Highlights of International Financial Reporting Standards (IFRS) issued in 2014

Transcription

1 Highlights of International Financial Reporting Standards (IFRS) issued in 2014 Publication date: November 2014

2 Table of Contents OVERVIEW OF IFRS ISSUED IN A. IFRS 14 REGULATORY DEFERRAL ACCOUNTS 5 INTRODUCTION 5 OVERVIEW OF IFRS 14 5 B. ACCOUNTING FOR ACQUISITIONS OF INTERESTS IN JOINT OPERATIONS - AMENDMENTS TO IFRS 11 6 ISSUE 6 KEY AMENDMENTS 6 C. CLARIFICATION OF ACCEPTABLE METHODS OF DEPRECIATION AND AMORTISATION - AMENDMENTS TO IAS 16 AND IAS 38 7 D. IFRS 15 - REVENUE FROM CONTRACTS WITH CUSTOMERS 8 INTRODUCTION 8 EFFECTIVE DATE 8 AN OVERVIEW OF IFRS 15 A FRAMEWORK FOR RECOGNISING REVENUE 8 OTHER REQUIREMENTS 10 PORTFOLIO OF CONTRACTS 10 CONTRACT COSTS 10 DISCLOSURE 10 E. AGRICULTURE: BEARER PLANTS - AMENDMENTS TO IAS 16 AND IAS EFFECTIVE DATE 11 PREVIOUS REQUIREMENT 11 REVISED REQUIREMENT 11 DEFINITION OF BEARER PLANT 12 ACCOUNTING 12 TRANSITIONAL PROVISION 12 PRACTICAL IMPLICATION 12 F. IFRS 9 FINANCIAL INSTRUMENTS 13 CLASSIFICATION AND MEASUREMENT 13 IMPAIRMENT 14 HEDGE ACCOUNTING 15 OWN CREDIT 15 G. EQUITY METHOD IN SEPARATE FINANCIAL STATEMENTS - AMENDMENTS TO IAS EFFECTIVE DATE AND TRANSITIONAL PROVISION 16 ISSUE 16 2

3 KEY AMENDMENTS 16 PRACTICAL IMPLICATION 16 H. SALE OR CONTRIBUTION OF ASSETS BETWEEN AN INVESTOR AND ITS ASSOCIATE OR JOINT VENTURE - AMENDMENTS TO IFRS 10 AND IAS 28) 17 I. ANNUAL IMPROVEMENTS TO IFRSS CYCLE 18 OVERVIEW OF STANDARDS ADDRESSED 18 SUMMARY OF AMENDMENTS (APPLY FROM 1 JANUARY 2016) 18 3

4 Overview of IFRS issued in 2014 IFRS 14 Regulatory Deferral Accounts Accounting for Acquisitions of Interests in Joint Operations Clarification of Acceptable Methods of Depreciation and Amortisation IFRS 15 Revenue from Contracts with Customers Agriculture: Bearer Plants IFRS 9 Financial Instruments Equity Method in Separate Financial Statements Sale or Contribution of Assets between an Investor and its Associate or Joint Venture Annual Improvements to IFRSs Cycle Amendments to IFRS 11 Amendments to IAS 16 and IAS 38 Amendments to IAS 16 and IAS 41 for Amendments to IAS 27 Amendments to IFRS 10 and IAS 28) Issue date 30 January May May May June July August September September 2014 Effective date: Annual periods beginning on or after Transition 1 January 2016 See transition provisions 1 January January January 2017 Prospective Prospective See transition provisions 1 January January 2018 Retrospective See transition provisions 1 January January January 2016 Retrospective Prospective Varies Early application permitted? Yes Yes Yes Yes Yes Yes Yes Yes Varies Source: IFRS Foundation 4

