IFRS Technical update Current standards and interpretations. IFRS Technical Update Cases Farah De Rouck Véronique Weets

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1 Current standards and interpretations IFRS Technical Update Cases Farah De Rouck Véronique Weets IBR 1

2 Current standards and interpretations TABLE OF CONTENT Table of content... 2 Current standards and interpretations... 4 IAS 1 Presentation of financial statements... 9 Preparation of financial statements... 9 Comprehensive case Amendments to IAS 32 and IAS 1 Puttable financial instruments and obligations arising on liquidation IFRS 8 Operating segments Descriptive information about an entity s reportable segments (IFRS 8. IG2) Information about reportable segment profit or loss, assets and liabilities (IFRS 8. IG3) Reconciliations of reportable segment revenues, profit or loss, assets and liabilities (IFRS 8. IG4) Geographical information (IFRS 8 IG5) Information about major customers (IFRS 8 IG6) IAS 23 Borrowing costs IFRS 2 Non-vesting conditions and cancellations IFRIC 12 Service concession arrangements Scope Financial asset/intangible asset Accounting for service concession arrangements IFRIC 16 Hedges of a net investment in a foreign operation IFRS 3 - Business combinations Identifying the acquirer Goodwill Measurement period Contingent consideration Bargain purchases Business combinations achieved in stages Determining what is part of the business combination transaction IBR 2

3 Current standards and interpretations Restructurings and liabilities Employee benefits Contingent payments to employees or selling shareholders Share based payments Reverse acquisitions Impairment of goodwill IAS 27 - Consolidated and separate financial statements Changes in ownership interest IFRIC 15 Agreements for the construction of real estate IFRIC 17 Non-cash distributions to owners IFRIC 18 Transfers of assets from customers Transfer of an electricity substation in exchange for connection to a price-regulated network Who controls the asset? Transfer of assets in an outsourcing agreement IBR 3

4 Current standards and interpretations CURRENT STANDARDS AND INTERPRETATIONS Standards Issued Endorse- Effective ment IFRS 1 First-time Adoption of International Financial Reporting 2003 Y 1/1/2004 Standards Amendment relating to IFRS Y 1/1/2006 Amendment to IFRS 1 and IAS 27 - Cost of an investment in a 2008 Y 1/1/2009 subsidiary, jointly controlled entity or associate Additional exemptions for first-time adopters /1/2010 Restructuring of the standard /7/2009 IFRS 2 Share based Payment 2004 Y 1/1/2005 Amendment relating to vesting conditions and cancellations 2008 Y 1/1/2009 Amendments to IFRS 2 - Group cash-settled share-based /1/2010 payment transactions Incorporation of IFRIC 8 and IFRIC 11 IFRS 3 Business combinations 2004 Y BC31/3/04 Comprehensive revision on applying the acquisition method /7/2009 IFRS 4 Insurance contracts 2004 Y 1/1/2005 Amendment for financial guarantee contracts 2005 Y 1/1/2006 IFRS 5 Non-current assets held for sale and discontinued 2004 Y 1/1/2005 operations ED Discontinued operations Sept 2008 IFRS 6 Exploration for and evaluation of mineral resources 2004 Y 1/1/2006 IFRS 7 Financial Instruments: Disclosures 2005 Y 1/1/2007 Amendment to IAS 39 and IFRS 7 Reclassification of financial 2008 Y 1/7/2008 assets Improving disclosures on financial instruments /1/2009 Reclassification of financial assets Effective date and /7/2008 transition ED Investments in debt instruments Dec 2008 ED/2009/3 Derecognition March 2009 IFRS 8 Operating segments 2006 Y 1/1/2009 ED/2009/7 Rate-regulated activities July 2009 IAS 1 Presentation of financial statements 2003 Y 1/1/2005 Amendment to add disclosures about an entity's capital 2005 Y 1/1/2007 Comprehensive revision including requiring a statement of 2007 Y 1/1/2009 comprehensive income Amendments relating to disclosure of puttable instruments and 2008 Y 1/1/2009 obligations arising on liquidation IAS 2 Inventories 2003 Y 1/1/2005 IAS 7 Cash flow statements Y IAS 8 Accounting policies, changes in accounting estimates and 2003 Y 1/1/2005 errors IAS 10 Events after the balance sheet date 2003 Y 1/1/2005 IAS 11 Construction contracts Y IAS 12 Income taxes Y ED/2009/2 Income taxes March 2009 IAS 16 Property, plant and equipment 2003 Y 1/1/2005 IAS 17 Leases 2003 Y 1/1/2005 IAS 18 Revenue Y IBR 4

5 Current standards and interpretations IAS 19 Employee benefits Y Amendment adding an option to recognise actuarial gains and 2004 Y 1/1/2006 losses in full, outside profit or loss, in a statement of changes in equity ED/2009/10 Discount rate for employee benefits August 2009 IAS 20 Accounting for government grants and disclosure of Y government assistance IAS 21 The effects of changes in foreign exchange rates 2003 Y 1/1/2005 IAS 23 Borrowing costs Y Comprehensive revision to prohibit immediate expensing 2007 Y 1/1/2009 IAS 24 Related party disclosures 2003 Y 1/1/2005 ED Amendment of IAS 24 Relationships with the state Dec 2008 IAS 26 Accounting and reporting by retirement benefit plans Y IAS 27 Consolidated and separate financial statements 2003 Y 1/1/2005 Consequential amendments arising from amendments to IFRS /7/ Amendment to IFRS 1 and IAS 27 - Cost of an investment in a 2008 Y 1/1/2009 subsidiary, jointly controlled entity or associate ED 10 Consolidated financial statements Dec 2008 IAS 28 Investments in associates 2003 Y 1/1/2005 Consequential amendments arising from amendments to IFRS /7/ IAS 29 Financial reporting in hyperinflationary economies Y IAS 31 Interests in joint ventures 2003 Y 1/1/2005 Consequential amendments arising from amendments to IFRS /7/ ED 9 - Joint arrangements Sep 2007 IAS 32 Financial instruments: Presentation 2003 Y 1/1/2005 Disclosure requirements replaced by IFRS Y 1/1/2007 Amendments relating to puttable instruments and obligations 2008 Y 1/1/2009 arising on liquidation ED/2009/9 Classification of rights issues August 2009 IAS 33 Earnings per share 2003 Y 1/1/2005 ED Simplifying earnings per share- proposed amendments to August 2008 IAS 33 IAS 34 Interim financial reporting Y IAS 36 Impairment of assets 2004 Y BC 31/3/2004 IAS 37 Provisions, contingent liabilities and contingent assets Y ED IAS 37 Non-financial liabilities June 2005 IAS 38 Intangible assets 2004 Y BC 31/3/2004 IBR 5

