International Financial Reporting Standards: Revised Readiness Toolkit October 2008

Transcription

1 Internationa Financia Reporting Standards: Revised Readiness Tookit October 2008

2 2 Section X Internationa Financia Reporting Standards: Revised Readiness Tookit Our vision is to hep the nation spend wisey. We promote the highest standards in financia management and reporting, the proper conduct of pubic business and beneficia change in the provision of pubic services. The Nationa Audit Office scrutinises pubic spending on behaf of Pariament. The Comptroer and Auditor Genera, Tim Burr, is an Officer of the House of Commons. He is the head of the Nationa Audit Office which empoys some 850 staff. He and the Nationa Audit Office are totay independent of Government. He certifies the accounts of a Government departments and a wide range of other pubic sector bodies; and he has statutory authority to report to Pariament on the economy, efficiency and effectiveness with which departments and other bodies have used their resources. Our work eads to savings and other efficiency gains worth many miions of pounds; at east 9 for every 1 spent running the Office.

3 Internationa Financia Reporting Standards: Revised Readiness Tookit October 2008

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5 Contents Introduction 6 Section A Overa summary of Management Actions 8 Section B Accounting Changes 10 First time adoption 11 Format of the Accounts 13 Accounting poicies 14 Consoidation and boundary issues 16 Investments 19 Non-current assets 20 Accounting for PPP arrangements, incuding PFI contracts 26 Inventories 29 Debtors 31 Cash 32 Leases 33 Other areas of impact 36 Section C Lessons Learned from the Private Sector 39 Annex 1 Financia Instruments 40 For further information pease contact: Andrew Baigent Director, Financia Audit Poicy and Support Nationa Audit Office Buckingham Paace Road Victoria London SW1W 9SP Te: Emai: andrew.baigent@nao.gsi.gov.uk Nationa Audit Office 2008

6 6 Introduction Internationa Financia Reporting Standards: Revised Readiness Tookit Introduction The transition from UK Accounting standards to Internationa Financia Reporting Standards (IFRS) and the IFRS version of the Treasury s Financia Reporting Manua (IFReM) is the argest change to UK pubic sector financia reporting since the introduction of resource accounting. HM Treasury set the revised timetabe for the transition in FD Letter 08/12, incuding Trigger Point dates for key actions in order to achieve IFRScompiant financia statements for the year to 31 March Awareness of the key issues and a panned approach wi ensure that the transition is managed effectivey and that the timetabe is achieved. The NAO have deveoped this readiness tookit to hep our cients consider the work they need to do in advance of the first set of audited IFRS accounts and estabish the key financia reporting issues for their organisation. We have aso incuded an Annex outining the key impacts of the transition to Financia Instrument Standards for the financia year, which entities may find usefu. The tookit is designed to be used by cient staff to assess the impact of the transition on their business and financia statements. The tookit: Outines each appicabe standard, and any reevant Treasury adaptations or interpretations for the centra government sector; Detais the key areas of each of the appicabe standards, where they differ from current UK GAAP and the FREM; and Suggests a series of questions and actions which management shoud consider in defining their approach to the transition. We have designed the document to be as comprehensive as possibe and to address the majority of the issues in impementing IFRS. However, it is not intended to repace the need for detaied knowedge of the standards and the IFReM adaptations. It is important that the issues are considered by the business as a whoe, not just finance staff in isoation, as impementation in the private sector suggests that in many cases, the detaied knowedge required to successfuy introduce IFRS ies outside the finance function.

7 Internationa Financia Reporting Standards: Revised Readiness Tookit Introduction 7 The guide has three sections: Section A is designed to pu together the key issues and processes that management need to take into account; Section B considers the individua Internationa Financia Reporting Standards and the areas of impact; Section C notes some of the key essons from the private sector from impementation of IFRS. Annex 1 detais some of the considerations around the impementation of the financia instrument standards for FRS, to be impemented in NAO Audit teams wi be avaiabe to discuss the process of transition and timetabe with cients as required and wi audit the restatement of figures required by IFRS 1 First Time Adoption of IFRS, in ine with the requirements of Treasury s trigger points. Note Due to current egisative restrictions within the Charities Act, charitabe NDPBs wi continue to prepare their accounts in accordance with the Charities SORP, which draws from current UK GAAP. This checkist shoud therefore not be used for charities, uness IFRS-compiant consoidation schedues are required for Resource Accounts or Whoe of Government Accounts purposes.

8 8 Section A Internationa Financia Reporting Standards: Revised Readiness Tookit Section A Overa summary of management actions Background This section summarises the management actions that are required to impement IFRS successfuy. In competing this section you wi want to draw on information gathered in Section B. Management wi need to ensure that sufficient steps are taken to successfuy impement IFRS and the IFReM. In particuar, management wi wish to review their activities and their organisation so that they are aware of the impact of the transition to the new standards and that they have sufficient resources and knowedge to ensure a successfu transition. Preparation Resources and knowedge COMMENT 1 What are the key impacts on the organisation and its financia reporting arising from the impementation of IFRS? 2 What are the key changes to accounting poicies? 3 What eve of resource is required to successfuy manage the transition? 4 What IFRS staff training is required? Note Consideration shoud be given to training finance and non-finance staff (such as procurement staff and business managers) in the impacts of IFRS. 5 What actions are required to ensure that bodies that are consoidated into the financia statements wi successfuy impement IFRS? 6 What roe do interna audit have in aiding the transition?

