IFRS Technical Update. Véronique Weets

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1 Véronique Weets

2 FACILITATORS Dr. Véronique Weets is a Professor of International Accounting and a faculty member at two Belgian universities. In that role she is responsible a general IFRS course and a Financial Instruments course. At regular occasions she participates in Master Programs of UAMS, Programs of Vlerick and the Solvay Business School. Véronique Weets was also associated with the IFRS Technical desk of Deloitte in Belgium, where she was involved in client work on matters such as the transition to IFRS and the subsequent application of IFRS to listed companies. She was also responsible for client trainings as well as trainings of the professional staff. As from 2006 Véronique Weets created her own company in which she helps clients with the application of IFRS on a daily basis through trainings or consultancy. This means that she actively searches for the practical translation of this principle based framework of accounting in order to provide realistic solutions to the clients. Therefore, facilitation sessions provided by Véronique Weets always have a strong theoretical basis that is translated to practical applications that are relevant to the business environments of the delegates. In addition to this, Véronique Weets is also an author of a long list of technical accounting literature in English, French and Dutch. DISCLAIMER Whilst every effort is made to ensure that the contents of its case studies and other material handed out during or in connection with courses are accurate and up to date, we shall not be under any liability whatsoever for any inaccuracy or misleading information whether arising for negligence or otherwise and in particular we shall not be liable for any consequential damage or expense of any loss of profit or any liability to third parties incurred as a result of reliance on such inaccurate or misleading information. REFERENCES (OTHER THAN THE OFFICIAL PUBLICATIONS OF THE IASB) Deloitte, Business combinations and changes in ownership interest A guide to the revised IFRS 3 and IAS 27, EFRAG, and FEE, Impairment of financial assets The expected loss model, December Mazars, Business combinations and consolidation key points of the new standards in 40 questions and answers, October 2009 Instituur van de Bedrijfsrevisoren

3 OVERVIEW General update Revised framework Accounting for business combinations, group companies and non controlling interests o IFRS 3 Business Combinations (1/7/2009) o IAS 27 Consolidated and Separate Financial statements (1/7/2009) o Annual improvements 2008 that relate to IFRS 3 (revised) (1/7/2009) o ED 9 Joint arrangements (September 2007) o ED 10 Consolidated financial statements (December 2008)) Financial instruments o Amendment IAS 39 Eligible hedged items (1/7/2009) o IFRIC 16 Hedges of a net investment in a foreign operation (EU: 1/7/2009) o ED/2009/1 Proposed amendments to IFRIC 9 and IFRIC 16 o Amendment IAS 32 Classification of rights issues (1/2/2010) o IFRIC 19 Extinguishing financial liabilities with equity instruments (1/7/2010) o IFRS 9 Financial instruments (1/1/2013) o ED 2009/3 Derecognition (March 2009) o ED 2009/12 Financial instruments: Amortised cost and impairment (November 2009) o ED/2010/4 Fair value option for financial liabilities (May 2010) First time adoption of IFRS o IFRS 1 First time adoption of international financial reporting standards (1/7/2009) o IFRS 1 Additional exemptions for first time adopters (1/1/2010) o IFRS 1 Limited exemption from comparative IFRS 7 disclosures for first time adopters (1/1/2010) o ED/2010/10 Removal of fixed dates for first time adopters o ED/2010/12 Severe hyperinflation proposed amendments to IFRS 1 Other new/amended IFRS and IFRIC effective after 1/1/2009 o Amendment IFRS 2 Group cash settled share based payment transactions (1/1/2010) o IFRIC 12 Service concession arrangements (EU:29/03/2009) o IFRIC 17 Distributions of non cash assets to owners (1/7/2009) o IFRIC 18 Transfer of assets from customers (Transfers as of 1/7/2009) o Amendment IAS 24 (1/1/2011) o Amendment IFRIC 14 Prepayments of a minimum funding requirement (1/1/2011) o Annual improvements IFRS for small and medium sized entities Instituur van de Bedrijfsrevisoren

4 Exposure Drafts o ED IAS 37 Non financial liabilities (June 2005) o ED 2010/1 Measurement of liabilities in IAS 37 (January 2010) o ED Simplifying earnings per share (August 2008) o ED IFRS 5 Discontinued operations (September 2008) o ED 2009/2 Income tax (March 2009) o ED 2010/11 Deferred tax: Recovery of underlying assets (September 2010) o ED 2009/5 Fair value measurement (May 2009) o ED 2010/7 Measurement uncertainty analysis disclosure for fair value measurements (June 2010) o ED 2009/6 Management commentary (June 2009) o ED 2009/8 Rate regulated activities (July 2009) o ED 2010/3 Defined benefit plans (April 2010) o ED 2010/5 Presentation of items of OCI (May 2010) o ED 2010/6 Revenue from contracts with clients (June 2010) o ED 2010/8 Insurance contracts (July 2010) o DI 2010/1 Stripping costs in the production phase of a surface mine o ED 2010/9 Leases Practical issues and experience with recent implementations o IFRS 8 Operating segments o IAS 23 Borrowing costs o IAS 28 Separate and consolidated financial statements Instituur van de Bedrijfsrevisoren

5 IFRS Technical Update Véronique Weets Overview General update Revised framework Accounting for business combinations, group companies, noncontrolling interests Financial instruments First time adoption of IFRS Other new/amended IFRS and IFRIC effective as of 1/1/2010 or later IFRS for small and medium sized entities Exposure drafts Practical issues and experience with recent implementations 1

6 General update Overview Current standards and interpretations IASB and IFRIC projects Endorsements in Europe Application of IFRS in Belgium Other developments 2

7 Current standards and interpretations Current standards: 29 IAS and 9 IFRS As from 2008 there is an annual improvements project affecting several standards Current interpretations: 11 SIC and 16 IFRIC As of 1/1/2010, IFRIC 8 and IFRIC 11 are withdrawn because their guidance is incorporated in IFRS Effective dates new or amended IFRSs Amendments IAS 39 and IFRS 7 Reclassifications of financial assets Amendment IAS 39 and IFRIC 9 Embedded derivatives 1/1/2008 1/3/2008 1/7/2008 1/10/2008 IFRIC 12 (IASB) IFRIC 13 IFRIC 16 IFRIC 14 Not adopted by the EU Adopted by the EU 3

8 2009 Effective dates new or amended IFRSs Amendment IFRS1/IAS 27 IFRS 2 Vesting conditions and cancellations IFRS 7 Improvement disclosures IFRS 8 Operating segments IAS 1 Revised IAS 23 Revised IAS 32 Puttable instruments Most amendments due to annual improvements project (May 2008) that do not relate to IFRS 3: IAS 1, IAS 8, IAS 10, IAS 16, IAS 18, IAS 19, IAS 20, IAS 23, IAS 27, IAS 28, IAS 29, IAS 31, IAS 34, IAS 36, IAS 38, IAS 39, IAS 40, IAS 41 IFRS 1 Restructuring IFRS 3 Revised IAS 27 Revised IAS 39 Eligible hedged items Amendments in annual improvements project (May 2008) that relate to IFRS 3: IFRS 1, IFRS 5, IFRS 7: Amendments in annual improvements project (April 2009) that relate to IFRS 3: IFRS 2, IAS 38, IAS 39, IFRIC 9, IFRIC 16 1/1/ /3/ /6/2009 1/07/2009 1/07/2009 IFRIC 15 IFRIC 12 (EU) IFRIC 16 (EU) IFRIC 17 IFRIC 18 Not adopted by the EU Adopted by the EU Effective dates new or amended IFRSs Amendments to IFRS 2 Group cash settled sharebased payment transactions including withdrawal of IFRIC 8 and IFRIC 11 IFRS 1 Additional exemptions for first time adopters Amendments due to annual improvements project (April 2009) that do not relate to IFRS 3: IFRS 2, IFRS 5, IFRS 8, IAS 1, IAS 7, IAS 17, IAS 18, IAS 36, IAS 38, IAS 39, IFRIC 9, IFRIC 16 IFRS 1 Limited exemptions from comparative IFRS 7 Disclosures IAS 24 Amended IFRIC 14 Prepayment of a minimum funding requirement Amendment due to annual improvements project (May 2010): IFRS 1, IFRS 7, IAS 4, IAS 34, IFRIC 13 Amendment IFRS 7: Transfer of financial assets IFRS 9 Financial Instruments 1/1/2010 1/2/2010 1/7/2010 1/1/2011 1/7/2011 1/1/2013 Amendment IAS 32 Classification of rights issues IFRIC 19 Extinguishing financial liabilities with equity instruments Amendments due to annual improvements project (May 2010): IFRS 3 & IAS 27 Not adopted by the EU Adopted by the EU 4

9 Endorsement in Europe All standards are endorsed except for IFRS 9 Financial instruments (issued November 2009) All amendments are endorsed except for Annual improvements (issued May 2010) All interpretations are endorsed Due to slow endorsements effective date in EU can differ from IASB effective date Most recent status: work/regulations_adopting_ias_text_en.htm Application IFRS Belgium S EP A R A T E IFRS not allowed for most companies IFRS mandatory for real estate companies C O NS O L I D AT E D IFRS mandatory for listed companies (European Regulation) and allowed for non-listed companies IFRS mandatory for banks IFRS mandatory for real estate companies IFRS mandatory for insurance companies 5