6 Current standards and interpretations IAS 39 Financial instruments: Recognition and measurement 2003 Y, except 1/1/2005 for carve out Amendment for macro hedging 2004 Y 1/1/2005 Amendment for day 1 gain/loss transition 2004 Y 1/1/2005 Amendment for hedges of forecast intragroup transactions 2004 Y 1/1/2006 Amendment for fair value option 2005 Y 1/1/2006 Amendment for financial guarantee contracts 2005 Y 1/1/2006 Amendment to IAS 39 - Eligible hedged Items 2008 Y 1/7/2009 Amendment to IAS 39 and IFRS 7 Reclassification of financial 2008 Y 1/7/2008 assets Reclassification of financial assets: Effective date and transition 2008 Y 1/7/2008 Embedded derivatives-amendments to IFRIC 9 and IAS /7/2008 ED/2009/3 Derecognition March 2009 ED/2009/7 Financial Instruments: Classification and July 2009 Measurement IAS 40 Investment property 2003 Y 1/1/2005 IAS 41 Agriculture Y Other Issued Effective Framework for the preparation and presentation of international financial reporting standards ED Exposure draft of an improved conceptual framework for May 2008 financial reporting Chapter 1: The objective of financial reporting Chapter 2: Qualitative characteristics and constraints of decision-useful financial reporting information IFRS for SME s July 2009 Annual improvements Y Mostly 1/1/2009 Annual improvements ED/2009/5 Fair value meansurement May 2009 ED/2009/6 Management Commentary June 2009 ED/2009/11 Annual improvements August 2009 IBR 6

7 Current standards and interpretations Interpretations Endorsement Effective IFRIC 1 Changes in existing decommissioning, restoration and similar liabilities Y 1/1/2004 IFRIC 2 Members shares in co operative entities and similar instruments Y 1/1/2005 IFRIC 3 Emission rights Withdrawn in June 2005 IFRIC 4 Determining whether an arrangement contains a lease Y 1/1/2006 IFRIC 5 Rights to interests arising from decommissioning, restoration and Y 1/1/2006 environmental rehabilitation funds IFRIC 6 Liabilities arising from participating in a specific market Waste Y 1/12/2005 electrical and electronic equipment IFRIC 7 Applying the restatement approach under IAS 29 Y 1/3/2006 IFRIC 8 Scope of IFRS 2 Y 1/5/2006 Amendments to IFRS 2 - Group cash-settled share-based payment 1/1/2010 transactions Incorporation of IFRIC 8 and IFRIC 11 IFRIC 9 Reassessment of embedded derivatives Y 1/6/2006 Embedded derivatives-amendments to IFRIC 9 and IAS 39 1/7/2008 ED/2009/1 Post-implementation revisions to IFRIC interpretations (Proposed amendments to IFRIC 9 and IFRIC 16 IFRIC 10 Interim financial reporting and impairment Y 1/11/2006 IFRIC 11 IFRS 2 Group and treasury share transactions Y 1/3/2007 Amendments to IFRS 2 - Group cash-settled share-based payment 1/1/2010 transactions Incorporation of IFRIC 8 and IFRIC 11 IFRIC 12 Service concession arrangements Y IASB:1/1/2008 EU:29/3/2009 IFRIC 13 Customer loyalty programmes Y 1/7/2008 IFRIC 14 IAS 19 - The limit on a defined benefit assets, minimum funding Y 1/1/2008 requirements and their interaction ED/2009/4 Prepayments of a minimum funding requirement (proposed amendments to IFRIC 14) IFRIC 15 Agreements for the construction of real estate Y 1/1/2009 IFRIC 16 Hedges of a net investment in a foreign operation 1/10/2008 ED/2009/1 Post-implementation Revisions to IFRIC Interpretations (Proposed amendments to IFRIC 9 and IFRIC 16 IFRIC 17 Distributions of non-cash assets to owners 1/7/2009 IFRIC 18 Transfer of assets from customers 1/7/2009 IFRIC D25 Extinguishing financial liabilities with equity instruments IBR 7