9 Internationa Financia Reporting Standards: Revised Readiness Tookit Section A 9 7 What is the potentia impact on the accounts preparation timetabe as a resut of the transition to IFRS? COMMENT 8 How is management panning to keep the Audit Committee informed of the timetabe and progress being made towards adoption of the revised standards? 9 What is the potentia budgetary impact of the move to IFRS? 10 How and when wi engagement with the externa auditor take pace? 11 Wi the Accounts incude a statement on preparedness and the potentia impact of the transition to IFRS? Preparations Systems and data 12 What impications to the configuration of financia systems arise as a resut of the transition to IFRS? 13 For what baances and discosures is there a need to capture new and revised data with regard to IFRS? Note Areas such as eases, financia instruments and fixed assets may require additiona data capture. 14 How do management accounting processes need to be re-engineered to ensure they are compatibe with IFRS? 15 Has the accounts format been atered to ensure it is ine with the new requirements of the IFReM? Note The format shoud agree with IFRS Department Yeow, IFRS Agency Pink, IFRS NDPB Green and IFRS Magenta Pension Scheme Accounts, as appropriate. ( 16 Are parae systems needed for , for IFRS and FRS based information, to ensure that comparative information can be accuratey produced?

10 10 Section B Internationa Financia Reporting Standards: Revised Readiness Tookit Section B Accounting changes First time adoption Background In Apri 2008 the Treasury announced the Trigger Points for the impementation of IFRS in the ead up to the first set of IFRS compiant accounts for the year ending 31 March IFRS shadow accounts for wi aso be produced. Key dates are now as foows: 30 September 2008 reporting entities shoud have competed the restatement of 31 March 2008 baances into an IFRS basis; 31 December 2008 competion of NAO audit of 31 March 2008 baance sheet restatement; 10 September 2009 reporting entities shoud have competed their shadow accounts and passed to the NAO; and 31 December 2009 the NAO shoud have competed its dry-run audit of the shadow accounts. Management wi need to ensure that they are abe to produce financia reporting information on an IFRS basis to feed into restated comparatives. Unti 31 March 2009 management wi aso need to produce information on the current UK GAAP basis for their pubished financia statements. In overview there is a need for organisations to: Assess the areas of impact on their accounts; Capture the required data for the restatement figures required by the trigger points; Assess the impact of the revised standards on the format of their financia statements; and Review their accounting poicies to identify any required revisions.

11 Internationa Financia Reporting Standards: Revised Readiness Tookit Section B 11 Entities wi need to consider the foowing standards in their first time adoption review process: IFRS 1 First Time Adoption of IFRS; IAS 1 Format of the Accounts; IAS 8 Accounting Poicies. First time adoption of IFRS IFRS 1 Background IFRS 1 sets out detaied rues that entities must foow when adopting IFRS for the first time. The standard aso sets out a number of exemptions that may be appied when adopting IFRS. However, for UK Government impementation Treasury have ceary stated that adjustments shoud ony be made if they are materia. If an entity wishes to appy either of these exemptions a fu audit trai must be produced to outine the assessment and sufficient evidence must be provided to evidence that the appication of the exemption is appropriate. The main issues that bodies need to be aware of when adopting IFRS 1 are: A fu audit trai for a adjustments from UK GAAP to IFRS wi be required; Additiona reconciiations and discosures wi need to be produced, see detaied sections beow; A significant amount of anaysis and documented evidence wi be required even when proving ni adjustments; Key issues need to be fagged eary and discussed with auditors to ensure there is timey agreement on accounting treatment; The ength of discosures within the accounts as a resut of IFRS wi be increased; Eary engagement with Audit Committees is essentia to ensure they are aware of the process and the impact of the change to IFRS; and Significant investments in terms of time and resources are ikey to be required to ensure that a issues with IFRS are resoved, especiay for more compex accounts. The Treasury has adapted the rues of IFRS 1 in the IFReM. This section refects these adaptations and interpretations.

12 12 Section B Internationa Financia Reporting Standards: Revised Readiness Tookit IFRS 1 Areas of impact Process 17 Has fu consideration been given to the key issues for appying fu retrospective restatement of IFRS required by the Treasury s Trigger Points? Restatement of Baances 18 Has a restatement of the Baance Sheet as at 31 March 2008 been carried out and submitted to the NAO by 30/09/2008? 19 Are pans in pace for the production of a fu set of shadow accounts for the financia year eading to the 10 September 2009 Trigger Point for the foowing: Baance Sheet as at 31 March 2009 OCS/Income Statement for the year ended 31 March 2009 Cash Fow Statement for the year ended 31 March 2009 Notes to the Accounts Statement of Operating Cost by Departmenta Aim and Objective (resource accounts ony) Note As stated in the new estimates manua, the Statement of Pariamentary Suppy for Departments is not to be restated as a resut of the adoption of IFRS. Discosure of the Impact of IFRS 20 Have pans been deveoped for producing additiona discosure notes outining the effect of the adoption of IFRS, incuding the foowing, where the adjustments are materia? A reconciiation of equity (net assets) under FRS to equity under IFRS as at 1 Apri A reconciiation between net operating costs for the year reported under UK GAAP and as reported under IFRS where this is not expained through the reconciiation of taxpayer s equity;