10 Other developments The SEC allows the use of IFRSs in financial reports filed by foreign private issuers registered with the Commission. Foreign private issuers have a choice between IFRSs and US GAAP for financial years ending after 15 November 2007 Must be IFRS as issued by the IASB Two year exception for foreign private issuers that use the European Commission's 'carve out' for IAS 39 as long as a reconciliation to the IASB's version of IFRSs is provided. proposes to provide US issuers the alternative to use IFRSs. Other developments 6

11 Other developments In the rest of the world more and more countries are permitting/obliging the use of IFRS. IFRSs are used By listed entities in over 110 jurisdictions By unlisted entities in over 80 jurisdictions According to SEC 28% of global market capitalization uses US GAAP 35% of global market capitalization uses IFRS Application of IFRS Rest of the world 7

12 How to keep up to date IASB: IASB Update IASB Insight IASB Observer notes IASB Project summaries IFRIC IFRIC Update EFRAG: Endorsement advices eu/internal en htm Deloitte: Free e learnings 8

13 Revised framework Purpose of the conceptual framework to assist the Board in the development of future IFRSs and in its review of existing IFRSs; to assist the Board in promoting harmonisation of regulations, accounting standardsand procedures relating to the presentation of financial statementsby providing a basis for reducing the number of alternative accounting treatments permitted by IFRSs; to assist national standard setting bodies in developing national standards; to assist preparers of financial statements in applying IFRSs and in dealing with topics that have yet to form the subject of an IFRS; to assist auditors in forming an opinion on whether financial statements comply with IFRSs; to assist users of financial statements in interpreting the information contained in financial statementsprepared in compliance with IFRSs; and to provide those who are interested in the work of the IASB with information about its approach to the formulation of IFRS The Conceptual Framework is not an IFRS. Nothing in the Framework overrides any specific IFRS 9

14 Scope Chapter 1: The objective of financial reporting; Chapter 2: The qualitative characteristics of useful financial information; Chapter 3: The definition, recognition and measurement of the elements from which financial statements are constructed; and Chapter 4: Concepts of capital and capital maintenance. Chapter 1: The objective of general purpose financial reporting 10

15 Objective of financial statements 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 Information to assess the prospects for future net cash inflows Information about resources of the entity, claims against the entity, and how efficiently and effectively management and governing board have discharged their responsibilities Information to estimate the value of the reporting entity Establish concepts that underly estimates, judgements and models that are used to establish financial reports Information about economic resources, claims and changes in resources and claims Information about the nature and amounts of a reporting entity s economic resources and claims, helps users to identify Financial i strengths and weaknesses Liquidity and solvency How future cash flows will be distributed among those with a claim against the reporting entity Information about changes in economic resources and claims, helps users to understand the return that the entity has producedon on itseconomicresources How well management has discharged its responsibilities Understanding uncertainty of future cash flows Predict future returns on economic resources 11

16 Chapter 3: Qualitative characteristics of useful financial information Qualitative characteristics Fundamental QCs Relevance: capable of making a difference in the decisions Materiality Faithful representation Complete Neutral Free from error Enhancing QCs Comparability Verifiability Timeliness Understandability Cost constraint: benefits of reporting particular information should justify the costs in curred to provide and use that information 12

17 ED/2010/2 Conceptual framework for financial reporting: The reporting entity Definition of a reporting entity A reporting entity is a circumscribed area of economic activities whose financial information has the potential to be useful to existing and potential equity investors, lenders and other creditors who cannot directly obtain the information they need in making decisions about providing resources to the entity and in assessing whether the management and the governing board of that entity have made efficient and effective use of the resources provided. 13

18 Definition of a controlling entity An entity controls another entity when it has the power to direct the activities of that other entity to generate benefits for (or limit losses to) itself. If an entity that controls one or more entities prepares financial reports, it should present consolidated financial statements. Definition of a controlling entity A portion of an entity could qualify as a reporting entity if the economic activities of that portion can be distinguished objectively from the rest of the entity and financial information about that portion of the entity has the potential to be useful in making decisions about providing resources to that portion of the entity. 14

19 ED Framework What is next? Phase B: Elements and recognition Phase C: Measurement Phase E: Presentation and disclosure Phase F: Purpose and status Phase G: Not for profit entities Phase H: Remaining issues Accounting for business combinations, group companies, non controlling interests 15

20 Overview IFRS 3 Business combinations IAS 27 Amendment Consolidated and separate financial statements Annual improvements 2008 that relate to IFRS 3 Revised ED 9 Joint arrangements ED 10 Consolidated financial statements IFRS 3 Business combinations 16

21 Overview Background Definitions Basic principles of the acquisition method Measurement period Subsequent measurement and accounting Key differences between IFRS 3 (revised) and IFRS 3 (old) Effective date and transition Special topics Background First version of IFRS 3 Business combinations was issued in 2004 Replaced IAS 22 Business combinations Amended IAS 38 Intangibles and IAS 36 Impairment of assets Revised version of IFRS 3 was published in 2008 Joint publication of revised version of SFAS 141 Related amendments to IAS 27 Consolidated and separate financial statements Applicable to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period after 1/7/

22 Background The United Kingdom Financial Reporting Council (FRC) has issued a study examining the quality of accounting and reporting under IFRS 3 Business Combinations. Companies told the FRC that acquisition accounting is costly and difficult, and at the same time investors said that the resulting information is not useful. The FRC found that IFRS 3 "has been poorly applied by companies due to unfamiliarity with its requirements and the complexity of valuing intangible assets such as brands and customer relationships". The study found that companies had "provided insufficient or inconsistent information about material acquisitions in their audited accounts when compared to the rationale for these acquisitions and supporting explanations given in their business reviews". The FRC intends to follow up on this study over the next 18 months and to provide feedback to the IASB. The FRC is the UK's independent regulator responsible for promoting confidence in corporate reporting and governance. Definitions Business combination (BC): transaction or other event in which an acquirer obtains control of one or more businesses. Scope exclusions Businesses brought together to form a joint venture; Acquisition of an asset or group of assets that do not constitute a business; BC of businesses under common control. 18

23 Definitions A business combination results in a parent subsidiary relationship when the acquirer obtains control of that entity A parent follows IAS 27 Consolidated and separate financial statements in accounting for the subsidiary Consolidated financial statements: full consolidation Separate financial statements At cost In accordance with IAS 39 Basic principles acquisition method All business combinations must be accounted for applying the acquisition method Results in an acquisition being accounted for similarly to the purchase of other assets Acquirer recognizes Assets, liabilities and contingent liabilities assumed Non controlling interest 19

24 Acquisition method Determining whether the transaction or event is a business combination Identifying the acquirer Determining the acquisition date Recognizing and measuring the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree Measuring consideration and determining what is part of the business combination Recognizing and measuring goodwill or a gain from a bargain purchase Subsequent measurement and accounting Identifying the acquirer Acquirer the combining entity that obtains control of the other combining entities or businesses. Control Ability to set the operating and financial policies of the company so as to obtain benefits from its activities Presumed if an entity acquires >50% of the voting rights unless it is clear that control does not exist May be achieved with less than 50% of voting shares 20

25 Identifying the acquirer Entity A owns 40 shares of the 100 shares of D. The remaining shares of D are owned by B (55 shares) and C (5 shares). D offers its shareholders h the right to sell in their shares at fair value. Only B accepts the offer and sells 30 shares. Does the transaction represent a business combination? Yes, if, due to the transaction A, acquires control, (cf. it now has 57% of the outstanding shares of D). Acquisition date The date on which the acquirer obtains control over the acquired entity Substance over form The date of acquisition is the measurement date for The consideration transferred The identifiable assets, liabilities and contingent liabilities of the acquiree The non controlling interest From acquisition date, an acquirer should incorporate results of operations of the acquiree recognize in the B/S the identifiable assets, liabilities and contingent liabilities of the acquiree and any goodwill arising on the acquisition 21

26 Recognition of acquired identifiable assets and liabilities The acquirer recognizes, separately from goodwill, the identifiable assets, liabilities and any non controlling interest in the acquiree Must meet the definition of assets and liabilities in the Framework Must be part of what the acquirer and the acquiree exchanged rather than a result of a separate transaction May result in recognizing assets and liabilities that the acquiree had not previously recognized (brand name, patent, customer relationship, ) Classification and designation of assets and liabilities is done based on conditions as they exist at acquisition date, except for lease and insurance contracts Exceptions to recognition principle Contingent liabilities Idemnification assets Measurement of acquired identifiable assets and liabilities The acquired assets & liabilities are measured initially at 100% of their fair value For each business combination, the acquirer shall measure any non controlling interest tin the acquiree either At fair value or At the non controlling interest s proportionate share of the acquiree s identifiable net assets Exceptions to measurement principle Contingent liabilities Deferred taxes Employee benefits Idemnification assets Reacquired rights Share based payments Non current assets held for sale 22

27 Recognizing and measuring goodwill Goodwill is measured as the excess of (a) over (b) (a) the aggregate of The fair value of the consideration transferred May include a contingent consideration May not include acquisition costs The amount of any non controlling interest in the acquiree (b) the net of the acquisition date amounts of the identifiable assets acquired an liabilities assumed Recognizing and measuring goodwill Goodwill must be allocated from the acquisition date to each of the acquirer CGUs that are expected to benefit from the synergies of the business combination. Independently of the allocation of the acquiree s other assets and liabilities to CGUs Goodwill should not be amortized but should be tested for impairment Before end of first reporting period after the combination At least annually thereafter 23