8 Current standards and interpretations Interpretations SIC-7 Introduction of the euro SIC-10 Government assistance No specific relation to operating activities SIC-12 Consolidation Special purpose entities SIC-13 Jointly controlled entities Non-monetary contributions by venturers SIC-15 Operating leases Incentives SIC-21 Income taxes Recovery of revalued non-depreciable assets SIC-25 Income taxes Changes in the tax status of an entity or its shareholders SIC-27 Evaluating the substance of transactions involving the legal form of a lease SIC-29 Service concession arrangements: Disclosures SIC-31 Revenue Barter transactions involving advertising services SIC-32 Intangible assets Web site costs Endorsement Y Y Y Y Y Y Y Y Y Y Y Effective Discussion papers Published Management commentary October 2005 Preliminary views on insurance contracts May 2007 Financial instruments with characteristics of equity February 2008 Preliminary views on amendments to IAS 19 Employee benefits March 2008 Preliminary views on an improved conceptual framework for financial reporting: May 2008 Reporting entity Reducing complexity in reporting financial instruments March 2008 Financial statement presentation October 2008 Preliminary views on revenue recognition in contracts with customers December 2008 DP/2009/1 Leases: Preliminary views March 2009 DP/2009/2 Credit risk in liability measurement June 2009 IBR 8

9 IAS 1 Presentation of financial statements IAS 1 PRESENTATION OF FINANCIAL STATEMENTS PREPARATION OF FINANCIAL STATEMENTS An extract of the general trial balance of Beechworth Ltd, a manufacturing company, for the year ended 30 June 20X7 is detailed below: Dr (CU) Cr (CU) Sales of goods Revaluation increment on available-for-sale investments Tax on investment revaluation increment Revaluation increment on land Tax on land revaluation increment Interest Cost of goods sold Distribution expenses Sales and marketing expenses Administration expenses Interest Other borrowing expenses Income tax expense Retained earnings, 30 June 20X Dividends paid during period ending 30 June 20X Land Available for sale investments Cash Land revaluation reserve, 30 June 20X Investment revaluation reserve, 30 June 20X Share capital, 30 June 20X Dividends reinvested Shares issued Prepare the statement of total comprehensive income and the statement of changes in equity of Beechworth Ltd for the year ended 30 June 20X7 in accordance with the requirements of IAS 1 (the new version), using statement captions that a listed company is likely to use. IBR 9

10 IAS 1 Presentation of financial statements COMPREHENSIVE CASE Below you find the consolidated balance sheet, the income statement, the consolidated statement of recognized income and expenses, the cash flow statement and an extract of the notes of the company EGAS. Assume that for all the other notes EGAS disclosed relevant and material information in accordance with IFRS the amounts presented are correct the tax rate of EGAS is 30% EGAS applies the new version of IAS 1. Additional information: During 20X6 EGAS has classified, in accordance with IFRS 5, an operation as discontinued. The property, plant and equipment related to this operation (5.1 mcu) is classified as non-current assets held for sale in accordance with IFRS 5. 3 mcu liabilities are directly associated with these non-current assets. This discontinued operation was loss-making for 1.1 mcu during 20X6. At the end of 20X6 EGAS had following assets o Investment property: 18.2 mcu o Goodwill: mcu o Inventories: 5.6 mcu o Property: 86.4 mcu o Cash and cash equivalents: 82.0 mcu o Other intangible assets: mcu o Plant: 20.1 mcu o Equipment: 9.1 mcu o Trade and other receivables: mcu o Deferred tax assets: 26.3 During 20X6 EGAS has the following expenses o Distribution expenses: mcu o Marketing expenses: mcu o Administration expenses: mcu o Finance expenses: 18.1 mcu o Cost of sales: 80.4 mcu During 20X6 EGAS has the following income o Revenue: mcu o Finance income: 3.5 mcu During 20X6 EGAS also recognized a net loss on property revaluation of 33mCU. This amount includes the deferred tax effect and is recognized directly in equity in accordance with IAS 16. Under the employee option scheme ordinary shares were issued. This increased the share capital with 0.1 mcu. The share premium was 11.8 mcu. Due to a purchase of minority interests, this line item decreased with 0.2 mcu. Final and interim dividend of the year amounts to 44.8 mcu. The statements contain mistakes with respect to the presentation and disclosure requirements of the new IAS 1. Your challenge is to find them. IBR 10

11 IAS 1 Presentation of financial statements Consolidated Balance Sheet As at 31 December 20X6 Non-current assets 20X6 20X5 Note CUm CUm Goodwill Other intangible assets Other non-current assets Current assets Inventories Deferred tax assets Trade and other receivables Cash and cash equivalents TOTAL ASSETS Current liabilities Trade and other payables Current tax liabilities Financial liabilities Borrowings Deferred consideration Deferred income Non-current liabilities Financial liabilities Borrowings Retirement benefit obligations Deferred tax liabilities Liabilities directly associated with non-current assets classified as held for sale 3 0 Minority interest TOTAL LIABILITES NET ASSETS IBR 11

12 IAS 1 Presentation of financial statements Equity Share capital Share premium account Other reserves Retained earnings TOTAL EQUITY Consolidated Income Statement For the year ended 31 December 20X6 Continuing operations Revenue Cost of sales (80.4) (60.7) Gross profit Selling and administrative expenses (619.4) (499.6) Net finance expenses (14.6) (5.7) Profit before taxation Taxation (67.5) (61.2) Profit for the year from continuing operations X6 CUm 20X5 Cum Discontinued operations (Loss)/Profit for the year from discontinued operations (1.1) 0 Profit for the year Attributable to: Equity shareholders Minority interest Profit for the year Consolidated Statement of Recognized Income and Expense For the year ended 31 December 20X6 20X6 CUm Profit for the year Revaluation of property (30.8) Net (losses)/gains not recognised in income statement (30.8) Total recognized income for the year Attributable to: Equity shareholders Minority interests 0.1 Total recognized income for the year IBR 12