5 A. IFRS 14 Regulatory Deferral Accounts Introduction IFRS 14 is only applicable to entities that apply IFRS 1 as first-time adopters of IFRS. Rate regulation is a framework where the price that an entity charges to its customers for goods and services is subject to oversight and/or approval by an authorised body. Industries that are subject to rate regulation include utilities such as gas, electricity and water. Rate regulation can have a significant impact on the timing and amount of an entity s revenue. Overview of IFRS 14 Recogni(on, measurement, impairment and derecogni(on An en(ty is permi6ed to con(nue applying its previous GAAP accoun(ng policies for the recogni(on and measurement of regulatory deferral accounts on first- (me adop(on. The interim standard does not include any further guidance on recogni(on, measurement, impairment and derecogni(on. Previous GAAP accoun(ng policies are only applied to balances that are not otherwise covered by specific IFRSs. That is, other specific IFRSs should be applied first, and only any residual balance is accounted for under IFRS 14. Other standards might also need to be applied to regulatory deferral accounts to reflect them appropriately in the financial statements. For example, the en(ty would apply its previous GAAP accoun(ng policy to the impairment of regulatory deferral account balances, but it would apply the IFRS impairment guidance to cash genera(ng units that contain such balances. Presenta(on and disclosure Presenta(on Balances arising from the applica(on of IFRS 14 are presented separately in the balance sheet and the statement of profit or loss and other comprehensive income. A separate line item is presented in the balance sheet for total regulatory deferral debit balances and total regulatory deferral credit balances, following a sub- total of all other assets and liabili(es. The dis(nc(on between current and non- current balances is not presented on the balance sheet, and offsemng is not permi6ed, although this informa(on might be disclosed elsewhere. The total movement in all regulatory deferral accounts is split between other comprehensive income (OCI) and profit and loss. The amount recorded in profit and loss is separately presented as a single line item aqer a sub- total for profit and loss. The amount recorded in OCI is presented in two line items, based on whether the amount relates to items that will or will not be subsequently reclassified to profit and loss. Movements are classified in OCI where the balances relate to items recognised in OCI. An en(ty that presents earnings per share (EPS) should present, in the income statement, EPS excluding and including the movement in the regulatory deferral accounts. 5

6 B. Accounting for Acquisitions of Interests in Joint Operations - Amendments to IFRS 11 Issue The amendment to IFRS 11, Joint arrangements provides specific guidance on accounting for the acquisition of an interest in a joint operation ( JO ) that is a business. Key amendments The amendments require an investor to apply the principles of business combination accounting when it acquires an interest in a JO that constitutes a business (as defined in IFRS 3, Business combinations). Specifically, an investor will need to: measure iden(fiable assets and liabili(es at fair value; expense acquisi(on- related costs; recognise deferred tax; and recognise the residual as goodwill. All other principles of business combination accounting apply unless they conflict with IFRS 11. The amendments are applicable to both the acquisition of the initial interest in a JO and the acquisition of additional interest in the same JO. However, a previously held interest is not remeasured when the acquisition of an additional interest in the same JO results in retaining joint control. Scope The amendments will apply to the acquisi(on of an interest in an exis(ng JO that is a business, or when a JO is formed and an exis(ng business is contributed. However the amendments do not apply when the forma(on of the JO coincides with the forma(on of a business. Transac(ons between an investor and a JO under common control are also excluded. Disclosures The amendments require the disclosure of informa(on specified in IFRS 3 and other IFRSs for business combina(ons. Transi(on Effec(ve date: prospec(vely for annual periods beginning on or aqer 1 January Earlier applica(on is permi6ed. Transac(ons before the adop(on date are grandfathered. 6

7 C. Clarification of Acceptable Methods of Depreciation and Amortisation - Amendments to IAS 16 and IAS 38 Issue The amendment to IAS 16, Property, plant and equipment and IAS 38, Intangible assets clarify when a method of deprecia(on or amor(sa(on based on revenue may be appropriate. Amendments deprecia(on of an item of property, plant and equipment based on revenue generated by using the asset is not appropriate. The amendment to IAS 38 establishes a rebu6able presump(on that amor(sa(on of an intangible asset based on revenue generated by using the asset is inappropriate. The presump(on may only be rebu6ed in certain limited circumstances. These are: - Where the intangible asset is expressed as a measure of revenue; or - Where it can be demonstrated that revenue and the consump(on of the economic benefits of the intangible asset are highly correlated. 7