28 BCs achieved in stages Treat business combinations achieved in stages as two transactions Sale of previously held interest Remeasure the at the acquiree at the acquisition date fair value Recognize the resulting gain or loss, in profit or loss Derecognize any amount recognized in other comprehensive income Business combination Treat the derecognition of the previously held interest as part of the consideration i transferred to the acquiree Measurement period If the initial accounting for a BC is incomplete by the end of the reporting period in which the combination occurs Report provisional amounts Retrospectively adjust provisional amounts to reflect new information about facts and circumstances that existed as of the acquisition date within one year from the acquisition date After the measurement period: revisions are only possible to correct an error in accordance with IAS 8 24

29 Subsequent adjustments to assets and liabilities General principle In accordance with other IFRS Contingent liabilities are measured at the higher of The amount that would be recognized in accordance with IAS 37; and The amount initially recognized Changes to the deferred tax assets recognised (or not recognised) at the acquisition date are subsequently recognised through the income statement Key differences between IFRS 3 (revised) and IFRS 3 (old) Acquisition costs Expensed in profit or loss Contingent consideration i Measured at fair value Adjustments to liability recognized in profit or loss Partial acquisitions Choice of measurement basis for non controlling interests Step acquisitions Previous/residual holdings remeasured to fair value Transactions with non controlling interests Recognized in equity no goodwill or profit/loss 25

30 Effective date and transition Effective date: prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 July Transition: No adjustment of previous business combinations. Changes in deferred tax assets are recognized in the statement of comprehensive income as from 1/7/2009 Special topics IFRS 3 (revised) 26

31 Overview Exceptions to the recognition or measurement principles Gain from a bargain purchase Determining what is part of the business combination transaction Lease contracts Intangible assets Reverse acquisitions Exceptions to recognition and measurement principles Exceptions to recognition principle Contingent liabilities shall be recognized as of the acquisition date if it is a present obligation that arises from past events and its fair value can be measured reliably Contrary to IAS 37 Subsequent accounting of contingent liabilities: Contingent liabilities are measured at the higher of The amount that would be recognized in accordance with IAS 37; and The amount initially recognized 27

32 Exceptions to recognition and measurement principles Exceptions to recognition and measurement principles Measurement in accordance with the related IFRS instead of at fair value Deferred taxes (IAS 12) Employee benefits (IAS 19) Replacements of an acquiree s share based payment awards (IFRS 2) Assets held for sale (IFRS 5) Indemnification assets Contractual indemnification of the acquirer for the outcome of a contingency Recognize indemnification asset at the same time that it recognizes the indemnified item At acquisition date and at fair value if the indemnification relates to an asset or a liability recognized at fair value at the acquisition date Later and on an other basis if related asset or liability is no recognized and/or is not valued at fair value Exceptions to recognition and measurement principles Exceptions to the measurement principle Reacquired rights shall be recognized as an intangible asset and measured on the basis of the remaining contractual term of the related contract regardless of whether market participants would consider potential contractual renewals in determining its fair value 28

33 Bargain purchases Principle: recognize in profit or loss on the acquisition date and allocate to acquirer Before recognizing gain: review procedures used to measure The identifiable assets acquired and liabilities assumed; The non controlling interest in the acquiree The consideration transferred The acquirer s previously held equity interest in the acquiree (BC in stages) Determining what is part of the business combination transaction Acquirer and acquiree may Have a pre existing relationship or other arrangement before negotiation for the business combination began Enter into an arrangement during the negotiations that is separate from the business combination Only apply IFRS 3 to part of the exchange in the business combination 29

34 Determining what is part of the business combination transaction Consider the following factors Reasons for the transaction For the benefit of the acquirer or for the combined entity rather than primarily for the benefit of the acquiree or its former owners Who initiated the transaction If initiated by the acquirer it might be entered into for the purpose of providing future economic benefits to the acquirer or combined entity Timing of the transaction Determining what is part of the business combination transaction Examples of separate transactions Transaction that in effect settles pre existing relationships between the acquirer and the acquiree Transaction that remunerates employees or former owners of the acquiree for future services; and Transaction that reimburses the acquiree or its former owners for paying the acquirer s acquisition related costs. 30

35 Determining what is part of the business combination transaction Pre existing relationship: Relationship that existed before contemplation of the business combination Contractual (vendor and customer or licensor and licensee) Non contractual (plaintiff and defendant) Recognise gain or loss measured as follows: For non contractual relationships: at fair value For contractual relationships, at the lesser of The amount by which the contract is favourable or unfavourable from the perspective of the acquirer when compared with market transactions The amount of any stated settlement provisions in the contract available to the counterparty to whom the contract is unfavorable. If ii. is lesser than i. the difference is included as part of the business combination accounting Determining what is part of the business combination transaction Contingent payments to employees or selling shareholders Consider following indicators Continuing employment Duration of continuing employment Level of remuneration Incremental payments to employees Number of shares owned Linkage to the valuation Formula for determining consideration Other agreements and issues 31

36 Determining what is part of the business combination transaction Share based payment awards Can only be part of the business combination if the acquiree or its employees have the ability to enforce replacement for example if replacement is required by: the terms of the acquisition agreement; the terms of the acquiree's awards; or applicable laws or regulations. If not all of the market based measure of the replacement awards shall be recognised as remuneration cost in the postcombination financial statements. Determining what is part of the business combination transaction Market based measure of acquirer s award Market based measure of acquiree s award Buy out of preacquisition SBP Post-acquisition services Excess value given Impacts goodwill Recognized as post-combination ti compensation expense 32

37 Determining what is part of the combination Original grant date Acquisition date Original vesting date New vesting date Vesting periods Original vesting period Portion completed Total new vesting period Part of the combination = Market- based measure of acquiree award X Portion of vesting period completed Greater of total vesting period and original vesting period Lease contracts Operating leases in which the acquiree is the lessee Recognize intangible asset if the terms are favorable Recognize liability if the terms are unfavorable An identifiable intangible asset may be associated with an operating lease, even if it is at market terms Lease of retail space in a prime shopping aria might provide entry into a market Operating leases in which the acquiree is the lessor Take terms of the lease into account when measuring the acquisition date fair value of an asset No separate recognition of an asset or liability if the terms are favorable or unfavorable 33

38 Intangible assets Recognize, separately from goodwill, the identifiable intangible assets acquired in a business combination Meeting separability or contractual legal criterion If the terms of a contract giving rise to a reacquired right are favorable or unfavorable, the acquirer shall recognize a settlement gain or loss Items that are not identifiable Assembled workforce Potential contract that the acquiree is negotiating at the acquisition date Reverse acquisitions A reverse acquisition occurs when the entity that issues securities is identified as the acquiree for accounting purposes Legal acquirer = accounting acquiree Legal subsidiary= accounting acquiror 34

39 Reverse acquisitions Measurement of the consideration transferred Acquirer usually issues no consideration for the acquiree Calculate the number of equity interest that the legal subsidiary (accounting acquirer) would have to issue to give the owners of the legal parent (accounting acquiree) the same percentage interest in the combined entity Measure these equity instruments at their fair value on the acquisition date. Reverse acquisitions Preparation and presentation of consolidated financial statements Issued under the name of the legal parent (accounting acquiree) but described as a continuation of the financial statements of the legal subsidiary (accounting acquirer) Retroactive adjustment of the acquirer s legal capital to reflect the capital of the legal parent. 35

40 Reverse acquisitions Preparation and presentation of consolidated financial statements Assets and liabilities of the legal subsidiary recognised and measured at their pre combination carrying amounts Assets and liabilities of the legal parent recognised and measured in accordance with IFRS 3 Retained earnings and other equity balances of the legal subsidiary before the business combination Issued equity instruments of the legal subsidiary (accounting acquirer) outstanding immediately before the business combination plus the fair value of the legal parent (accounting acquiree). Equity structure (number and type of equity interests isuued) reflects the equity structure of the legal parent Equity structure of the legal subsidiary is restated using the exchange ratio established in the acquisition agreement to reflect the number of shares of the legal parent issued in the reverse acquisition Reverse acquisitions Preparation and presentation of consolidated financial statements Non controlling interest Some of the owners of the legal acquiree might not exchange their equity interest of interests of the legal parent Treated as non controlling interest after the reverse acquisition because they only have an interest in the results and net assets of the legal acquiree not in the combined entity Even though the acquirer is the acquiree for accounting purposes, the owners of the legal acquirer have an interest in the results and net assets of the combined entity Reflects the non controlling shareholders proportionate interest in the pre combination carrying amounts of the legal acquiree s net assets 36

41 Reverse acquisitions Earnings per share Denominator From beginning of the period to acquisition date Weighted average number of ordinary shares of the legal acquiree outstanding during the period multiplied by the exchange ratio established in the merger agreement From the acquisition date to to the end of the period Actual number of ordinary shares of the legal acquirer outstunding during that period Comparative period Divide Profit or loss of the legal acquiree attributable to ordinary shareholders in each of those periods by The legal acquiree s historical weighted average number of ordinary shares outstanding multiplied by the exchange ratio established in the acquisition agreement IAS 27 Amendment Consolidated and separate FS 37