13 IAS 1 Presentation of financial statements Cash Flow Statement For the year ended 31 December 20X6 Cash flows from operating activities 20X6 20X5 Note CUm CUm Cash generated from continuing operations Interest received Interest paid (17.5) (8.1) Tax paid (60.3) (57.3) Net cash from operating activities Cash flows from other activities Acquisitions of subsidiaries (net of cash acquired) (617.5) (101.0) Disposal of subsidiaries Purchase of intangible assets (3.2) (6.3) Purchase of property. plant and equipment (23.8) (14.4) Proceeds from sale of property. plant and equipment Development expenditure (0.1) (0.7) Net proceeds from issue of ordinary share capital Purchase of treasury shares (13.3) 0 Finance lease principal payments (0.3) 0.9 Issue costs on loans (2.2) 0 Repayment of borrowings (631.7) (209.4) New borrowings Dividends paid to shareholders (39.1) (33.9) Net cash generated/(used) in other activities (177.7) (183.6) Net increase/(decrease) in cash and cash equivalents (before exchange rate changes) 15.1 (5.2) Effects of exchange rate changes (2.2) 0 Net increase/(decrease) in cash and cash equivalents 12.9 (5.2) Cash and cash equivalents at 1 January Cash an cash equivalents at 31 December IBR 13

14 IAS 1 Presentation of financial statements Note 27: Related party transactions Associates Year ended 31/12/X6 mcu Year ended 31/12/X6 Sales to associates Purchases from associates Amounts owed to associates Associates: AGAS A wholly owned subsidiary (BGAS) in the Group has a 12.4 % investment in AGAS. Areas of opportunity for cooperation have been identified. and work continues to pursue and implement these. Sales and purchases between related parties are made at normal market prices and outstanding balances are unsecured. Subsidiaries: EGAS has 3 wholly owned subsidiaries: BGAS. CGAS and DGAS. Transactions with subsidiaries are carried out on an arm s length basis. Outstanding balances that relate to trading balances are placed on intercompany accounts with no specified credit period. Long-term loans owed to and from the Company by subsidiary undertakings bear market rates of interest in accordance with the intercompany loan agreements. Directors and officers loans and transactions No loans or credit transactions were outstanding with directors or officers at the end of the year or arose during the year. The Group hasn t provided or benefited from any guarantees for any related party receivables or payables. During the year ended December X6 the Group has not made any provision for doubtful debts relating to amounts owed by related parties and there have been no other related party transactions. mcu IBR 14

15 IAS 32/IAS1 Puttable instruments and obligations arising on liquidation AMENDMENTS TO IAS 32 AND IAS 1 PUTTABLE FINANCIAL INSTRUMENTS AND OBLIGATIONS ARISING ON LIQUIDATION Determine whether the following instruments should be classified as a financial liability, an equity instrument or as a compound instrument under the existing IAS 32 and under the amended IAS 32 (Special edition iasplus, February 2008). Issued financial instrument Share puttable throughout its life at fair value, that is also the most subordinate, does not contain any other obligation, with discretionary dividends based on profits of the issuer Share puttable at fair value, that is not the most subordinate Share puttable at fair value only on liquidation that is also the most subordinate, but contains a fixed non-discretionary dividend. Share puttable at fair value only on liquidation that is also the most subordinate, but contains a fixed discretionary dividend and does not contain any other obligation. Any of the instruments described above issued by a subsidiary held by non-controlling parties, in the consolidated financial statements. Classification under existing IAS 32 Classification under amended IAS 32 IBR 15

16 IFRS 8 Operating Segments IFRS 8 OPERATING SEGMENTS DESCRIPTIVE INFORMATION ABOUT AN ENTITY S REPORTABLE SEGMENTS (IFRS 8. IG2) a. Description of the types of products and service from which each reportable segment derives its revenues Diversified Company has five reportable segments: car parts, motor vessels, software, electronics and finance. The car parts segment produces replacement parts for sale to car parts retailers. The motor vessels segment produces small motor vessels to serve the offshore oil industry and similar businesses. The software segment produces application software for sale to computer manufacturers and retailers. The electronics segment produces integrated circuits and related products for sale to computer manufacturers. The finance segment is responsible for portions of the company s financial operations including financing customer purchases of products from other segments and property lending operations. b. Measurement of operating segment profit or loss, assets and liabilities The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies except that pension expense for each operating segment is recognised and measured on the basis of cash payments to the pension plan. Diversified Company evaluates performance on the basis of profit or loss from operations before tax expense not including non-recurring gains and losses and foreign exchange gains and losses. Diversified Company accounts for intersegment sales and transfers as if the sales or transfers were to third parties, ie at current market prices. c. Factors that management used to identify the entity s reportable segments Diversified Company s reportable segments are strategic business units that offer different products and services. They are managed separately because each business requires different technology and marketing strategies. Most of the businesses were acquired as individual units, and the management at the time of the acquisition was retained. IBR 16

17 IFRS 8 Operating Segments INFORMATION ABOUT REPORTABLE SEGMENT PROFIT OR LOSS, ASSETS AND LIABILITIES (IFRS 8. IG3) Diversified Company does not allocate tax expense (tax income) or non-recurring gains and losses to reportable segments. In addition, not all reportable segments have material non-cash items other than depreciation and amortisation in profit or loss. The amounts in this illustration, denominated as currency units (CU), are assumed to be the amounts in reports used by the chief operating decision maker. Car parts Motor vessels Software Electronics Finance All other Totals CU CU CU CU CU CU Revenues from external customers (a) Intersegment revenues Interest revenue Interest expense Net interest revenue(b) Depreciation and amortisation Reportable segment profit Other material non-cash items: Impairment of assets Reportable segment assets Expenditures for reportable segment noncurrent assets Reportable segment liabilities (a) Revenues from segments below the quantitative thresholds are attributable to four operating segments of Diversified Company. Those segments include a small property business, an electronics equipment rental business, a software consulting practice and a warehouse leasing operation. None of those segments has ever met any of the quantitative thresholds for determining reportable segments. (b) The finance segment derives a majority of its revenue from interest. Management primarily relies on net interest revenue, not the gross revenue and expense amounts, in managing that segment. Therefore only the net amount is disclosed. IBR 17