8 Introduction D. IFRS 15 - Revenue from Contracts with Customers IFRS 15 sets out the requirements for recognising revenue that apply to all contracts with customers (except for contracts that are within the scope of the Standards on leases, insurance contracts and financial instruments). IFRS 15 replaces the previous revenue Standards: IAS 18 Revenue and IAS 11 Construction Contracts, and the related Interpretations on revenue recognition: IFRIC 13 Customer Loyalty Programmes, IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfers of Assets from Customers and SIC-31 Revenue Barter Transactions Involving Advertising Services. Effective date IFRS 15 is effective from 1 January Earlier application is permitted. An overview of IFRS 15 a framework for recognising revenue IFRS 15 establishes a comprehensive framework for determining when to recognise revenue and how much revenue to recognise. The core principle in that framework is that a company should recognise revenue to depict the transfer of promised goods or services to the customer in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. Step 1 - Identify the contract(s) with the customer Step 2 - Identify the performance obligations in the contract Step 3 - Determine the transaction price Step 4 - Allocate the transaction price to the performance obligations in the contract Step 5 - Recognise revenue when (or as) the entity satisfies a performance obligation 8

9 Step 1 Step 2 Step 3 Step 4 Identify the contract(s) with the customer Identify the performance obligations in the contract Determine the transaction price Allocate the transaction price A contract is an agreement between two or more parties that creates enforceable rights and obligations. A company would apply IFRS 15 to each contract with a customer that has commercial substance and meets other specified criteria. One criterion requires a company to assess whether it is probable that the company will collect the consideration to which it will be entitled in exchange for the promised goods or services. Performance obligations are promises in a contract to transfer to a customer goods or services that are distinct. In determining whether a good or service is distinct, a company considers if the customer can benefit from the good or service on its own or together with other resources that are readily available to the customer. A company also considers whether the company s promise to transfer the good or service is separately identifiable from other promises in the contract. For example, a customer could benefit separately from the supply of bricks and the supply of construction labour. However, those items would not be distinct if the company is providing the bricks and construction labour to the customer as part of its promise in the contract to construct a brick wall for the customer. In that case, the company has a single performance obligation to construct a brick wall. The bricks and construction labour would not be distinct goods or services because those items are used as inputs to produce the output for which the customer has contracted. The transaction price is the amount of consideration to which a company expects to be entitled in exchange for transferring promised goods or services to a customer. Usually, the transaction price is a fixed amount of customer consideration. Sometimes, the transaction price includes estimates of consideration that is variable or consideration in a form other than cash. Some or all of the estimated amount of variable consideration is included in the transaction price only to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur when the uncertainty associated with the variable consideration is subsequently resolved. Adjustments to the transaction price are also made for the effects of financing (if significant to the contract) and for any consideration payable to the customer. A company would typically allocate the transaction price to each performance obligation on the basis of the relative stand-alone selling prices of each distinct good or service. If a stand-alone selling price is not observable, the company would estimate it. Sometimes, the transaction price may include a discount or a variable amount of consideration that relates entirely to a specific part of the contract. The requirements specify when a company should allocate the discount or variable consideration to a specific part of the contract rather than to all performance obligations in the 9