42 Introduction Amendment as part of second phase of project on business combinations (together with IFRS 3) Relates mainly to Accounting for non controlling interests Loss of control of subsidiaries Objectives Reduce alternatives in accounting for subsidiaries (consolidated financial statements) and investments (separate financial statements) Scope Preparation and presentation of consolidated financial statements for a group of entities under control of a parent Accounting for investments in subsidiaries, jointly controlled entities and associates in the separate financial statements of a parent, a venturer or investor 38

43 Main changes Non controlling interest: equity in a subsidiary not attributable, directly or indirectly, to a parent Previously named «minority interest» Attribute total comprehensive income to the owners of the parent and to the non controlling interest even if it results in non controlling interest having a deficit balance Previously excess losses where attributed to owners of the parent, unless the non controlling interest had a binding obligation and was able to cover the losses Main changes Changes in a parent s ownership interest in a subsidiary that do not result in the loss of control should be accounted for as equity transactions. Previously, no guidance Any difference between the amount by which the noncontrolling interest is adjusted and the fair value of the consideration paid or received is recognized directly in equity 39

44 Main changes On the loss of control of a subsidiary, any equity interest remaining in the former subsidiary and any balances owned by or to the former subsidiary shall hllbe accounted for in accordance with other IFRSs from the date when control is lost Previously, regard carrying amount as cost on initial measurement in accordance with IAS 39. Transition and effective date Annual periods beginning on or after 1/7/2009 Retrospectively except if the following circumstances occurred before the effective date Changes in parent s ownership interest Loss of control over a subsidiary Losses in excess of the non controlling interest 40

45 Annual improvements 2008 that relate to IFRS 3 Revised Overview Scope of IFRS 2 and revised IFRS 3 IFRS 2 should not be applied in a combination of entities or businesses under common control or the contribution of a business on the formation of a joint venture Amendment to IAS 38 intangibles acquired in a business combination Intangible assets acquired in a business combination might be separable, but only together with a related asset, contract or liability Recognise the intangible separately from goodwill but Together with the related item The acquirer may recognise a group of complementary intangibles as a single asset provided the individual assets have similar useful lives If no active market exists an entity may apply multiples reflecting current market transactions to factors that drive the profitability of the asset IFRIC 9 does not apply to embedded derivatives in contracts acquired in a. A business combination b. A combination of entities or businesses under common control c. The formation of a joint venture Or their possible reassessment at the date of acquisition 41

46 Annual improvements 2010 that relate to IFRS 3 Revised Overview Contingent considerations relating to a business combination that occurred before the effective date of the revised IFRS Adjustment to the cost of the business combination (goodwill) Measurement of non controlling interests Avoid measurement at zero by limiting the measurement choice to non controlling interests that are present ownership instruments and entitle their holders to a proportionate share of entity s net assets in the event of liquidation. All other components of non controlling interest should be measured at their acquisition date fair value, unless another measurement basis is required by IFRSs. Current requirements to measure awards of the acquirer that replace acquiree share based payment transactions ti in accordance with IFRS 2 at the acquisition iti date applies also to share based payment transactions of the acquiree that are not replaced. to allocate the market based measure of replacement awards between the consideration transferred for the business combination and post combination remuneration applies to all replacement awards regardless of whether the acquirer is obliged to replace the awards or does so voluntarily 42

47 ED 9 Joint Arrangements Main proposed changes Replace IAS 31 Interests in Joint Ventures with a new standard to be titled Joint Arrangements. A joint arrangement is a contractual arrangement whereby two or more parties undertake an economic activity together and share decision making relating to that activity. 43

48 Types Joint operations Joint asset Joint ventures At first glance quite similar BUT!! Type depends on the rights and obligations that arise from the contractual arrangement Joint assets and operations: rights to individual assets or contractual obligations for expenses or financing Joint venture: rights to only a share of the outcome generated by a group of assets and liabilities carrying on an economic activity AND elimination of the use of the proportionate consolidation method for joint ventures 44

49 ED 10 Consolidated financial statements New definition of control A reporting entity controls another entity when the reporting entity has the power to direct the activities of that other entity to generate returns for the reporting entity. 'Power to direct the activities' is broader than 'power to govern the financial and operating policies' and, therefore, would broaden the scope of consolidation. A reporting entity can have power even if it has not exercised its voting rights or options to acquire voting rights, or is not actively directing the activities of another entity. 45

50 New definition of control Guidance on how to assess power and returns when: a reporting entity has less than a majority of the voting rights assessing control of a structured entity (called special purpose entity in SIC 12) Financial instruments 46

51 Expected developments Overview Amendment IAS 39 Eligible hedged items (1/7/2009) IFRIC 16 Hedges of a net investment in a foreign operation (EU: 1/7/2009) ED/2009/1 Proposed amendments to IFRIC 9 and IFRIC 16 Amendment IAS 32 Classification of rights issues (1/2/2010) IFRIC 19 Extinguishing financial liabilities with equity instruments (1/7/2010) Annual improvements project relating to IFRS 7 (1/1/2011) IFRS 9 Financial instruments (1/1/2013) ED 2009/3 Derecognition (March 2009) ED 2009/12 Financial instruments: Amortised cost and impairment (November 2009) ED/2010/4 Fair value option for financial liabilities (May 2010) 47

52 Amendment IAS 39 Eligible hedged items Definitions Hedging: mechanisms to reduce risk, and ultimately reduce the variability in cash flows that arise from these risks. Types: A fair value hedge A cash flow hedge A hedge of a net investment in a foreign operation ( net investment hedge ) Hedge accounting: method of presentation that may be voluntarily applied to hedging transactions and that result in a matched timing of recognition of gains and losses in profit or loss. 48

53 Hedging instruments and hedged items Hedging instrument mitgates risk Qualifying items Derivatives Non derivatives for FX risk Hedged instrument creates risk exposure Qualifying items Recognised assets and liabilities Unrecognised firm commitments Highly probable forecast transactions Net investment in a foreign operation Hedging instruments and hedged items Hedging instrument mitgates risk Hedged instrument creates risk exposure Qualifying items A single asset, liability, firm commitment, A group of assets, liabilities, firm commitments with similar characteristics In a portfolio hedge of interest rate risk only, a portion of the portfolio of financial assets or financial liabilities that share the risk being hedged 49

54 Hedging instruments and hedged items Hedging instrument mitgates risk Hedged instrument creates risk exposure Qualifying items Held to maturity investments cannot be a hedged item with respect to Interest rate risk, or Prepayment risk can be a hedged item with respect to risks from Changes in foreign currency exchange rates Credit risk Hedging instruments and hedged items Hedging instrument: mitgates risk Designation Single fair value, except Options: only intrinsic value Forwards: only spot value Portion of notional amount (not portion of time period) Can hedge more than 1 risk Tk Take different hedging hdi instruments together for 1 risk Not written option+ purchased option that is in substance net written option Hedged instrument creates risk exposure Designation FI All changes in the cash flows or fair value of a hedged item Only changes in the cash flows or fair value of a hedged item above or below a specified price or other variable (one sided risk) Interest rate exposure Designation of non FI Entirity or FX risk 50

55 Designation as hedged items Examples of designated portion of CF for an hedged item: Designate only cash flow losses that result from an increase in the price above the specified level Designate only the intrinsic value of a purchased option The time value of a purchased option can not be designated as a onesided risk since it is not a component of the forecast transaction that affects profit or loss Remark: An entity can improve effectiveness by excluding the time value of the hedging ginstrument as permitted by IAS 39 Designation of financial items as hedged items To be eligible for hedge accounting, The designated risks and portions must be separately identifiable components of the financial instrument Changes in the cash flows or fair value of the entire financial instrument arising from changes in the designated risks and portions must be reliably measurable A fixed rate FI hedged for changes in FV attributable to changes in a risk free or benchmark interest rate Inflation is not separately identifiable an reliably measureable and cannot be designated as a risk or a portion of a FI unless It is a contractually specified inflation portion of the cash flows of a recognised inflation linked bond where the inflation feature is not a separable embedded derivative 51

56 Examples Entity A whishes to issue 5 year fixed rate debt. Based on market rates of interest and A s credit rating, it is able to issue db debt at 6.5%. This comprises a 5 year interest rate risk of 4.5%, and a credit spread of 2%. Entity A may designate the hedged risk as changes in fair value of the debt associated with changes in interest rate only, i.e. it may exclude from the designation its own credit spread. This will increase the effectiveness of the hedge relationship as the equivalent credit risk inherent in the debt is not reflected in the terms of the interest rate swap. Transition and effective date The amendment is to be applied retrospectively for annual periods beginning on or after 1 July 2009 with earlier adoption permitted if disclosed. d 52

57 IFRIC 16 Hedges of a net investment in a foreign operation Hedges of a net investment in a net investment in a foreign operation The presentation currency does not create an exposure to which an entity may apply hedge accounting. Consequently, a parent entity may designate as a hedged risk only the foreign exchange differences arising from a difference between its own functional currency and that of its foreign operation. The hedging instrument(s) may be held by any entity or entities within the group. Disposal of a foreign operation IAS 39 must be applied to determine the amount that needs to be reclassified to profit or loss from the foreign currency translation reserve in respect of the hedging instrument IAS 21 must be applied in respect of the hedged item. 53