18 IFRS 8 Operating Segments RECONCILIATIONS OF REPORTABLE SEGMENT REVENUES, PROFIT OR LOSS, ASSETS AND LIABILITIES (IFRS 8. IG4) Revenues CU Total revenues for reportable segments Other revenues Elimination of intersegment revenues (4 500) Entity s revenues Profit or loss CU Total profit or loss for reportable segments Other profit or loss 100 Elimination of intersegment profits (500) Unallocated amounts: Litigation settlement received 500 Other corporate expenses (750) Adjustment to pension expense in consolidation (250) Income before income tax expense Assets CU Total assets for reportable segments Other assets Elimination of receivable from corporate headquarters (1 000) Other unallocated amounts Entity s assets Liabilities CU Total liabilities for reportable segments Unallocated defined benefit pension liabilities Entity s liabilities Other material items Reportable segment totals CU Adjustments CU Entity totals CU Interest revenue Interest expense (50) Net interest revenue (finance segment only) Expenditures for assets Depreciation and amortisation Impairment of assets The reconciling item to adjust expenditures for assets is the amount incurred for the corporate headquarters building, which is not included in segment information. None of the other adjustments are material. IBR 18

19 IFRS 8 Operating Segments GEOGRAPHICAL INFORMATION (IFRS 8 IG5) Because Diversified Company s reportable segments are based on differences in products and services, no additional disclosures of revenue information about products and services are required. Geographical information Revenues Non-current assets CU CU United States Canada China Japan Other countries Total INFORMATION ABOUT MAJOR CUSTOMERS (IFRS 8 IG6) Revenues from one customer of Diversified Company s software and electronics segments represent approximately CU5 000 of the Company s total revenues IBR 19

20 IAS 23 Borrowing costs IAS 23 BORROWING COSTS 1. Coupono plc has incurred CU in capital expenditure during the year, constructing a bottling plant for their clear beer division. At year-end, CU related to the construction of the plant is included in creditors. The plant is considered to be a qualifying asset under IAS 23 - Borrowing Costs. Coupono plc has the following borrowings outstanding: Bank overdraft: CU at 16% Long-term loan: CU at 5,1% (nominal interest rate) Debentures: CU at 6,8% Ancillary costs of 5000 CU have been incurred in connection with the arrangement of the long-term loan, which has the following characteristics: Issuing date: 1 January of year 1 Maturity date: 3 years Repayment schedule: CU at maturity date a. Determine the interest rate on the long-term loan using the effective interest rate method. b. Account for the long-term loan. c. Calculate the amount of borrowing costs to be capitalized, assuming that Coupono plc has a 31 December year-end and that the expenditures took place on the following dates: 1 February CU 1 July CU 1 November CU d. Calculate the amount of borrowing costs to be capitalized, assuming that the debentures were not in existence. 2. On 1 July 20X6, entity A entered into a C2.2 million contract for the construction of a building. The building was completed at the end of June 20X7. During the period, the following payments were made to the contractor: Payment date Amount (C 000) 1 July 20X September 20X March 20X7 1, June 20X7 200 Total 2,200 Entity A s borrowings as at its year end of 30 June 20X7 were as follows: a. 10% four-year note with simple interest payable annually, which relates specifically to the project; debt outstanding at 30 June 20X7 amounted to C700,000. Interest of C65,000 was incurred on these borrowings during the year, and interest income of C20,000 was earned on these funds while they were held in anticipation of payments. b. 12.5% 10-year note with simple interest payable annually; debt outstanding at 1 July 20X6 amounted to C1,000,000 and remained unchanged during the year. c. 10% 10-year note with simple interest payable annually: debt outstanding at 1 July 20X6 amounted to C1,500,000 and remained unchanged during the year. Calculate the amount of borrowing costs to be capitalized (PWC, November 2008). IBR 20

21 IAS 23 Borrowing costs 3. Entity A is constructing a building and expects it to take 18 months to complete. To finance the construction, on 1 January 20X8, the entity issues an eighteen month, variable-rate note payable, due on 30 June 20X9 at a floating rate of interest plus a margin of 1%. At that date the market rate of the interest is 8%. Interest payment dates and interest rate reset dates occur on 1 January and 1 July until maturity. The principal is due at maturity. Also on 1 January 20X8, the entity enters into an eighteen month interest rate swap with a notional amount of from which it will receive periodic payments at the floating rate and make periodic payments at a fixed rate of 9%, with settlement and rate reset dates every 30 June and 31 December. During the 18 month period, floating interest rates change as follows: Floating rate on principal Cash payments Rate paid by Entity A Period to 30 June 20X8 8% 9% Period to 31 December 20X8 8.5% 9.5% Period to 30 June 20X9 9.75% 10.75% The fair value of the swap is zero at inception. At 31 December 20X8 the swap has a fair value of , reflecting the fact that it is now in the money. The fair value of the swap then declines to zero at 30 June 20X9. Give the accounting entries if a. The interest rate swap meets the conditions for, and entity A applies, hedge accounting. i. On 1 January 20X8 ii. On 30 June 20X8 iii. On 31 December 20X8 iv. On 30 June 20X9 b. Entity A does not apply hedge accounting i. On 1 January 20X8 ii. On 30 June 20X8 iii. On 31 December 20X8 iv. On 30 June 20X9 c. Entity A does not apply hedge accounting alternative method i. On 1 January 20X8 ii. On 30 June 20X8 iii. On 31 December 20X8 iv. On 30 June 20X9 IBR 21