13 Internationa Financia Reporting Standards: Revised Readiness Tookit Section B 13 A discosure note of any required impairment due to the adoption of IFRS. Note Cients cannot use the adoption of IFRS to make corrections to inappropriate poicies under UK GAAP, or the inappropriate appication of egitimate poicies. Where past errors are identified as part of the IFRS impementation, they shoud be discosed separatey; these reconciiations shoud ceary identify the impact of IFRS ony. Format of the accounts IAS 1 Background IAS 1 is ess prescriptive than UK GAAP with regard to the structure and format of accounts. The IFReM sets out a prescribed format for government entities that must be appied and removes some of the options within IAS 1, for exampe the IFReM states that a Statement of Changes in Equity must be prepared, removing the option to produce a Statement of Recognised Income and Expenses. Entities shoud refer to the IFREM IFRS based Department Yeow, Agency Pink and NDPB Green for an indication of appropriate format of statements and accounts. IAS 1 Areas of impact 21 Has the format of the accounts, incuding accounting poicies, significant judgements and discosure notes, been considered to become IFRS compiant? Note The format shoud agree with IFRS Department Yeow, IFRS Agency Pink, IFRS NDPB Green and IFRS Magenta Pension Scheme Accounts, as appropriate. ( 22 Has the format of accounts been discussed with the auditors? (This shoud be considered in the audit of the 31/03/08 restatement of baances.)

14 14 Section B Internationa Financia Reporting Standards: Revised Readiness Tookit Accounting poicies IAS 8 Background Accounting poicies are defined in IAS 8 as the specific principes, bases, conventions, rues and practices appied by an entity in preparing and presenting financia statements. Some revisions to accounting poicies wi be required as a resut of the adoption of IFRS and the private sector saw a significant increase in the ength of accounting poicy discosures in the financia statements as a resut of the transition to IFRS. This increase in ength was argey due to the need to provide more expanation on appication of the standards, but aso due to the requirement to expain areas of judgement and an indication of uncertainties in accounting estimates. The adoption of IFRS is an opportunity for cients to revisit their accounting poicies and ensure that they compy with the guidance in a areas. IAS 8 Areas of impact COMMENT 23 Is the entity reviewing its accounting poicies to confirm that they are compiant with the requirements of IFRS and the IFReM? Areas that entities wi commony need to revise incude: Consoidation and boundary issues (for nondepartments ony). The use of fair vaue for and and buidings fixed assets and the entity s approach to vauation of the assets. The use of fair vaue or depreciated historic cost for non-property assets. The approach used to vauing financia instruments. The approach to vauing and depreciating intangibe non-current assets. The appication of the revised inventories guidance (where appicabe). The cacuation of empoyee benefits accruas.

15 Internationa Financia Reporting Standards: Revised Readiness Tookit Section B 15 The appication of the revised reated parties guidance. COMMENT The expanation of significant areas of judgement and uncertainties in accounting estimates. The approach to recognising and accounting for PPP / PFI arrangements. 24 Are there any adjustments to existing poicies which, whist not stricty required for IFRS purposes, are proposed to aid the carity and understanding of the financia statements?

16 16 Section B Internationa Financia Reporting Standards: Revised Readiness Tookit Consoidation and boundary issues Background In addition to the review of impementation procedures, poicies and the format of the accounts, entities need to assess the impact of IFRS on their accounting boundary. The IFReM states that the departmenta boundary is different from the concept of a group under generay accepted accounting practice: it is based on in-year budgetary contro and not on strategic contro. The IFReM aso gives detais of bodies both inside and outside the departmenta resource accounting boundary, with NDPBs specificay excuded. However, there may be some impact on NDPBs and Trading Funds as they wi be appying the consoidation and boundary standards in fu. The standards that entities need to consider in this area are: IAS 27 Subsidiaries; IAS 28 Associates; and IAS 31 Joint Ventures. IAS 27, 28, 31 Areas of impact COMMENT 25 What are the effects of IFRS on the accounting boundary? Subsidiaries IAS 27 For those entities that are not specificay outined in the IFReM as outside of the accounting boundary (see IFReM chapter ), under IAS 27 a subsidiaries must be consoidated. Subsidiaries are defined in terms of contro, defined as the power to govern the financia and operating poicies of an enterprise so as to obtain benefit from its activities. 26 Are there reevant reationships which demonstrate the foowing factors that indicate contro and may, as a resut, impact on the financia statements? (Note one or more of these factors wi be judged to indicate contro and it is the theoretica abiity to contro, not the exercise of it which is reevant)

17 Internationa Financia Reporting Standards: Revised Readiness Tookit Section B 17 Ownership of more than 50 per cent of the voting power. COMMENT Power over more than 50 per cent of the voting rights. Power to govern financia and operating poicies. Power to appoint or remove the majority of the members of the board of directors. Power to cast the majority of votes at meetings of the board of directors. 27 Are there changes to the entity s consoidation process as a resut of IFRS? Associates IAS 28 Under IAS 28, investors must use the equity accounting method to account for a associates. Associates are cassified as such if the investor has significant infuence over the investee, being the power to participate in the financia and operating poicy decisions of the investee but not contro or joint contro over those poicies. 28 Are there reevant reationships which demonstrate the foowing that indicate significant infuence? (Note As for contro, one or more or these factors wi indicate significant infuence) Representation on the board (greater than 20 per cent of the voting power resuts in significant infuence). Participation in the poicy making process. Materia transactions with the investee. Interchange of manageria personne. Provision of essentia technica information. 29 Are there changes to the bodies which wi be equity accounted as a resut of the transition to IFRS?