58 Transition If an entity had designated a hedging instrument as a hedge in a net investment but the hedge does not meet the conditions for hedge hd accounting in IFRIC 1, the entity shall apply IAS 39 to discontinue that hedge accounting prospectively Effective dates IASB: 01/10/2008 EU: 30/06/2009 ED/2009/1 Proposed amendments to IFRIC 9 and IFRIC 16 54

59 Amendment IFRIC 9 and IFRIC 16 IFRIC 9 Reassessment of embedded derivatives: Exclude from the scope of IFRIC 9 embedded derivatives in contracts acquired in combinations of entities or businesses under common control or in the formation of a joint venture. The proposed effective date is annual periods beginning on or after 1 July 2009 in time for the effective date of IFRS 3 (2008). Amendment IFRIC 9 and IFRIC 16 IFRIC 16 Hedges of a net investment in a foreign operation Allow entities to designate as a hedging instrument in a hedge of a net investment in a foreign operation an instrument that is held by the foreign operation that is being hedged. The proposed effective date is annual periods beginning on or after 1 October

60 Classification of rights issues Classification of rights issues A financial liability is any liability that is A contractual obligation To deliver cash or another financial asset to another entity; To exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavorable to the entity; or Certain contracts that will, or may be settled in the entity s own equity instruments A non derivative for which the entity is or may be obliged to deliver a variable numberof theentity s entity own equity instruments A derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of equity instruments 56

61 Classification of rights issues Rights, options or warrants to acquire a fixed number of the entity s own equity instrument for a fixed amount of any currency are equity instruments If these rights, options or warrants are offered pro rata to all of its existing owners of the same class of its own non derivative instruments. IFRIC 19 Extinguishing financial liabilities with equity instruments 57

62 Key guidance If debtor extinguishes a liability fully or partly by issuing equity instruments to the creditor. equity instruments are 'consideration paid' therefore derecognise the financial liability fully or partly; measure the equity instruments issued to the creditor at fair value, unless fair value is not reliably determinable, in which case the equity instruments issued are measured at the fair value of the liability extinguished; recognise in profit or loss the dff difference between the carrying amount of the financial liability (or part) extinguished and the measurement of the equity instruments issued. Key guidance If only part of a liability is extinguished, determine whether any part of the consideration paid relates to modification of the terms of the remaining liability. If it does, the debtor must allocate the fair value of the consideration paid between the liability extinguished and the liability retained. determine whether the terms of the remaining debt have been substantially modified (taking into account any portion of the consideration paid that was allocated to the remaining debt). If substantial modification: account for an extinguishment of the old remaining liability and the recognition of a new liability (see IAS 39.40). Retrospective application as of annual periods beginning on or after 1 July Earlier application is permitted. 58

63 Annual improvements relating to IFRS 7 AI relating to disclosures on financial instruments Encourages qualitative disclosures in the context of the quantitative disclosure required to help users to form an overall picture of the nature and extent of risks arising from financial instruments. Clarifies the required level of disclosure around credit risk and collateral held and provides relief from disclosure of renegotiated loans. 59

64 IFRS 7 Enhanced derecognition disclosures Derecognition disclosures Objective improve users understanding of transfer transactions of financial assets (for example, securitisations), including understanding the possible effects of any risks that may remain with the entity that transferred the assets. require additional disclosures if a disproportionate amount of transfer transactions are undertaken around the end of a reporting period. broadly align the relevant disclosure requirements of IFRSs and US GAAP. The IASB had originally proposed to replace the existing derecognition model in IAS 39. However, in light of the feedback received, the IASB decided to retain the existing derecognition requirements and to finalise improved disclosure requirements. Entities shall apply the amendments for annual periods beginning on or after 1 July In the first year of application, comparative information are not required. 60

65 IFRS 9 Financial instruments Overview Background Objective and scope Recognition and derecognition Classification Measurement Hedge accounting: not used yet Disclosures: not used yet Effective date and transition 61

66 Background IFRS 9 will ultimately replace IAS 39 in its entirety IASB aims to do that by the end of 2010 Three main phases Classification and measurement Financial assets (including some hybrid contracts) Final standard published in November 2009 Financial liabilities Exposure draft on fair value option for financial liabilities published in May 2010 Impairment methodology ED on amortised cost and impairment published in November 2009 Hedge accounting ED on derecognition Objective and scope The objective of this IFRS is to establish principles for financial reporting of financial assets that will present relevant and useful information to users of financial statements for their assessment of the amounts, timing and uncertainty of the entity s future cash flows It is applicable to all assets within the scope of IAS 39 62

67 Recognition and derecognition Financial assets shall be recognised in the statement of financial position when and only when the entity becomes party to the contractual provisions of the instrument. A regular way purchase or sale of a financial asset shall be recognised and derecognised in accordance with IAS 39.38andAG53 56of 56 IAS Classification Financial assets shall be classified on the basis of both The entity s business model for managing the financial assets; and The contractual cash flow characteristics of the financial asset 63

68 Classification Financial assets shall be measured at amortised cost if The objective is to hold the financial in order to collect the contractual cash flows; and The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal outstanding All other financial assets are measured at fair value A financial asset may be designated as measured at fair value through profit or loss if it eliminates or significantly reduces an accounting mismatch IAS 39. AG4D 4G Classification Hybrid contracts with a host that is a financial instrument shall be accounted for in their entirity in accordance with this standard d Hybrid contracts with a host that is not a financial instrument shall be separated if the embeded derivative is not specific to a party to the contract (IAS and AG 27 33) Classify the derivative in accordance with this standard or IAS 39 Account for the host in accordance with the other IFRS 64

69 Classification Reclassification is only possible when and only when the entity changes its business model for managing its financial assets No restatement of previously recognised gains or losses Measurement At initial recognition, a financial asset shall be measured at its fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition of the financial asset IAS and 48A, AG69 82 A financial asset shall be measured at amortised cost if The objective is to hold it in order to collect the contractual cash flows; and The contractual t lterms of the financial i asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal outstanding Other financial assets are measured at fair value 65

70 Measurement Gains and losses on assets which are not part of a hedging relationship Measured at fair value: recognise in profit or loss Unless it is an investment in an equity instrument and the entity has elected to present the gains and losses on that investment in other comprehensive income Election is irrevocable Only for equity instruments that are not held for trading Dividends are recognised in accordance with IAS 18 Measured at amortised cost: recognise in profit or loss when the financial asset is derecognised, impaired or reclassified and through the amortisation process Effective date and transition Annual periods beginning on or after 1 January 2013 Earlier application is permitted It is not mandatory to set the date of initial application at the beginning of a reporting period (but explain why) Retrospective application based on the business model at the date of initial application No restatement for prior periods if the entity adopts this IFRS for reporting periods beginning before 1 January Differences between the previous carrying amount and the fair value at the date of initial application are recognised in the opening retained earnings of the reporting period that includes the date of initial application. 66

71 Future developments: IFRS 9 Future developments: IFRS 9 67

72 Summary IFRS 9 ED/2009/3 Derecognition 68

73 Summary Derecognition: removing a financial instrument from an entity's financial statements. Occurs if the entity no longer controls a financial asset or no longer has an obligation to settle a financial liability. More disclosures when an entity continues to have an ongoing involvement in a financial asset that would be derecognised under the proposal. Summary Similar to IAS 39 in that (a) it uses the same criteria for when a transferred part of a financial asset qualifies to be assessed for derecognition (with some additional guidance to address known application issues); (b) it uses a test of control (although unlike IAS 39 that test has primacy); and (c) many of the derecognition outcomes will be similar (the notable exceptions being transfers, such as repurchase agreements, involving readily obtainable financial assets). 69

74 Summary Different from IAS 39 in that it does not combine elements of several derecognition concepts but rather focuses on a single element (control). The proposed approach does not have: a test to evaluate the extent of risks and rewards retained; specific pass through requirements; or a requirement for a transferor (in a transfer that fails derecognition) to recognise and measure a financial asset to the extent of its continuing involvement. ED/2009/12 Financial Instruments: Amortised cost and impairment 70

75 Comprehensive review of accounting for financial instruments Criticism current IAS39: difficult to understand, apply and interpret, urging Board to develop a Standard that is principle based and less complex 3 phases: Derecognition Classification and measurement Impairment of financial assets and hedge accounting Mandatorily application not before 1/1/2012 Amortised cost and impairment The existing incurred loss model. all loans will be repaid until evidence to the contrary (known as a loss or trigger event) is identified. Only at that point is the impaired loan (or portfolio of loans) written down to a lower value. mismatch: front loading of interest revenue (which includes an amount to cover the lender's expected loan loss) while the impairment loss is recognised only after a loss event occurs. 71

76 Financial Instruments: Classification and Measurement IASB's proposed expected loss model expected losses are recognised throughout the life of a loan or other financial asset measured at amortised cost, not just after a loss event has been identified. a provision against credit losses would be built up over the life of the financial asset based on the expected cash flows of the instrument (including expected credit losses), not market values. extensive disclosure requirements would provide investors with an understanding of the loss estimates that an entity judges necessary. ED/2010/4 Fair value option for financial liabilities 72