10 contract. Step 5 Recognise revenue when a performance obligation is satisfied A company would recognise revenue when (or as) it satisfies a performance obligation by transferring a promised good or service to a customer (which is when the customer obtains control of that good or service). A performance obligation may be satisfied at a point in time (typically for promises to transfer goods to a customer) or over time (typically for promises to transfer services to a customer). For a performance obligation satisfied over time, a company would select an appropriate measure of progress to determine how much revenue should be recognised as the performance obligation is satisfied. Other requirements Portfolio of contracts Although IFRS 15 specifies the accounting required for an individual contract, in some cases, a company may be able to apply the requirements to a portfolio of contracts instead of applying the requirements separately to each contract with a customer. Contract costs IFRS 15 also includes requirements for accounting for some costs that are related to a contract with a customer. A company would recognise an asset for the incremental costs of obtaining a contract if those costs are expected to be recovered. For costs to fulfil a contract that are not within the scope of other Standards, a company would recognise an asset for those costs if the following criteria are met: the costs relate directly to a contract (or a specifi c anticipated contract); the costs generate or enhance resources of the company that will be used in satisfying performance obligations in the future; and the costs are expected to be recovered. Disclosure To help investors better understand the nature, amount, timing and uncertainty of revenue and cash flows from contracts with customers, IFRS 15 requires a company to disclose quantitative and/or qualitative information about: revenue recognised from contracts with customers, including the disaggregation of revenue into appropriate categories; contract balances, including the opening and closing balances of receivables, contract assets and contract liabilities; performance obligations, including when the company typically satisfies its performance obligations and the amount of the transaction price that is allocated to the remaining performance obligations in a contract; significant judgements, and changes in judgements, made in applying the requirements; and assets recognised from the costs to obtain or fulfil a contract with a customer. 10

11 E. Agriculture: Bearer Plants - Amendments to IAS 16 and IAS 41 Effective date Applicable retrospectively to annual periods beginning on or after 1 Jan 2016 (early application permitted). Previous requirement Biological assets Living plants Living animals Prior to these amendments, IAS 41 Agriculture required all biological assets related to agricultural activity to be measured at fair value less costs to sell. Revised requirement IAS 41 Fair value model Biological assets Living plants Living animals Bearer plants Produce growing on bearer plants and other plants IAS 16 Cost or revaluation model IAS 41 Fair value model The amendments add a definition of a bearer plant and require bearer plant to be accounted for as property, plant and equipment in accordance with IAS 16 Property, Plant and Equipment instead of IAS 41 because their operation is similar to that of manufacturing. 11

12 Definition of bearer plant A bearer plant is defined as a living plant that is used in the production or supply of agricultural produce, is expected to bear produce for more than one period and has a remote likelihood of being sold as agricultural produce, except for incidental scrap sales at the end of the plant's productive life. Accounting Type Bearer plant Produce growing on bearer plants Scope IAS 16 IAS 41 Accounting Examples Biological assets that satisfy the definition of bearer plants are measured either at cost or revalued amounts, less accumulated depreciation and impairment losses. Tea bushes, grape vines, oil palms and rubber trees. Measured at fair value less costs to sell with changes in fair value included in profit or loss in the period in which they arise. Tea leaves, grapes, oil palm fruit and latex. Before bearer plants are in the location and condition necessary to be capable of operating in the manner intended by management, i.e before they mature, they are accounted for as selfconstructed items of property, plant and equipment. Transitional provision Existing IFRS preparers can elect to use the fair value of the bearer plants at the beginning of the earliest period presented in those FS as the deemed cost at that date. Entities are exempted from IAS 8 requirement to disclose the amount of any adjustment for the current period for each FS item affected. Entities would still be required to provide those disclosures for each prior period presented in the FS. Practical implication Companies with agricultural activities should assess if their biological assets meet the definition of bearer plants as this determines the subsequent measurement model. Management should ensure that the costs incurred for bearer plants can be determined. The cost model will be most commonly used in practice. Government grants related to bearer plants now fall within the scope of IAS 20 rather than IAS 41. Livestock is excluded from the scope of the amendments and therefore continues to be measured at fair value because using the cost model would be more complex and an active market usually exists. These amendments will be early adopted by most entities to which it applies. 12

13 F. IFRS 9 Financial Instruments Classification and Measurement IFRS 9 introduces a logical approach for the classification of financial assets, which is driven by cash flow characteristics and the business model in which an asset is held. This single, principle-based approach replaces existing rule-based requirements that are generally considered to be overly complex and difficult to apply. The new model also results in a single impairment model being applied to all financial instruments, thereby removing a source of complexity associated with previous accounting requirements. The following diagram provides an overview of the classification of financial assets into the principal measurement categories, along with the presentation and designation options under IFRS 9. 13