18 18 Section B Internationa Financia Reporting Standards: Revised Readiness Tookit Joint ventures IAS 31 COMMENT Joint ventures are defined in terms of a contractua arrangement, whereby two or more parties undertake an economic activity that is subject to joint contro. Note IAS 31 ony appies when decisions require unanimous consent. Three types of joint ventures are identified, jointy controed operations, jointy controed assets and jointy controed entities. 30 What contractua arrangements whereby two or more parties undertake an activity that is subject to joint contro, and unanimous consent is required to take decisions, exist? 31 If such arrangements exist then is the body accounting for them as foows, dependent on the nature of the arrangement? Jointy controed operations: The assets it contros and the iabiities it incurs. The expenses it incurs. Its share of the joint venture income. Jointy controed assets: Its share of the jointy controed assets. Any iabiities it has incurred directy. Its share of any iabiities incurred jointy. Its share of the joint venture income and expense. Any expenses it has incurred. Jointy controed entities the venturer wi need to appy one of the foowing treatments: Proportiona consoidation. The equity method of accounting for the entity.

19 Internationa Financia Reporting Standards: Revised Readiness Tookit Section B 19 Investments Background Generay the impact of IFRS on investments is restricted to the Financia Instruments standards, IAS 32 and 39 and IFRS 7, equivaent to FRS 25, 26 and 29 to be impemented in under UK GAAP and the FReM. However, there are two specific areas where other standards may affect the accounting for investments: Non-current assets hed for sae IFRS 5; and Investment property IAS 40. If an entity has any assets that it is panning to se, or property that is hed as an investment, then these standards wi appy. IFRS 5 appies to a disposa group (group of assets and associated iabiities to be disposed of by sae or otherwise together as a group in a singe transaction) and noncurrent assets hed for sae (that are not under the scope of financia instruments or IAS 40 Investment Property). IAS 40 defines investment property as property hed to earn rentas or for capita appreciation or both, rather than for: use in the production or suppy of goods and services; for administrative purposes; or sae in the ordinary course of business. Note There is no ink between assets hed for sae and discontinued operations. Discontinued operations wi not have a significant impact in the pubic sector as the IFReM states that machinery of government transfers do not count as discontinued operations. Non-current assets hed for sae and discontinued operations IFRS 5 IFRS 5 Areas of impact 32 Are non-current assets hed for sae cassified appropriatey and shown separatey on the Baance Sheet? 33 Are a such assets vaued at the ower of carrying amount and fair vaue ess costs to se and not being depreciated? 34 Has any impairment as a resut of the change in vauation to ower of carrying amount ess costs to se been recognised?

20 20 Section B Internationa Financia Reporting Standards: Revised Readiness Tookit Note The recognition of subsequent gains is aowed, but ony to the extent that they reverse any impairment oss. Investment property IAS 40 IAS 40 Areas of impact 35 Is the entity hoding investment properties at fair vaue and not depreciating them? Note The option to vaue investment property at depreciated historic cost has been removed by the IFReM. 36 Is the entity passing a revauation gains/ osses reated to investment property through the OCS? 37 Is the entity cassifying investment properties that they have deveoped for sae as stock? 38 Is investment property that is to be occupied by the entity being, correcty, cassified as property, pant and equipment? Non-current assets Background The transition to IFRS with regard to non-current (fixed) assets wi affect the majority of entities within the pubic sector. The internationa standards require some significant changes in accounting treatment that wi resut in adjustments for most entities. The standards that impact on the accounting for non-current assets are: IAS 16 Property, Pant and Equipment; IAS 38 Intangibe Assets; IAS 23 Borrowing Costs; IAS 36 Impairment. Note These standards do not appy to assets hed for sae, bioogica agricutura assets, exporation and evauation assets, minera rights and reserves, or investment properties.

21 Internationa Financia Reporting Standards: Revised Readiness Tookit Section B 21 Property, pant and equipment IAS 16 Background IAS 16 is simiar to the equivaent UK standard, FRS 15, in many respects though there are some changes in emphasis and new rues. These are highighted beow. There is the opportunity for entities to revisit their accounting for non-current assets as a resut of the adoption IFRS and introduce a more component based approach. This wi require materia components of non-current assets to be capitaised and depreciated separatey, which wi aow a more accurate refection of the consumption of economic benefits and the recapitaisation of components when they are repaced. However, we advise entities to take a pragmatic approach to the recognition of components under IAS 16 and ony recognise components if there is a cear case for doing so. The appicabiity of IAS 16 to infrastructure and heritage assets is detaied in the IFReM in Chapter 6. IAS 16 Areas of impact 39 Is the entity vauing property fixed assets: At vauation and not historic cost? Using the most appropriate method? Note Options incude: quinquennia vauation suppemented by indexation and no interim vauations, annua vauation, or a roing programme of revauation. The option given in IAS 16 to measure at cost has been withdrawn by the IFReM, as has the option to vaue ony certain casses of assets. At fair vaue using a method determined by vauers? As assets under construction as appropriate? Using the most appropriate reserve to record the revauation (revauation reserve, donated asset reserve or government grant reserve)? 40 Is the entity recognising and vauing nonproperty fixed assets at fair vaue, or depreciated historic cost for assets with a short ife or ow vaue?