77 ED FV option for financial liabilities Volatility in profit or loss resulting from changes in an entity's own credit risk is counter intuitive and does not provide useful information except for value changes relating to derivatives and liabilities held for trading (such as short sales). Proposal: All gains and losses resulting from changes in 'own credit' for those financial liabilities that an entity chooses to measure at fair value should be recognised as a component of 'other comprehensive income', not in profit or loss. Entities that bifurcate financial liabilities when relevant may continue to do so. ED FV Option for financial liabilities 73

78 First time adoption of IFRS Overview Restructuring of the standard (1/7/2009) Aditional exemptions for first time adopters (1/1/2010) Limited exemption from comparative IFRS 7 disclosures for first time adopters (1/1/2010) Annual improvements project relating to IFRS 1 (1/1/2011) ED/2010/10 Removal of fixed dates for first time adopters ED/2010/12 Severe hyperinflation proposed amendments to IFRS 1 74

79 IFRS 1 First time adoption of IFRS Objectives To improve clarity of standard the IASB decided to Remove some transitional provisions relating to IFRSs from the main body to appendices Remove some transitional provisions as they are not longer relevant Exemptions are categorised into Business combinations Exemptions from other IFRSs Short term exemptions 75

80 New structure of IFRS 1 Objective Scope Recognition and measurement Opening IFRS statement of financial position NEW: due to the revised version of IAS 1: presentation of an opening IFRS statement of financial position at the date of transition to IFRSs. Accounting policies Exceptions to retrospective application of other IFRSs Estimates + Reference to appendix B Exemptions from other IFRSs: Reference to appendix C E New structure of IFRS 1 Presentation and disclosure Comparative information: Explanation of transition to IFRSs Reconciliations Designation of financial assets or financial liabilities Use of fair value as deemed cost Interim financial reports Effective date 76

81 Structure of IFRS 1 Appendix A: defined terms Appendix B: Exceptions to the mandatory application of IFRSs retrospectively Derecognition of financial assets and financial liabilities Hedge accounting Non controlling interests Appendix C: Exemptions for business combinations New structure of IFRS 1 Appendix D: Exemptions from other IFRSs Share based payment transactions Insurance contracts Fair value or revaluation as deemed cost Leases Employee benefits Cumulative translation differences Investments in subsidiaries, jointly controlled entities and associates Assets and liabilities of subsidiaries, associates and joint ventures 77

82 New structure of IFRS 1 Appendix D: Exemptions from other IFRSs (cont ed) Compound financial instruments Designation of previously recognized dfinancial i instruments t Fair value measurement of financial assets or financial liabilities at initial recognition Decommissioning liabilities included in the cost of property, plant and equipment Financial assets or intangible assets accounted for in accordance with IFRIC 12 Service Concession Arrangements Borrowing costs Appendix E Short term exemptions from IFRSs Reserved for future possible short term exemptions Amendments IFRS 1 Additional Exemptions for First time Adopters 78

83 Additional Exemptions for First time Adopters With respect to measurement exemptions of property, plant and equipment fair value or revaluation as deemed cost is replaced with deemed cost. For measurement of oil and gas properties, previous GAAP measurements are acceptable under certain conditions. In this case, the decommissioning, restoration and similar liabilities shall be measured in accordance with IAS37 as at the date of transition to IFRSs, vs. applying IFRS 1 exemption Leases: if a first time adopter made the same determination of whether an arrangement contained a lease in accordance with previous GAAP as that required by IFRIC 4 but at a date other than that required by IFRIC 4, the first time adopter need not reassess that determination when it adopts IFRSs. Limited exemption from comparative IFRS 7 disclosures for first time adopters 79

84 Exemption from comparative IFRS 7 disclosures Amendment of IFRS 1 to state that an entity need not provide the comparative prior period information required by the March 2009 amendments to IFRS 7 Improving disclosures about financial instruments for first time adopters adopting before 1 January Annual improvements relating to IFRS 1 80

85 Overview Accounting policy changes in the year of adoption Revaluation basis as deemed cost Use of deemed cost for operations subject to rate regulation ED/2010/10 Removal of fixed dates for first time adopters 81

86 Main proposal The proposal would amend IFRS 1 by replacing references to a fixed transition date of 1 January 2004 with the date of transition to IFRSs. No restatement of derecognition transactions that occurred before the date of transition to IFRSs. No recalculation of day 1 differences on initial recognition of financial instruments, where the transaction occurred before the date of transition to IFRSs. ED/2010/12 Severe hyperinflation Proposed amendments to IFRS 1 82

87 Main proposed amendments How should an entity resume presenting financial statements in accordance with IFRSs after a period when the entity was unable to comply with IFRSs because its functional currency was subject to severe hyperinflation? Proposed answer: Such an entity would be allowed to measure assets and liabilities at fair value and use that fair value as the deemed cost of those assets and liabilities in the opening IFRS statement of financial position. Other new and amended IFRS applicable as of 1/1/

88 Overview Amendment IFRS 2 Group cash settled share based payment transactions (1/1/2010) IFRIC 12 Service concession arrangements (EU:29/03/2009) / IFRIC 17 Distributions of non cash assets to owners (1/7/2009) IFRIC 18 Transfer of assets from customers (Transfers as of 1/7/2009) Amendment IAS 24 (1/1/2011) / Amendment IFRIC 14 Prepayments of a minimum funding requirement (1/1/2011) Annual improvements Amendments IFRS 2 Group cash settled share based payment transactions 84

89 Group cash settled share based payment transactions Scope arrangements where the subsidiary receives goods or services from employees or suppliers but its parent or another entity in the group must pay those suppliers. The amendments make clear that: Clarification An entity that receives goods or services in a share based payment arrangement must account for those goods or services no matter which entity in the group settles the transaction and whether the transaction is settled in shares or cash. Group cash settled share based payment transactions Incorporate guidance previously included in IFRIC 8 Scope of IFRS 2 and IFRIC 11: IFRS 2 Group and Treasury Share Transactions. The amendments are effective for annual periods beginning on or after 1 January 2010 and must be applied retrospectively. Earlier application is permitted. 85

90 IFRIC 12 Service concession arrangements Overview Introduction Definitions Common features of service concession arrangements Scope of IFRIC 12 Accounting for a SCA by the operator 86

91 Introduction IFRIC 12 was issued 30/11/2006 and: Applies to accounting by operators of private to public service concession arrangements Entities shall apply the interpretation for annual periods beginning on or after 1/1/2008, retrospectively No transitional provisions!: prospective application is allowed if retrospective application is considered impracticable. In this case the asset shall be tested for impairment. Definitions Service concession arrangements are arrangements: in which the public sector attracts private sector participation in the development, financing, operation and maintenance of infrastructure for public services. 87

92 Definitions GRANTOR Public Service concession arrangement sets out: Performance standards Mechanisms for adjusting prices Arrangements for arbitrating disputes OPERATOR Private Operator activities: Construct/upgrade infrastructure Operate and maintain infrastructure for a specified period of time Common features of a SCA Contract Obliges the operator to provide the services to the public on behalf of the grantor Sets the initial prices to be levied by the operator and regulates price revisions over the period of the service arrangement The grantor is a public sector entity or a private sector entity to which the responsibility for the service has been delegated The operator is responsible for management of the infrastructure and related services and does not merely act as an agent on behalf of the grantor is obliged to hand over the infrastructure to the grantor in a specified condition at the end of the period of the arrangement, for little or no incremental consideration. 88

93 Scope of IFRIC 12 Public to Private service concession arrangements in which: The grantor controls services provided by the operator; and Either The grantor controls any significant residual interest in the infrastructure at the end of the concession arrangement; or No significant residual interest exists Accounting for SCA by the operator The operator does not recognize the assets as PPE or leased assets Financial assets if Grantor agrees to pay a specified amount; or Grantor agrees to guarantee the shortfall between amounts received from users and a specified amount Intangible assets if Grantor only pays when users use the service Grantor only grants a right ihto charge users for the service Bifurcated assets If the consideration is partly by a financial asset and partly by an intangible asset 89

94 IFRIC 17 Distributions of non cash assets to owners Scope Non reciprocal distributions of assets to owners acting in their capacity as owners: Distributions of non cash assets Property, plant and equipment, businesses, ownership interests, disposal groups Distributions that give owners a choice of receiving either noncash assets or a cash alternative The interpretation does not apply to a distribution of a non cash asset that is ultimately controlled by the same party or parties before and after distributions 90

95 Issues When an entity declares a distribution and has an obligation to distribute the assets concerned to its owners, it must record a liability bl for the dividend d dpayable. When should the entity recognise the dividend payable? How should an entity measure the dividend payable? When the entity settles the dividend payable, how should it account for the difference between the carrying amount of the assets distributed and the carrying amount of the dividend payable? Consensus The liability to make the distribution shall be recognised When declaration of the dividend by management is approved by the shareholders, if the jurisdiction requires such approval, or When the dividend is declared by management, if the jurisdiction does not require approval by the shareholders Measurement: The liability to distribute non cash assets as a dividend shall be measured at the fair value of the assets to be distributed If there is a choice of receiving either a non cash asset or a cash alternative, consider both the fair value of each alternative and the associated probability When an entity settles the dividend payable, it shall recognise the difference, if any, between the carrying amount of the assets distributed and the carrying amount of the dividend payable in profit or loss. 91

