impairment when facts and circumstances suggest that the carrying amount exceeds the recoverable amount. The entity determines the level (cash-generating unit or group of units) at which impairment must be tested. The level must not be larger than a segment used for purposes of segment reporting. Impairment is measured in accordance with IAS 36 Impairment of Assets. The financial statements must identify and explain amounts recognised in the financial statements arising from the exploration for, and evaluation of, mineral resources. The Standard restricts accounting policy changes. Any changes in accounting for exploration and evaluation expenditures must result in information that is more relevant and reliable. Judgements and estimates In most respects, an entity may continue to use the accounting policies for exploration and evaluation expenditures that it applied immediately before adopting IFRS 6. Such policies may involve a range of judgments and estimates. Management must consider whether expenditures meet the definition of exploration and evaluation assets and whether they are to be classified as either tangible or intangible. In addition, they must elect a cost or revaluation model to be used for measurement subsequent to initial recognition. Various judgements are required in relation to impairment testing. Specifies the financial reporting for the expenditures incurred in exploration for, and evaluation of, mineral resources before the technical feasibility and commercial viability of extracting the mineral resources is demonstrable. continued 15

21 IFRS 6 Exploration for and Evaluation of Mineral Resources continued First-time adoption For exploration and evaluation expenditures there are no specific mandatory exceptions from the general principle in IFRS 1 First-time Adoption of International Financial Reporting Standards to recognise and measure all assets and liabilities in an entity s first IFRS financial statements as if it had always applied IFRSs. On adoption of IFRSs, entities are required to explain their policies for accounting for exploration and evaluation expenditure and to ensure that items classified as exploration and evaluation expenditure satisfy the criteria in IFRS 6. Impairment testing may result in additional impairment expenses as compared to those recognised in terms of an entity s previous GAAP. However, a first-time adopter may, if its previous GAAP requirements for exploration and development costs for oil and gas properties in the development or production phases are accounted for in cost centres that include all properties in a large geographical area, choose to apply the transitional provisions specified in IFRS 6. 16

22 IFRS 7 Financial Instruments: Disclosures The Standard IFRS 7 specifies disclosure for financial instruments. The presentation, recognition and measurement of financial instruments are the subjects of IAS 32 Financial Instruments: Presentation, IFRS 9 Financial Instruments and IAS 39 Financial Instruments: Recognition and Measurement respectively. 1 The Standard applies to financial risks arising from all financial instruments of all entities. However, the extent of the disclosure required is dependent on the extent to which the entity uses financial instruments and its exposure to the related risks. The Standard requires disclosure of: the significance of financial instruments for an entity s financial position and performance; qualitative information about exposure to risks arising from financial instruments. The disclosures describe management s objectives, policies and processes for managing those risks; and quantitative information about exposure to risks arising from financial instruments, including specified minimum disclosures about credit risk, liquidity risk and market risk. These 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. Requires disclosures that enable users to evaluate: the significance of financial instruments for the entity s financial position and performance; and the risks arising from financial instruments to which the entity is exposed and how the entity manages those risks. The required disclosures provide an overview of the entity s use of financial instruments and its exposure to the risks they create. Such information is useful because it can influence existing and potential investors, lenders and other creditors (users ) assessment of the financial position and financial performance of an entity or of the amount and timing of its future cash flows. Greater transparency of financial risks allows users to make more informed judgements about risk and return. Judgements and estimates The significance of financial instruments for an entity s financial position and performance is disclosed. Judgement is required when grouping financial instruments into classes that are appropriate to the nature of the information disclosed and taking into account the characteristics of those financial instruments. continued 1 The development of IFRS 9 is ongoing. IFRS 9 will eventually replace IAS 39 in its entirety. The main phases of the project are: Phase 1: Classification and measurement; Phase 2: Impairment methodology; and Phase 3: Hedge accounting. Phase 1 has been completed so IFRS 9 now sets out requirements for the classification and measurement of financial assets and financial liabilities. In addition the derecognition requirements from IAS 39 have been reproduced unchanged in IFRS 9. IFRS 9 is mandatory only from 1 January Until that time, an entity may continue to apply IAS 39 or, if an entity chooses to apply some or all of the new requirements in IFRS 9, it must apply them in conjunction with those parts of IAS 39 that continue to be relevant to them. 17