22 22 Section B Internationa Financia Reporting Standards: Revised Readiness Tookit 41 Is the entity capitaising donated assets at fair vaue with the credit entry made to the donated asset reserve? 42 Is the entity capitaising subsequent expenditure when it is probabe economic benefits wi fow and the costs can be measured reiaby? (Note The requirement under FRS to extend the economic ife of the asset has been removed) 43 Is the entity taking revauation osses first to reserves then to the OCS for any oss in excess of previous revauation gains? (Note The reevant reserve must be used, donated assets to the donated asset reserve, grant financed to government grant reserve) 44 Do any of the entity s non-current assets have a residua vaue? Note If so then this residua vaue, where materia, must be revisited at every Baance Sheet date with depreciation adjusted accordingy. 45 Is the entity vauing assets that have been purchased for non-monetary assets at fair vaue? Intangibe fixed assets IAS 38 Background There are substantia differences between IAS 38 and the equivaent UK standard FRS 10, regarding the identification of assets and the capitaised costs of such assets. There is the potentia for adjustments to be required on adoption of IAS 38 for some entities. The Treasury have adapted the rues of IAS 38 in the IFReM and, as a resut, we are not expecting significant additions or removas from entities baance sheets. However, where there is a cear case for capitaisation of inteectua property and database type assets, they shoud be recognised.

23 Internationa Financia Reporting Standards: Revised Readiness Tookit Section B 23 IAS 38 Areas of impact 46 Is the entity recognising intangibe assets when they are separatey identifiabe from the business and meet the criteria of IAS 38 (as opposed to the requirement for assets to have an avaiabe market prior to recognition under FRS 10)? Note There is no presumption under IAS 38 that intangibes have a finite Expected Usefu Life, unike under FRS 10. However, if the entity chooses an infinite ife for an intangibe asset then annua impairment reviews must be carried out. 47 Is the entity hoding intangibe assets at the appropriate vauation? On first time adoption, IAS 38 aows entities to eect to used deemed cost for initia recognition of the intangibe asset where that asset meets the recognition criteria in IAS 38 and the revauation criteria. That deemed cost may be fair vaue, or cost or depreciated repacement cost (DRC). Under IFRS 1 an entity can ony eect to use these routes if the intangibe asset meets both recognition criteria in IAS 38, incuding reiabe measurement of origina cost. Thus, an entity can ony use retrospective capitaisation where it hods reiabe origina cost information in reation to the internay generated asset. For subsequent measurement IAS 38 aows the use of either the cost or revauation mode for each cass of intangibe asset. The IFReM has withdrawn the option to vaue intangibe assets at cost. Where an active market exists intangibe assets shoud be measured at fair vaue and where it does not, intangibe assets shoud be measured using indices or some suitabe aternative to assess the DRC of intangibe assets which is a proxy for fair vaue. Note Intangibes wi have to be retrospectivey vaued at the date of adoption of IFRS.

24 24 Section B Internationa Financia Reporting Standards: Revised Readiness Tookit 48 Is the entity capitaising deveopment costs (they must be capitaised under IAS 38, unike under FRS where this was optiona)? To do so, has the entity been abe to demonstrate the foowing: the technica feasibiity of competing the intangibe asset so that it wi be avaiabe for use or sae; its intention to compete the intangibe asset and use or se it; its abiity to use or se the intangibe asset; how the intangibe asset wi generate probabe future economic benefits. Among other things, the entity can demonstrate the existence of a market for the output of the intangibe asset or the intangibe asset itsef or, if it is to be used internay, the usefuness of the intangibe asset; the avaiabiity of adequate technica, financia and other resources to compete the deveopment and to use or se the intangibe asset; and its abiity to measure reiaby the expenditure attributabe to the intangibe asset during its deveopment. 49 Is the entity capitaising internay generated software as an intangibe asset? Note Under the UK FReM internay generated software was capitaised as a tangibe asset (chapter ). 50 Is the entity expensing website costs rather than capitaising them, uness the entity can prove that the site is used to deiver future service potentia? Note If the website is simpy for the purpose of informing stakehoders of the services or objectives of the reporting entity the costs shoud not be capitaised.

25 Internationa Financia Reporting Standards: Revised Readiness Tookit Section B 25 Borrowing costs IAS 23 Background IAS 23 sets out the accounting treatment for borrowing costs. The standard requires borrowing costs to be capitaised when they reate to fixed assets, removing the option to capitaise under FRS 15. The IFReM states that cost of capita is outside the scope of IAS 23 and, therefore, shoud not be capitaised. IAS 23 Area of impact 51 Is the entity capitaising any finance costs reated to fixed assets whie being prepared for intended use or sae (except cost of capita)? Impairment IAS 36 (Appies to and, buidings, machinery and equipment, intangibes, and assets carried at revaued amounts under IAS 16 and IAS 36) Background IAS 36 is simiar to the equivaent UK standard, FRS 11, though there are some areas of difference with regard to the accounting and measurement of impairments. IAS 36 Areas of impact 52 Are impairments aocated to a reevant revauation reserve first, at a times, when an asset is found to be impaired? Note Unike under FRS where impairment for a permanent diminution is taken to the OCS. 53 Is the entity assessing impaired assets by comparing the carrying vaue with the higher of fair vaue ess costs to se and vaue in use?