96 Impact on IFRS 5 Amendment to scope of IFRS 5 to include non current assets that are held for distribution to owners acting in their capacity as owners (held for distribution to owners) A non current asset (or disposal group) is classified as held for distribution to owners when the entity is committed to distribute the asset (or disposal group to owners): Available for immediate distribution in their present condition Distribution must be highly probable Actions must be initiated and should be expected to be completed within one year Unlikely l that significant ifi changes will be made The probability of shareholder s approval (if required in the jurisdiction) must be considered as part of the assessment of whether the sale is highly probable. Measurement at the lower of its carrying amount and fair value less costs to distribute Transition and effective date Prospective application for annual periods beginning on or after 1 July Retrospective application is not permitted. 92

97 IFRIC 18 Transfers of assets from customers Background Sometimes entities receive contributions of Property, plant and equipment that must be used to provide access a network and provide them with ongoing access to a supply of goods or services Commodities Outsourcing arrangements Cash to be used to acquire/construct PPE necessary to provide such access Contributions may come from Customers Other parties 93

98 Scope and transition Accounting for the asset received by entities that receive such assets Out of scope Government grants (IAS 20) Service concession arrangements (IFRIC 12) Prospective application to transfers of assets received on or after 1/7/2009, earlier application is permitted Issues Is the definition of an asset met? If the definition of an asset is met, how should the transferred item of property, plant and equipment be measured on initial recognition? If the item of property, plant and equipment is measured at fair value on initial recognition, how should the resulting credit be accounted for? How should the entity account for a transfer of cash from its customer? 94

99 Consensus Recognition of a transfer in the form of PPE if the asset transferred meets the definition of an asset in the framework Assess whether h it controls the resource and whether h future economic benefits are expected to flow to it from that resource based on the terms and conditions of the arrangement Factors to consider: Can it Exchange that asset for other assets Employ it to produce goods or services Use it to settle liabilities Distribute it to owners Decide how the asset will be used and maintained and when it is replaced Restrict others access to those benefits/charge a price for others to use it? Right of ownership is not essential Consensus If the recognition criteria are met, the asset is initially measured at fair value and subsequently accounted for in accordance with IAS 16 95

100 Consensus Accounting for the credit if the transferred item should be recognized IAS 18.12: When goods or services are rendered in exchange for dissimilar goods or services, the exchange is regarded as a transaction which generates revenue Identify the separately identifiable services in accordance with IAS Service connection Does it represent value for that customer and can the fair value be reliably measured? Providing ongoing access to a supply of goods or services Are goods or services delivered at a lower price than would otherwise be charged? Consensus Subsequent recognition of the revenue If one service is identified: over the period that the service is performed (IAS 18.20) If more than one service is identified Allocate the fair value of the consideration to each identifiable item and recognize the revenue allocated to each service in accordance with IAS 18 If an ongoing service is identified as part of the agreement Recognize the allocated revenue over the terms of the agreement If there is no term in the agreement The period over which this revenue is recognized can not be longer than the useful life of the transferred asset. 96

101 Consensus Accounting for a cash contribution Consider whether the asset that must be acquired meets the recognition criteria of an asset If it does not meet the criteria account for cash contribution as proceeds for providing the prepayment asset to the customer (IAS 11 or IAS 18) If it meets the criteria Recognize and measure in accordance with IAS 16 Recognize liability for the obligation to provide access to a supply of goods or services. IAS 24 Related party disclosures 97

102 IAS 24 Related party disclosures Scope exemption A reporting entity is exempt from the disclosure requirements in relation to related party transactions and outstanding balances, including commitments with A government that has control, joint control or significant influence over the reporting entity; and Another entity that is a related party because the same government has control, joint control or significant influence over both the reporting entity and the other entity IAS 24 Related party disclosures Revised definition: a related party is a person or entity that is related to the entity that is preparing its financial statements A person or close member of that person s family is related to the entity if that person Has control or joint control over the reporting entity Has significant influence over the reporting entity; or Is a member of the key management personnel of the reporting entoty or of a parent of the reporting entity 98

103 IAS 24 Related party disclosures An entity is related to a reporting entity if The entity and the reporting entity are members of the same group One entity is an associate or joint venture of the other entity (or an associate or joint venture of the group of which the reporting entity is a member Both entities are joint ventures of the same third party One entity is a joint venture of a third entity and the other entity is an associate of the third entity The entity is a post employment benefit plan for the benefit of employees of either the reporting entity or an entity related to the reporting entity If the reporting entity is itself such a plan, the sponsoring employers are also related to the reporting entity The entity is controlled or jointly controlled by a person identified in (a) A person identified in (a)(i) has significant influence over the entity or is a member of the key management personnel of the entity (or of a parent of the entity IFRIC 14 Prepayment of minimum funding requirements 99

104 Key conclusions Correction of an unintended result of IFRIC 14 in some circumstances entities are not permitted to recognise as an asset some voluntary prepayments for minimum funding contributions. the amendments correct the problem. Effective for annual periods beginning 1 January 2011, with earlier application permitted. The amendments must be applied retrospectively to the earliest comparative period presented. Annual improvements 100

105 Annual improvements project Provide a streamlined process for dealing efficiently with a collection of miscellaneous, non urgent but necessary minor amendments to IFRSs Exposure draft in August 20X1, 90 day comment period; Final Standard in April, 20X2; Effective in January 20X3 / / / ual+improvements/annual+improvements+process.htm IFRS for small and medium sized entities 101

106 Drivers for the IFRS for SMEs Full IFRSs National GAAP Not tailored to specific Not comparable across needs of users of SME national boundaries financial statements SME May not be perceived as Contains a large amount of high quality of detail which is not relevant to SMEs Not necessarily based Does not take into on a similar framework account the limited to full IFRSs ability of SMEs to bear costs of compliance and of the required expertise IFRS for SMEs May be limited training material and similar resources available Context The IFRS for SMEs is A self contained set of accounting principles that are based on full llifrss, but tthatthat have been tailored for SMEs Topics that are not relevant to SMEs are omitted Some accounting policies are disallowed because a simplified method is available Many of recognition and measurement principles are simplified Substantially fewer disclosures Simplified language and explanations throughout Organized by topic to be more user friendly 102

107 Context Maintenance. Thorough review of SMEs experience after two years An omnibus exposure draft will then be published approximately once every three years. This will include consideration of new and amended IFRSs that have been adopted since the IFRS for SMEs was last updated The effective date of the IFRS for SMEs will be determined in each jurisdiction that adopts it Comparison with full IFRSs Omitted topics Accounting policy options disallowed because a simplified treatment is available Earnings per share Revaluation model dlfor PPE and intangible assets Interim financial reporting Proportionate consolidation for jointly controlled entities Segment reporting Accounting policy choice for Insurance investment property Range of methods to account for Special accounting for assets government grants held for sale Df Deferral of actuarial gains and losses of defined pension plans NCI measured at fair value Certain options for financial instruments 103

108 Comparison with full IFRSs Simplifications to recognition and measurement requirements Reductions in disclosure requirements Examples Financial instruments Goodwill and indefinite life intangibles Associates and jointly controlled entities PPE and intangible assets Defined benefit plans Assets held for sale Exchange differences Borrowing costs Development costs Biological assets Equity settled share based payment Because They relate to topics or accounting policy options that are omitted or recognition and measurement principles that have been simplified; or They are not considered appropriate based on users needs and/or cost benefit considerations Application of IFRS for SMEs in the World Nearly 50 jurisdictions have taken action to adopt the IFRS for SMEs or indicated publicly an intention to do so. Translations are available or will be available in Czech, Spanish, Italian, Turkish, Romanian, Chinese, Portuguese, Arabic, French, Japanese Serbian, Armenian, Polish Russian, Albanian, Ukrainian 104

109 Application of IFRS for SMEs in Europe Incompatible with the EU Accounting Directives: Prohibition to present or describe any items of income and expense as extraordinary items Measurement of certain financial instruments at fair value Measurement of associates/jointly controlled for which there is a published price quotation using the fair value model Presumption that the useful life of goodwill is ten years if an entity is unable to make a reliable estimate of the useful life Requirement to recognise immediately in profit or loss any negative goodwill Prohibition to reverse an impairment loss recognised for goodwill IFRS for SMEs in Belgium ons/library?l=/accounting/2010_consultation/authorities _standard&vm=detailed&sb=title d d d l 105

110 Exposure Drafts Overview ED IAS 37 Non financial liabilities (June 2005) ED 2010/1 Measurementof liabilities in IAS 37 (January 2010) ED Simplifying earnings per share (August 2008) ED IFRS 5 Discontinued operations (September 2008) ED 2009/2 Income tax (March 2009) ED 2010/11 Deferred tax: Recovery of underlying assets (September 2010) ED 2009/5 Fair value measurement (May 2009) ED 2010/7 Measurement uncertainty analysis disclosure for fair value measurements (June 2010) ED 2009/6 Management commentary (June 2009) ED 2009/8 Rate regulated activities (July 2009) ED 2010/3 Defined benefit plans (April 2010) ED 2010/5 Presentation of items of OCI (May 2010) ED 2010/6 Revenue from contracts with clients (June 2010) ED 2010/8 Insurance contracts (July 2010) DI/2010/1 Stripping costs in the production phase of a surface mine ED 2010/9 Leases 106