14 Amortised cost measurement category A financial asset is classified as subsequently measured at amortised cost if it: Meets the SPPI criteria; and Is held within a business model whose objective is to hold financial assets in order to collect contractual cash flows. FVOCI measurement category A financial asset is classified as subsequently measured at FVOCI if it: Meets the SPPI criterion; and Is held in a business model in which assets are managed both in order to collect contractual cash flows and for sale. FVTPL measurement category All other financial assets i.e. financial assets that do not meet the criteria for classification as subsequently measured at either amortised cost or FVOCI are classified as subsequently measured at fair value, with changes in fair value recognized in profit or loss. In addition, an entity has the option at initial recognition to irrevocably designate a financial asset at FVTPL if doing so eliminates or significantly reduces a measurement or recognition inconsistency i.e. an accounting mismatch that would otherwise arise from measuring assets or liabilities or recognizing the gains and losses on them, on different bases. Impairment During the financial crisis, the delayed recognition of credit losses on loans (and other financial instruments) was identified as a weakness in existing accounting standards. As part of IFRS 9, the IASB has introduced a new, expected-loss impairment model that will require more timely recognition of expected credit losses. Specifically, the new Standard requires entities to account for expected credit losses from when financial instruments are first recognised and to recognise full lifetime expected losses on a more timely basis. The general model, including the interest revenue calculations, is provided in the diagram below. 14

15 Firstly, a portion of expected credit losses (a 12-month measure) is recognised for all relevant financial instruments from when they are first originated or acquired. In subsequent reporting periods, if there has been a significant increase in the credit risk of a financial instrument since it was first entered into or acquired, full lifetime expected credit losses would then be recognised. Secondly, the way in which interest revenue is calculated depends on whether an asset is considered to be actually credit-impaired. Initially interest is calculated by applying the effective interest rate to the gross amount of an asset. However, if an asset is considered to be credit-impaired, the calculation changes to applying the effective interest rate to the amortised cost amount (ie net of the impairment allowance) of the asset. We felt that this better reflected the economic situation. Hedge accounting IFRS 9 introduces a substantially-reformed model for hedge accounting, with enhanced disclosures about risk management activity. The new model represents a significant overhaul of hedge accounting that aligns the accounting treatment with risk management activities, enabling entities to better reflect these activities in their financial statements. In addition, as a result of these changes, users of the financial statements will be provided with better information about risk management and the effect of hedge accounting on the financial statements. Own credit The vast majority of financial liabilities will continue to be measured at amortised cost under IFRS 9. IFRS 9 introduces new requirements for the accounting and presentation of changes in the fair value of an entity s own debt when the entity has chosen to measure that debt at fair value under the FVO. IFRS 9 requires liabilities that an entity elects to measure at fair value to be recognised on the balance sheet at (full) fair value. The portion of fair value changes caused by changes in the entity s own credit risk is recognised in other comprehensive income. To make this improvement more readily accessible, an entity that applies IFRS 9 before 1 January 2018 can choose to apply this change to its accounting for financial instruments in isolation (that is, prior to applying any other parts of IFRS 9). Early application for banks is expected, because they often choose to measure their structured debt financing at fair value and are often asked by those reading their financial statements to provide non-gaap adjustments to remove the own credit effect from profit or loss. 15