26 26 Section B Internationa Financia Reporting Standards: Revised Readiness Tookit 54 Where an asset is not hed for the purpose of generating cash fows, is the entity cacuating the vaue in use with reference to the cost of repacing the service potentia provided by the asset? 55 Where appicabe, is the entity not depreciating goodwi and carrying out annua impairment reviews as required by IAS 36? Accounting for PPP arrangements, incuding PFI contracts, under IFRS Background Under IFReM most PPP / PFI assets wi come onto the pubic sector baance sheet. The accounting treatment under IFRS is determined by whether the PPP arrangement, incuding PFI contracts, meets the definition of a service concession arrangement under IFRIC 12 Service Concession Arrangements. If the definition is met, the asset wi be on the grantor s baance sheet, vaued in the same way as other assets of that generic type, with the iabiity vaued accordingy with reference to the capita vaue of the contract. The standards that appy to PPP arrangements, incuding PFI contracts, are: IFRIC 12 Service Concession Arrangements IAS 17 Leases 56 Does the arrangement meet the definition of a service concession arrangement under IFRIC 12? COMMENT A service concession arrangement is one which contractuay obiges the private sector operator to provide the services reated to the particuar infrastructure to the pubic on behaf of the grantor (the pubic sector).

27 Internationa Financia Reporting Standards: Revised Readiness Tookit Section B 27 In addition, the grantor must: COMMENT Contro or reguate what services the operator must provide with the infrastructure, to whom and at what price; and Contros, through beneficia entitement or otherwise, any significant residua interest in the infrastructure at the end of the term of the arrangement. 57 Has the PPP / PFI contract been accounted for as on baance sheet when there has been a cear case that contro and residua vaue have been transferred to the private sector operator? 58 Does the infrastructure asset meet the criteria for capitaisation? Probabiity of future economic benefit? Reiabe measurement of cost? These shoud be recognised in accordance with IAS 16 and vaued in the same way as other noncurrent assets of a simiar type. 59 How is the arrangement to be accounted for? Can separate arrangements within the contract reating soey to the infrastructure asset be identified? If so, then the asset wi be measured as under IAS 17 Leases, with the service eement and the interest charge recognised as incurred over the term of the engagement. Is there a unitary payment stream that incudes infrastructure and service eements that cannot be separated? In this case, the service eement of the payment must be estimated. The fair vaue of the asset determines the amount to be recorded as an asset together with an offsetting contract iabiity payabe. In both cases the iabiity is ony for the capita eement of the contract obigation. The interest charge and the service eements shoud be expensed in the OCS.

28 28 Section B Internationa Financia Reporting Standards: Revised Readiness Tookit 60 Has the correct interest rate impicit in the contract been used? COMMENT For contracts signed before 1 Apri 2008 the grantor shoud use the risk free market rate at the time the contract was signed as pubished by the Treasury on the FReM website ( For contracts signed after 1 Apri 2008 the rate shoud be cacuated using a formua based on the ong-term nomina interest rate and the infation rate, as pubished in the Treasury s Pocket Data Bank. There is guidance on this formua and a ink to the Data bank on the FReM website. (www. financia-reporting.gov.uk) 61 Where the arrangement is on baance sheet whereas previousy it was off baance sheet under UK GAAP: Has the non-current asset been measured in the same way as other non-current assets of that generic type at the opening baance sheet date? Has the iabiity been measured at its fair vaue with reference to the capita vaue of the contract? 62 Has the subsequent measurement of the non-current asset been done using an appropriate asset revauation approach? Have iabiities been measured using the appropriate discount rate? 63 Has any revenue received under any revenue sharing provision in the service concession arrangement been recognised in ine with IAS 18 Revenue? 64 Have any guarantees by the grantor to the operator made as a part of the arrangement been appropriatey accounted for under IAS 32 and 39?

29 Internationa Financia Reporting Standards: Revised Readiness Tookit Section B 29 Inventories Background The standards that appy to inventories are: IAS 2 Inventories; IAS 11 Construction Contracts IAS 41 Agricutura Assets. Inventories are defined as assets hed for sae in the ordinary course of business; or in the process of production for such sae; or in the form of materias or suppies to be consumed in the production process or in the rendering of services. Entities that are inventory rich may need to review their accounting for their inventories against IAS 2 in detai to ensure that they are adopting the correct approach. Inventories IAS 2 For ong term contract inventory issues see construction contracts beow. Excudes agricutura and forest products, mineras and minera compounds Background IAS 2 and SSAP 9 are simiar standards in most respects though there are some minor adjustments to the accounting and the scope of the standards. IAS 2 Areas of impact 65 Is the entity accounting for a inventories of a simiar nature and use consistenty? 66 Is the entity hoding a inventories at current cost? Note as is required by the IFReM. 67 Is the entity vauing inventories using a method other than Last In First Out (LIFO), as is specificay stated in IAS 2?