111 ED Amendments to IAS 37 ED Amendments to IAS 37 Scope Apply to all liabilities not within scope of another standard Except executory contracts, unless onerous Eliminate contingent liabilities Currently describes two different ideas Unrecognized present obligation Possible obligation (business risk) 107

112 ED Amendments to IAS 37 Present obligations are liabilities Non recognition inconsistent with Framework and other standards Business risks are not liabilities Recognition inconsistent with Framework ED Amendments to IAS 37 Lawsuits Claim against company <> obligation Claim may be evidence that an obligation exists More guidance on identifying liabilities Distinguishing business risks from liabilities Need for evidence to support judgment that present obligation exists More guidance on measurement Expected value calculations 108

113 ED 2010/1 Measurement of liabilities in IAS 37 ED 2010/1 Main provisions Account for uncertainty about the amount and timing of outflows by using the probability weighted average of the outflows for the range of possible outcomes. Elimination of probability criterion Measured at the amount that the entity would rationally pay at the measurement date to be relieved of the liability. estimate of the present value of the resources required to fulfill the liability based on expected outflows of resources, the time value of money, and the risk that the actual outflows might ultimately differ from the expected outflows. 109

114 ED 2010/1 Main provisions Liability to pay cash to a counterparty (for example to settle a legal dispute) expected cash payments plus any associated costs, such as legal fees. Liability is to undertake a service (for example, to decommission plant) at a future date amounts that the entity estimates it would pay a contractor at the future date to undertake the service on its behalf. 110

115 ED Simplifying earnings per share Proposed amendments to IAS 33 Amendments IAS 33 Principle to determine which shares and other instruments should be included in the EPS calculation. The weighted average number of ordinary shares includes only those instruments that give their holder the right to share currently in profit or loss of the period. Clarification of EPS calculation for particular instruments, such as contracts to sell or repurchase an entity's own shares and participating instruments. treat those contracts as if the entity had already repurchased the shares. 111

116 Amendments IAS 33 If a convertible financial instrument would have a more dilutive effect if conversion is assumed, then the entity would assume the more dl dilutive treatment for dl diluted d EPS. Simplify the EPS calculation for instruments that are accounted for at fair value through profit or loss. Do not adjust the numerator or denominator of the diluted EPS calculation. Exposure draft on discontinued operations Amendments IFRS 5 112

117 Amendments IFRS 5 Current IFRS 5 defines a discontinued operation as 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 exclusively with a view to resale. Amendments IFRS 5 This exposure draft proposes changing the definition so that a discontinued operation is a component of an entity that is an operating segment (as that term is defined din IFRS 8) and either has been disposed of or is classified as held for sale or is a business (as that term is defined in IFRS 3 Business Combinations (as revised in 2008)) that meets the criteria to be classified as held for sale on acquisition. The exposure draft proposes that an entity should determine whether the component of an entity meets the definition of an operating segment regardless of whether it is required to apply IFRS

118 Amendments IFRS 5 The amounts presented for discontinued operations should be based on the amounts presented in the statement of comprehensive income, even if segment information disclosed to comply with IFRS 8 includes different amounts that are reported to the chief operating decision maker. Disclosures for all components of an entity that have been disposed of or are classified as held for sale, except for businesses that meet the criteria to be classified as held for sale on acquisition. ED/2009/2 Income Tax 114

119 Overview Retains the temporary difference approach. Recognise now the future tax consequences of past events and transactions, rather than waiting until the tax is payable or recoverable. Remove most of the exceptions to simplify the accounting and strengthen the principle in the standard. Changed structure for the standard that will make it easier to use. Closely aligns with FASB Statement 109 Accounting for Income Taxes. Proposed amendments A new definition of tax basis: the measurement under applicable substantively enacted tax law of an asset, liability, or other item. Assume recovery of the carrying amount of the asset by sale, rather than management expectation of sale or use. Deferred tax not recognised on initial recognition of an asset or liability whose recovery or settlement will have no effect on taxable profit. Revised definitions of tax credit and investment tax credit. 115

120 Proposed amendments On initial measurement, assets and liabilities that have tax bases different from their initial carrying amounts are disaggregated into (a) an asset or liability excluding entity specific tax effects and (b) any entity specific tax advantage or disadvantage. Recognise and measure the entity specific advantage or disadvantage in accordance with IFRSs and recognise a deferred tax asset or liability for any resulting temporary difference between the carrying amount and the tax basis. If the consideration paid or received differs from the total recognised amounts of the acquired assets and liabilities (including deferred tax), Recognises the difference as an allowance against, or premium on, the deferred tax asset or liability. Proposed amendments The exception from recognising a deferred tax asset or liability arising from investments in subsidiaries, branches, associates and joint ventures will be restricted to foreign subsidiaries, joint ventures or branches Deferred tax assets would be recognised in full, with a valuation allowance to reduce the carrying amount to the highest amount that is more likely than not to be realisable. Uncertainty would be reflected by measuring current and deferred tax assets and liabilities using the probabilityweighted average amounts of possible outcomes 116

121 Proposed amendments Where different tax rates apply to distributed and undistributed profits, current and deferred tax assets and liabilities bl would reflect the entity's expectations of future distributions. Income tax expense would be allocated to the components of comprehensive income and Deferred tax assets and liabilities would be classified as eithercurrentor non currentbasedon how therelated non tax asset or liability is classified. ED 2010/11 Deferred tax: Recovery of the underlying assets 117

122 ED 2010/11 Recovery of the underlying assets Currently, the measurement of deferred taxes depends on whether an entity expects to recover an asset by using the asset or by selling the asset. The proposed amendment would introduce a presumption that an asset is recovered entirely through sale unless the entity has clear evidence that recovery will occur in another manner. ED/2009/5 Fair value measurement 118

123 Fair value measurement No extension of the use of fair value measurements Add disclosure requirements about how fair values were determined. Replace fair value measurement guidance contained within individual IFRSs with a single, unified definition of fair value, authoritative guidance on the application of fair value measurementin inactive markets. Largely consistent with SFAS 157 Fair value measurements Fair value measurement FV definition (exit price): "the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date". Most advantageous market. Assumptions that market participants would use Highest and best use of an asset Transferred at the measurement date. Day 1 profit or loss Four identified cases Recognise any resulting gain or loss unless the relevant IFRS states otherwise 119

124 ED/2010/7 Measurement uncertainty analysis disclosure for fair value measurements Minor amendments to the May 2009 proposal Enhance the original proposal by requiring the measurement uncertainty analysis disclosure to reflect the interdependencies d between unobservable bl inputs used to measure fair value in Level

125 IASB conclusions to date on fair value measurement Fair value : Price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). In the absence of an actual transaction at the measurement date, a fair value measurement assumes that a transaction takes place at that date in the principal (or most advantageous) market for the asset or liability. Market based measurement, not an entity specific measurement. should be determined using the assumptions that market participants would use when pricing the asset or liability, including assumptions about risk. does not consider an entity's intention to hold an asset or to settle or otherwise fulfil a liability. For a non financial asset, fair valuation presumes the asset is used at its highest and best use. To increase consistency and comparability in fair value measurements and related disclosures, the IASB would establish a fair value hierarchy that prioritises into three levels the inputs to valuation techniques Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. ED/2009/6 Management commentary 121

126 Management commentary Non mandatory guidance for preparing and presenting a 'management commentary accompanies but is not part of the financial statements, explains how the entity's financial position, financial performance and cash flows relate to management's objectives and its strategies for achieving those objectives. ED/2009/8 Rate regulated Activities 122

127 Rate regulated Activities core principles To recognise a regulatory asset or regulatory liability if the regulator permits the entity to recover specific previously incurred costs or requires it to refund previously collected amounts and to earn a specified return on its regulated activities by adjusting the prices it charges its customers; To measure a regulatory asset or regulatory liability at the expected present value of the cash flows to be recovered or refunded as a result of regulation, both on initial recognition and at the end of each subsequent reporting period; To provide disclosures that identify and explain the amounts recognised in the entity s financial statements arising from a regulatory asset or regulatory liability and assist users of those financial statements to understand the nature and financial effects of its rate regulated activities. ED 2010/3 Defined benefit plans 123

128 Presentation current requirements IAS 19 Presentation proposed requirements 124

129 ED 2010/3 Defined benefit plans Immediate recognition of all estimated changes in the cost of providing defined benefits and all changes in the value of plan assets. Eliminate the various methods currently in IAS 19, including the 'corridor' method Separate presentation of: service cost in profit or loss finance cost (ie, net interest on the net defined benefit liability) as part of finance costs in profit or loss remeasurement in other comprehensive income ED 2010/3 Defined benefit plans Improved disclosures about matters such as: the characteristics of the company's defined benefit plans the amounts recognised in the financial statements risks arising from defined benefit plans participation in multi employer plans 125

130 ED/2010/5 Presentation of items of OCI Presentation of items of OCI Profit or loss and OCI in separate sections of a single continuous statement. Items of OCI and, if elements are presented before tax, income tax on these items should be grouped on the basis of whether they will eventually be 'recycled' (reclassified) into the profit or loss section of the statement of comprehensive income. The title of the statement of comprehensive income would be changed to 'Statement of profit or loss and other comprehensive income 126

131 Presentation of items of OCI ED 2010/6 Revenue from contracts with customers 127