16 G. Equity method in separate financial statements - Amendments to IAS 27 Effective date and transitional provision An entity electing to change to the equity method shall apply the amendments for annual periods beginning on or after 1 January 2016 in accordance with IAS 8 Accounting policies, changes in accounting estimates and errors. Earlier application is permitted. Issue The IASB has amended IAS 27, Separate financial statements, to restore the option to use the equity method to account for investments in subsidiaries, joint ventures and associates in an entity s separate financial statements. Key amendments An entity can now account for investments in subsidiaries, joint ventures and associates in its separate financial statements: at cost; or in accordance with IFRS 9; or using the equity method as described in IAS 28. The IASB has also clarified the definition of separate financial statements as those produced in addition to: consolidated financial statements by an entity with subsidiaries; or financial statements prepared by an entity which has no subsidiaries but has investments in associates or joint ventures required to be equity accounted under IAS 28. IFRS 1 has been amended to permit use of the business combinations exemption for investments in subsidiaries accounted for using equity method in the separate financial statements of the first-time adopter. Practical implication The amendments are expected to reduce compliance costs for entities that are required to prepare separate financial statements in which they account for investments in subsidiaries, joint ventures and associates using the equity method. Prior to the amendment these entities had to prepare two sets of separate financial statements, one for IFRS reporting and one for local statutory reporting. Retrospective application may be challenging for those entities who do not already prepare separate financial statements using the equity method as the figures from the previous consolidated financial statements may require adjustment. 16

17 H. Sale or Contribution of Assets between an Investor and its Associate or Joint Venture - Amendments to IFRS 10 and IAS 28) The amendments address the inconsistency between the requirements in IFRS 10 and those in IAS 28 (2011), in dealing with the sale or contribution of assets between an investor and its associate or joint venture. The main consequence of the amendments is that a full gain or loss is recognised when a transaction involves a business (whether it is housed in a subsidiary or not). A partial gain or loss is recognised when a transaction involves assets that do not constitute a business, even if these assets are housed in a subsidiary. The amendments is effective from annual periods commencing on or after 1 January

18 I. Annual Improvements to IFRSs Cycle Overview of standards addressed IFRS 5 Non- current Assets Held for Sale and Discon5nued Opera5ons IFRS 7 Financial Instruments: Disclosures IAS 19 Employee Benefits Changes in methods of disposal. Servicing contracts. Applicability of the amendments to IFRS 7 to condensed interim financial statements. Discount rate: regional market issue. IAS 34 Interim Financial Repor5ng Disclosure of informa(on elsewhere in the interim financial report. Summary of amendments (apply from 1 January 2016) Standard Summary of change(s) IFRS 5 Reclassifying an asset (or disposal group) from held for sale to held for distribution, or vice versa does not constitute a change to a plan of sale or distribution. o The asset (or disposal group) does not need to be reinstated in the financial statements as if it had never been classified as held for sale or held for distribution simply because the manner of disposal has changed. The guidance on changes in a plan of sale should be applied to an asset (or disposal group) which ceases to be held for distribution but is not reclassified as held for sale. IFRS 7 If an entity transfers a financial asset to a third party under conditions which allow the transferor to derecognise the asset, IFRS 7 requires disclosure of all types of continuing involvement that the entity might still have in the transferred assets. IFRS 7 provides guidance on what is meant by continuing involvement in this context. The amendment adds specific guidance to help management determine whether the terms of an arrangement to service a financial asset which has been transferred constitute continuing involvement. The amendment is prospective with an option to apply retrospectively. The amendment clarifies that the additional disclosure required by the amendments to IFRS 7, Disclosure Offsetting financial assets and financial liabilities is not specifically required for all interim periods, unless required by IAS 34. The amendment is retrospective. IAS 19 When determining the discount rate for post-employment benefit obligations, it is the currency that the liabilities are denominated in that is important, and not the country where they arise. The assessment of whether there is a deep market in high-quality corporate bonds is based on corporate bonds in that currency, not corporate bonds in a particular country. Similarly, where there is no deep market in high-quality corporate bonds in that currency, government bonds in the relevant currency should be used. The amendment is retrospective but limited to the beginning of the earliest period presented. IAS 34 The amendment clarifies what is meant by the reference in the standard to information disclosed elsewhere in the interim financial report. The amendment further amends IAS 34 to require a cross-reference from the interim financial statements to the location of that information. The amendment is retrospective. 18