22 IFRS 2 Non-vesting conditions and cancellations IFRS 2 NON-VESTING CONDITIONS AND CANCELLATIONS 1. Determine whether the condition is a vesting or a non-vesting condition. For vesting conditions, determine whether it is a service condition or a performance condition (market or non-market). For nonvesting conditions determine which party can choose to meet the condition. Enile NV grants its employees the opportunity to participate in a plan in which the employees obtain share options if they agree to save 25% of their monthly salary for a three year period Roland SA grants 1,000 share options to 50 employees. The share options will vest at the end of year three, provided the employees remain in service until then. Employees of Wolfgang GmbH receive five shares of the entity if the Standard & Poor Commodity Index has increased by 0.05% Karm Plc granted 10,000 share options to each of 10 senior executives. The share options will vest and become exercisable immediately, if and when the entity s share price increases from CU50 to CU70 and the executives are still working for Karm Plc at that moment Kinda Ltd will give the employees of the accounting department 10 share options if the IPO on which they currently work is successful and they are still working for Kinda at the time of the IPO Haraf NV grants its key management share options that vest if the share price growth (as a percentage) of Haraf exceeds the average share price growth of Haraf s 10 most significant competitors during fiscal 2008, provided the individuals are still employed on the last day of the year Casmo SA grants its key management share options that vest if the share price growth (as a percentage) of Casmo ranks in the top quartile of the largest 100 companies in its market for fiscal 2008, provided the individuals are still employed on the last day of the year. 2. An entity grants an employee the opportunity to participate in a plan in which the employee obtains share options if he agrees to save 25 % of his monthly salary of CU400 for a three-year period. The monthly payments are made by deduction from the employee s salary. The employee may use the accumulated savings to exercise his options at the end of three years, or take a refund of his contributions at any point during the three-year period. The estimated annual expense for the share-based payment arrangement is CU120. After 18 months, the employee stops paying contributions to the plan and takes a refund of contributions paid to date of CU How should the entity account for this share-based transaction? IBR 22

23 Service concession arrangements IFRIC 12 SERVICE CONCESSION ARRANGEMENTS SCOPE Decide for the following scenarios whether IFRIC 12 should be applied or not 1. A construction company has an agreement with the French government to construct a tunnel through a mountain. The tunnel is constructed on land of the French government, which means that the French government is the legal owner of the tunnel. During a period of 15 years the company will collect toll from drivers using the tunnel. The fare is limited to 5 by the French government. During the 15 year-period the tunnel must be maintained by the construction company. After this period the government will take over the maintenance. 2. A power company builds a power plant. It contracts a power purchase agreement with the local government. Through the agreement it is obliged to generate energy for the adjacent city. The government will pay a fixed capacity payment to the company, if the plant is available, regardless of it being dispatched. At the end of the 15-year agreement, the power company can manage its plant at its sole discretion. The power plant has a useful life of 30 years. 3. A power company builds a power plant. It contracts a power purchase agreement with the local government. Through the agreement it is obliged to generate energy for the adjacent city. The government will pay a fixed capacity payment to the company, if the plant is available, regardless of it being dispatched. At the end of the 25-year agreement, the power company can manage its plant at its sole discretion. The power plant has a useful life of 30 years. 4. A power company builds a power plant. It contracts a power purchase agreement with the local government. Through the agreement it is obliged to generate energy for the adjacent city. The users will pay a fixed price per MW acquired to the company. At the end of the 25-year agreement, the power company can manage its plant at its sole discretion. The power plant has a useful life of 30 years. 5. A power company builds a power plant. It contracts a power purchase agreement with the local government. Through the agreement it is obliged to generate energy for the adjacent city. The users will pay a fixed price per MW acquired to the company. At the end of the 15-year agreement, the power company can manage its plant at its sole discretion. The power plant has a useful life of 30 years. IBR 23

24 IFRS 12 Service concession arrangements FINANCIAL ASSET/INTANGIBLE ASSET Decide for the following scenarios whether a financial asset or an intangible asset should be recognized 1. A waste incineration company has an agreement with the Belgian government to construct and operate a waste incineration oven. The company can use this oven to treat any waste collected by the Belgian municipalities for a period of 20 years. The price paid by the municipalities for waste incineration is fixed by the government and is reviewed every year. After 20 years, the oven will become the property of the Belgian government. 2. A privately owned hospital that has an arrangement with the Swiss government to construct, maintain, and operate a division for AIDS patients for 20 years. Under the arrangement, the hospital is paid by the patients for care but if patients cannot afford to pay for the care the Swiss government reimburses the hospital. The payments should at least cover the cost of the infrastructure, the maintenance of the infrastructure and the variable costs of the care. In addition, if there are not sufficient payments by the patients to cover the fixed cost of the hospital, the government will compensate for those costs. At the end of the concession period the infrastructure either reverts to the government or the concession is renewed. 3. A construction company has an agreement with grantor Spain to construct a road and maintain and operate the road for twelve years. Under the contract, the company will be paid an annual amount, with the total to be paid over the arrangement being equal to 70% of the total costs to be incurred. The company will be able to charge users a toll, which is capped by the grantor. IBR 24