30 30 Section B Internationa Financia Reporting Standards: Revised Readiness Tookit 68 Is the entity appying the foowing detaied rues for inventories (as stated in the IFReM): Stockpie goods (strategic materias hed for use in nationa defence and emergencies) spit between fixed assets and other inventories and accounted for separatey? Confiscated, seized and forfeited property cassified as surrenderabe to the consoidated fund? Goods hed under price support and stabiisation programmes (purchased by, for exampe, the Rura Payments Agency under order by the EU) vaued at cost adjusted by depreciation or revauation as prescribed? Construction contracts IAS 11 Background IAS 11 is simiar to the equivaent standard, SSAP 9. A construction contract is defined as a contract specificay negotiated for the construction of an asset or a combination of assets that are cosey inter-reated or interdependent in terms of their design, technoogy and function or their utimate purpose or use. There is no reference to a minimum duration for such a contract and the standard appies to a contracts that start in one reporting period and end in the next. IAS 11 appies to assets such as bridges, buidings, dams, machines buit to customer order and specifications with a negotiated price and bespoke (though not minimay customised) software contracts. Note This standard appies ony to entities that deveop ong term construction contracts for sae, IAS 2 or IAS 16 wi appy to entities that are purchasing such assets. IAS 11 Area of impact 69 Is the entity using one of the foowing methods to recognise assets: eve of costs incurred, surveys of work performed, competion of a proportion of the contract and percentage competion (but ony when the outcome of the contract can be estimated reiaby)?

31 Internationa Financia Reporting Standards: Revised Readiness Tookit Section B 31 Agricutura assets IAS 41 Background There is no equivaent UK standard to IAS 41. The rues for the treatment of agricutura assets ony appy up to the point of harvest, post harvest IAS 2 Inventories appies. (Note This is a speciaist standard which wi not appy to many entities. The IFReM carifies that this standard ony appies in the government sector to activities that are undertaken for commercia gain, which may, or may not, comprise the fu entirety of a reporting entity s operations. IAS 41 does not appy to goods hed under price stabiisation programmes.) IAS 41 Area of impact 70 Is the entity carrying a bioogica agricuture assets at fair vaue ess estimated point of sae costs, with variations in the carrying amount reported as part of operating costs? Debtors Background IAS 39 has one specific rue reating to bad debt provisions that may impact on the government sector. Debtors IAS Is the entity, in genera, ony providing for specific bad debts (specificay stated in IAS 39)? Note Entities can make a bad debt provision providing it is based on evidence, with reference to the current economic environment.

32 32 Section B Internationa Financia Reporting Standards: Revised Readiness Tookit Cash Background IAS 7 sets out the format and detais of the Cash Fow Statement. The IFReM contains a prescribed format for the cash fow statement that must be foowed. There is, however, one additiona rue within IAS 7 which may impact on some government entities. Cash fow statement IAS 7 72 Has the entity foowed the format of the Cash Fow Statement as outined in IAS 7? Note As is stated in the IFReM. 73 Have departments incuded the additiona note in Chapter 5 of the IFReM, reconciing cash and cash equivaents due to the consoidated fund, in the resource accounts format? 74 Is the entity incuding cash equivaents in the Cash Fow Statement and the cash ine of the Baance Sheet? Note Cash equivaents are defined as short term, highy iquid investments that are readiy convertibe to cash and are subject to a ow risk of changes in vaue. This is a change in cassification from UK GAAP.

33 Internationa Financia Reporting Standards: Revised Readiness Tookit Section B 33 Leases Background IAS 17 is simiar in many respects to SSAP 21, but the focus on the assessment of the finance/operating ease spit is based soey on the whether substantiay a of the risks and rewards of ownership of the asset have been transferred to the essee, removing the 90 per cent test, of the present vaue of minimum ease payments as a proportion of the vaue of the asset, avaiabe in SSAP 21. In addition IAS 27 states that any and and buiding eases shoud be subject to separate assessments for the and and buiding eements. This is ikey to ead to more buidings being incuded on pubic sector baance sheets. IFRIC 4 extends the scope of the ease based accounting treatment beyond the ega form or eases to ease type arrangements, which wi increase the discosure and recognition requirements for some entities. Leases IAS Foowing a review of materia contracts, are extensive changes required to ensure that the cassification of operating/finance eases is correct? The organisation needs to pay specia attention to any operating eases that are cassified as such due to the strict appication of the 90 per cent test within SSAP 21, as they wi need to be revisited to ensure that the cassification is correct aong the foowing terms. The ease cassification test is based on the baance of risk and rewards of ownership. Indicators that a ease shoud be cassified as a finance ease incude: The ease transfers ownership to the essee at the end of the term. The ease contains a bargain purchase option. The present vaue of the minimum ease payments covers at east substantiay a of the fair vaue of the asset.

34 34 Section B Internationa Financia Reporting Standards: Revised Readiness Tookit The asset is speciaised. The essee has an obigation to compensate for the essor s osses. The essee is exposed to the residua vaue of the asset. The ease can be extended at a rent substantiay ower than the market rent. 76 Is the entity assessing any arrangements which do not take the ega form of a ease yet convey the right to use an asset in return for payment or a series of payments? If so IFRIC 4 may require the recognition of a ease (finance or operating) together with the appropriate discosure. (Two criteria must be met: the arrangement must be based on the right to use a specific asset; and the arrangement must contain a right to contro the use of an asset, for exampe an outsourcing arrangement or a teecoms contract that provides the right to capacity/bandwidth). If the arrangement fas under the scope of IFRIC 4 then the standard risk and rewards tests wi need to be appied to assess the operating/finance ease spit as detaied above. 77 Is the entity reviewing a finance eases for and and buidings? Such eases wi need to be revisited and reassessed using the above cassifications as, under IAS 17, and eements must be separated from buidings eements in combined eases and cassified as operating eases uness the and transfers to the essee at the end of the ease term. 78 Do any of the entity s eases incude incentives such as rent free periods or minimum incrementa increases? If so are they incuded in the cassification assessment and accounted for appropriatey within the finance/operating ease?