25 IFRS 12 Service concession arrangements ACCOUNTING FOR SERVICE CONCESSION ARRANGEMENTS Arrangement terms: Cost of construction: 100 Profit on construction: 10 Cash flows over life: 200 A. Financial Asset Model Assume that the interest revenue to be recognized over the life of the contract (based on the effective interest rate method in accordance with IAS 39 Financial Instruments: Recognition and Measurement) is 10. During construction: Dr Financial asset 110 Cr Revenue 110 Dr Cost of construction 100 Cr Cash 100 In accordance with IAS 39, the entity recognizes a financial asset at the fair value of the construction and recognizes the cost of the construction. Revenue of 110, costs of 100 and a profit of 10 is thus recognized during the construction. During operational phase: Dr Financial asset 10 Cr Finance revenue 10 Dr Financial asset 80 Cr Revenue 80 Dr Cash 200 Cr Financial asset 200 Total revenue over the life of the contract: 200 Total cash flows over the life of the contract: 200 Over the life of the construction period the financial asset is measured using the effective interest method. In this example, the finance revenue recognized under this method is 10. The excess of the total cash flows over the life of the contract (200) over the carrying amount of the financial asset (110+10=120), is recognized as revenue (80). When cash is received the financial asset is credited. Total Revenue of 90 is therefore recognized during the operational phase. (NB: This is a simplified example. Concession arrangements will normally also incorporate significant running costs during the life of the concession). IBR 25

26 IFRS 12 Service concession arrangements B. Intangible Asset Model During construction: Dr Construction costs 100 Cr Cash 100 Dr Intangible asset 110 Cr Revenue 110 During the construction, the cost of the construction services provided is recognized as work in process and then a subsequent exchange transaction of construction WIP for an intangible asset is recognized at the fair value of the constructions services provided. This gives revenue of 110, costs of 100 and a profit of 10 during the construction. During operational phase: Dr Amortization expense 110 Cr Intangible asset 110 Dr Cash 200 Cr Revenue 200 Total revenue over the life of the contract: 310 Total cash flows ovr the life of the contract: 200 During the life of the concession the intangible asset is amortized and the cash flows are recognized as revenue. This means that during the operational phase of the service concession arrangement 110 of concession costs are recognized and 200 of revenue is recognized. This leads to a profit of 90 during the operational phase of the contract. C. Bifurcated Model Additional information: Cash flows guaranteed by the government are 60, which is 54% of the fair value of the construction. Assume that the interest revenue that should be recognized over the life of the contract (based on the effective interest rate in accordance with IAS 39 Financial Instruments: Recognition and Measurement) is 6. During construction: Dr Receivable 60 Cr Revenue 60 A financial asset of 60, equal to the cash flows guaranteed by the government, is recognized as construction services are provided. Dr Cost (exp) 54 Dr Construction WIP 46 Cr Cash 100 IBR 26

27 IFRS 12 Service concession arrangements Since the government guarantees 54% of the fair value of the construction, a cost of 54 related to the financial asset is recognized during the course of construction in the income statement. The remaining part of the construction costs (100-54=46) are considered to be costs that are related to acquisition of the intangible asset. Dr Intangible asset 50 Cr Revenue 50 An intangible asset is recognized for the difference between the fair value of the construction (110) and the value of the financial asset (60). Dr Cost of sales 46 Cr WIP 46 The construction cost related to the construction of the intangible asset is recognized as cost of sales. During the construction the entity recognizes revenue of 110, costs of 100 and profit of 10. During operational phase: Dr Financial asset 6 Cr Finance revenue 6 The financial asset is measured in accordance with the effective interest method. Dr Amortization expense 50 Cr Intangible asset 50 The intangible asset is amortized. Dr Cash 200 Cr Revenue 134 Cr Financial asset 66 The cash received is split between revenue and the reduction of the receivable (60+6). During the operational phase of the contract the entity recognizes revenue of 140, costs of 50 and profit of 90. Total revenue over the life of the contract: 250 Total cash flows over the life of the contract: 200 IBR 27

28 Hedges of a net investment in a foreign operation IFRIC 16 HEDGES OF A NET INVESTMENT IN A FOREIGN OPERATION Fact pattern (based on application guidance of IFRIC 16): Padre is the ultimate parent entity of a group of 4 entities: Padre NV, Andre Ltd (functional currency Japanese yen (JPY)), Bea Plc. (functional currency pounds sterling (GBP)) and Carmen Ltd (functional currency US dollars (USD)). Andre and Bea are direct subsidiaries of Padre. Carmen is a subsidiary of Bea. Padre presents its consolidated financial statements in its functional currency of euro (EUR). Each of its subsidiaries is wholly owned. Parent s investment in Andre is JPY and its investment in Bea is 500 million GBP. The investment of Bea in Carmen represents 300 million USD. Parent s 500 million GBP net investment in subsidiary Bea includes the 159 million GPB net investment in subsidiary Carmen. In other words, Bea s net assets other than its investment in Carmen are 341 million GBP. Questions 1. Which risks can be designated for hedge accounting? 2. Assume that Padre wishes to hedge the foreign exchange risk from its net investment in Carmen and that Andre has an external borrowing of 300 million USD. The net assets of Andre at the start of the reporting period of JPY include the proceeds of the external borrowing of 300 million USD. a. Give the treatment in absence of hedge accounting b. What would change if the entity applies hedge accounting for the EUR/USD risk c. What would change if the entity applies hedge accounting for the USD/GBP risk 3. When C is disposed of, which amounts will be reclassified to profit or loss in Padre s consolidated financial statements from its foreign currency translation reserve (see also question 5)? 4. Parent wishes to hedge the foreign exchange risks in relation to its net investment in Bea as well as that in relation to subsidiary C. a. Assume that Padre holds suitable hedging instruments denominated in USD and GBP that it could designate as hedges of its net investments in Bea and Carmen. What are the designations Padre could make? b. Assume that Bea hold 300 million USD external debt, the proceeds of which were transferred to Parent by an inter-company loan denominated in GPB. What designations could be made by both Padre and Bea? Remark: Because both its assets and liabilities increased by 159 million GBP, Bea s net assets are unchanged. 5. Assume that Padre used a USD borrowing in Andre to hedge the EUR/USD risk of the net investment in Carmen in Padre s consolidated financial statements. Assume the hedge was fully effective and the full USD/EUR accumulated change in the value of the hedging instrument before disposal of Carmen is 24 million EUR (gain). This is matched exactly by the fall in value of the net investment in Carmen, when measured against the functional currency of Padre (Euro). The accumulated exchange gain on the net investment in Bea when measured against the functional currency of Padre (Euro) is 62 million EUR. If Padre uses the step-bystep method of consolidation those amounts are 49 million EUR gain and 11 million EUR loss respectively. a. What is the treatment if the direct method of consolidation is used? b. What would change if Padre uses the step-by-step method? IBR 28