35 Internationa Financia Reporting Standards: Revised Readiness Tookit Section B Is the entity discosing operating ease payments on the basis of the year they are paid rather than the year in which the commitment expires? Note This is a change to the SSAP 21 requirement. 80 Does the organisation act as a essor in any ease transactions? If so the ease wi need to be accounted for as foows: Finance ease: Initiay recognise the asset as a receivabe at an amount equa to the net investment in the ease (gross investment discounted using the impicit interest rate). Subsequenty recognise income on a pattern refecting a constant periodic rate of return on the essor s net investment in the finance ease. Operating ease: Present the asset as appropriate to its nature. Recognise ease income in a straight ine basis over the ease term. Incude the transaction expenses with the asset and depreciate in ine with the entities poicy.

36 36 Section B Internationa Financia Reporting Standards: Revised Readiness Tookit Other areas of impact Background IAS 18, IAS 19, IAS 24 and IFRS 8 contain some areas of revised guidance that wi impact on the entities when adopting IFRS. Revenue IAS 18 (Tax and other revenue streams) COMMENT 81 Revenue is accounted for in ine with the criteria set out in IAS 18 Revenue. The IFReM detais the treatment of some specific types of income. SIC 31 Barter Transactions Invoving Advertising Services aso appies. IFReM Chapter 13 detais the treatment of revenue from taxes and duties for HMRC and the DVLA, this chapter is substantiay the same as the UK-based FReM chapter. Empoyee benefits IAS How wi an assessment of the eves of unpaid eave or other accrued empoyment rights be determined for incusion in the account, if materia? The accrua shoud be based on the eve of untaken eave at the end of the year, adjusted subsequenty in foowing accounting periods. Entities need to ensure that they put in pace processes to capture the data required for the accrua and deveop a pragmatic but defensibe approach to determining the accrua. 83 Is the entity accruing for bonuses in year where appicabe? Reated parties IAS Has the entity considered how reated parties transactions wi be captured and discosed as required by the interpretations in the IFReM.

37 Internationa Financia Reporting Standards: Revised Readiness Tookit Section B 37 For departments, the ministeria tites and names of a ministers who had responsibiity for the department during the year must be incuded in the reated parties discosures. COMMENT The effects of changes in foreign exchange rates IAS 21 Under IAS 21 the average exchange rate method of retransation can ony be used if it is not materiay different from the spot rates over the period. In addition, IAS 21 does not aow organisations to use the rate stated in a forward contract to retransate foreign exchange at the baance sheet date. The spot rate must be used and a derivative financia instrument recognised at fair vaue for the forward contract. 85 How materia are exchange rates to the organisation and are pans in pace to ensure the spot rate is used, uness it is not materiay different from the average exchange rate?

38 38 Section B Internationa Financia Reporting Standards: Revised Readiness Tookit IFRS 8 Operating segments Background The treatment under IFRS 8 is significanty different to SSAP 25 as it requires reporting of segments of an entity s interna reporting framework. The standard wi appy to a non-department entities, whie departments wi continue to produce a Statement of Net Operating Costs by Departmenta Aim and Objective, which wi provide the necessary segmenta information. 86 What segments woud be discosed, foowing the through the eyes of management approach to identifying segments required by IFRS 8? COMMENT 87 Have discosures been deveoped for: The basis of measurement of reportabe segments? Profit/oss, tota assets and tota iabiities for each segment? Note The requirement to separate out assets and iabiities reating to individua segments may prove difficut for some entities. Types of products and services from which each segment derives its revenues? Interest revenues and interest expenses for each reportabe segment?

39 Internationa Financia Reporting Standards: Revised Readiness Tookit Section C 39 Section C Lessons from the private sector The introduction of IFRS in the private sector caused a number of difficuties. The standards that created the most probems were IAS 32, 39 and IFRS 7 on Financia Instruments; IAS 27, 28 and 31 on Subsidiaries, Associates and Joint Ventures; IFRS 2 on Share Based Payment; and IAS 12 on Income Taxes. IFRS 2 and IAS 12 wi not appy to the pubic sector in genera, but the other standards wi be appied, as adapted by the IFReM, which wi resut in significant impacts for some organisations. The key essons from the private sector transition to IFRS are as foows: Eary preparation is essentia to ensure that there is no knock-on impact on the timetabes for the first year of IFRS compiant Accounts; The eve of discosure required under IFRS and therefore the ength of accounts, increased significanty as a resut of the transition and the new standards; For most organisations the impact assessment and understanding of the new standards took consideraby onger than was expected; A significant investment in staff training was required; Fagging up and discussing key issues and potentia areas of difficuty with key stakehoders eary aided smooth transition; Board and Audit Committee engagement is crucia, to ensure that they are invoved in the project and aware of the areas of impact and the potentia risks invoved in the transition. The NAO beieve that a number of these issues wi appy equay to the centra government impementation of IFRS. Given the progress the centra government entities have made in bringing forward the aying and pubication of accounts to the pre-recess period, it is important that the process of impementation is we managed to ensure that timetabes are not adversey affected.