29 Hedges of a net investment in a foreign operation IBR 29

30 Hedges of a net investment in a foreign operation IBR 30

31 IFRS 3 - Business combinations IFRS 3 - BUSINESS COMBINATIONS IDENTIFYING THE ACQUIRER Factor Consideration primarily cash, other assets or incurring liabilities Consideration primarily in equity interests Relative size More than two combining entities New entity formed which issues equity interests New entity formed which transfers cash, other assets or incurs liabilities Relative voting rights in the combined entity after the combination No majority interest in the combined entity, but single large minority interest Composition of the governing body of the combined entity Terms of the exchange of equity interests Acquirer is GOODWILL 1. Consider the following information (ACCA, pg 2308) At 31 December 20X5 Parent Subsidiary Cu CU Non-current assets Tangibles Cost of investment in Subsidiary Net current assets Issued capital Retained earnings Parent bought 100% of Subsidiary on 31 December 20X5 Subsidiary's reserves are CU 100 at the date of acquisition. The fair values of the identifiable assets approximate their net carrying amounts. Calculate the goodwill and prepare the consolidated balance sheet at 31 December 20X5 IBR 31

32 IFRS 3 - Business combinations 2. Mocas purchased 75% of the capital of Haraf for CU on 1 July 20X0. at this date the equity of Haraf was: CU Share capital General reserve Retained earnings At this date Haraf had not recorded any goodwill, and all identifiable assets and liabilities were recorded at fair value except for the following cases: Carrying amount Fair value CU CU Inventory Plant (cost CU ) Land The tax rate is 30%. Calculate the goodwill and determine the journal entries related to the business combination a. If the non-controlling interest is measured at its fair value of b. If the non-controlling interest is measured at its proportionate share in the net assets of Haraf MEASUREMENT PERIOD 1. Maltis acquired the net assets of BodySculpt on 31 December 20X5. The cost of acquisition was CU4.2 million and goodwill on acquisition was CU0.6 million. While preparing the financial statements for the combined Maltis at the end of 20X6 the following items were identified: During 20X6 Maltis discovered that BodySculpt owned land that had been acquired many years ago but which had not been separately identified and recorded at acquisition. Maltis estimated that the fair value of the property as at the date of acquisition was CU BodySculpt holds a significant investment in Pool Side. Due to a change in economic conditions affecting Pool Side s industry in the latter half of 20X6, the recoverable amount of the investment was estimated to have fallen below its carrying amount by CU How should Maltis treat these two items in its consolidated financial statements at 31 December 20X6? 2. AC acquires TC on 30 September 30 20X7. AC seeks an independent appraisal for an item of property, plant, and equipment acquired in the combination, and the appraisal was not completed by the time AC issued its financial statements for the year ending 31 December 20X7. In its 20X7 annual financial statements, AC recognized a provisional fair value for the asset of CU At the acquisition date, the item of property, plant, and equipment had a remaining useful life of five years. Five months after the acquisition date, AC received the independent appraisal, which estimated the asset s acquisition-date fair value as CU How should AC report this transaction? IBR 32

33 IFRS 3 - Business combinations CONTINGENT CONSIDERATION Entity A acquires 85% of XYZ on 1 July 20X5 on the following terms Issuance of shares of Entity A equity shares to XYZ shareholders. At the date of exchange, which is also the acquisition date, the market value of Entity A s shares is 250 per share. Entity A s share price did not fluctuate unduly before or after the issuance. Par value of the stock is 80 per share. Issuance costs related to the stock total Entity A also issues notes payable to the XYZ shareholders on 1 July 20X5. XYZ shareholders will receive a total of CU one year from the date of acquisition. Entity A s incremental borrowing rate is 12 %. The present value factor for 12% is The terms also require that at the end of six months after the acquisition, Entity A will pay in cash to each XYZ shareholder an additional amount in relation to the number of shares of Entity A stock that they received if the following conditions are met: o o If XYZ s net profit is between 20% and 30% higher than the net profit earned during the six months prior to acquisition, the shareholder is entitled to a cash payment of 50 for each share received in Entity A. If XYZ s net profit is more than 30% higher than the net profit earned during the six months prior to acquisition, the shareholder is entitled to a cash payment of 70 for each share received in Entity A. At the date of acquisition, Entity A estimated that the probability of having an increase in net profit of more than 20% is 60%, and the probability for an increase of more than 30% is 20%. Entity A also incurred the following costs: CU Legal services for review and preparation of purchase documents Accounting services to assist in evaluating and recording the acquisition Registration and business transfer fees to government offices Appraisal services for determination of fair value on certain assets Costs to remove XYZ s old signs and install new signs a. Based on the information shown above, calculate the initial cost of the acquisition that will be recorded on Entity A s accounting records. b. At 31 December 20X5 Entity A established that XYZ s net profit for the six months following acquisition was 32% higher than the net profit earned during the six months previous to the acquisition. Give the appropriate accounting entry. IBR 33