Appendices STANDARDS ISSUED BUT NOT EFFECTIVE IMMEDIATELY WITH EARLIER APPLICATION PERMISSIBLE

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1 Appendices STANDARDS ISSUED BUT NOT EFFECTIVE IMMEDIATELY WITH EARLIER APPLICATION PERMISSIBLE Appendix A: Financial Instruments (IFRS 9) Appendix B: New IFRS Issued and Amendments to Existing Standards Effective in 2011 and Later Years 577

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3 International Trends in Financial Reporting under IFRS: Including Comparisons With Us Gaap, China Gaap, And India Accounting Standards By Abbas Ali Mirza and Nandakumar Ankarath Copyright 2012 by John Wiley & Sons Appendix A FINANCIAL INSTRUMENTS (IFRS 9) 1. OBJECTIVE 1.1 This Standard replaces International Accounting Standard (IAS) 39, Financial Instruments: Recognition and Measurement, and is being introduced in a phased manner. In November 2009, the International Accounting Standards Board (IASB) issued International Financial Reporting Standard (IFRS) 9, Financial Instruments, and introduced new classification and measurement requirements for financial assets to replace the classification and measurement requirements previously included in IAS 39. The first phase deals with the classification and measurement of financial assets effective from January 1, 2013, with an option for early adoption. 1.2 In October 2010, the IASB issued a revised version of IFRS 9 in which it added requirements for classification and measurement of financial liabilities. The requirements for impairment of financial assets measured at and hedge accounting would be introduced in the next two phases. 1.3 IFRS 9 is effective for annual periods beginning on or after January 1, 2013, with early application permitted. IFRS 9 requires retrospective application (subject to some transitional provisions). However, entities that apply IFRS 9 in advance of its effective date for reporting periods beginning before January 1, 2012, can choose not to restate the comparative periods. 1.4 An entity opting for early adoption may choose to enjoy the exemption given in the transitional provision and not to restate comparative information in the year of the initial application. These points are relevant for such entities: Comparative information for prior periods will not be restated. The classification and measurement requirements previously applied in accordance with IAS 39 and disclosures made in accordance with IFRS 7, Financial Instruments: Disclosures, will be retained. The entity should disclose accounting policies for both periods: one applying IFRS 9 (current period) and the other applying IAS 39 (prior period). Any difference between the previous carrying amount and the carrying amount at the beginning of the annual reporting period that includes the date of initial application will be recognized in the opening retained earnings (or other component of equity, as appropriate). 579

4 580 Wiley International Trends in Financial Reporting under IFRS The entity is not required to present a statement of financial position as at the beginning of the earliest comparative period since the entity chooses not to restate comparative information. The additional statement of financial position may be required due to the application of other new and revised IFRS. 2. SYNOPSIS OF THE STANDARD A summary of this Standard, which is effective for annual periods beginning on or after January 1, 2013, with early application permitted, is presented next. 2.1 IFRS 9 requires initial classification of all financial instruments into two classification categories: those measured at and those at fair value. This classification is driven by the entity s business model for managing financial assets and whether the contractual cash flows represent payments only for principal and interest. This classification condition is not an instrument-by-instrument approach to classification and should be determined on a higher level of aggregation. 2.2 The fair value of a financial asset at initial recognition is normally the transaction price. However, if part of the consideration given is for something other than the financial instrument, the fair value of the financial instrument is estimated using a valuation technique. 2.3 Debt instruments that meet the business model and the cash flow test are subsequently measured at ; all other debt instruments are fair valued through the profit and loss (FVTPL). 2.4 An option has been provided to entities to elect to classify a financial instrument as FVTPL even where it qualifies for measurement, if doing so eliminates or reduces accounting inconsistency. 2.5 All equity instruments are fair valued, and the entity may elect to recognize value changes through profit or loss or through other comprehensive income. For equity instruments not held for trading, the entity may designate it to be fair valued through other comprehensive income (FVTOCI). This election is made on an instrument-by-instrument (i.e., share-by-share) basis. Amounts presented in other comprehensive income shall not be subsequently transferred to profit or loss. 2.6 IFRS 9 removes the exemption to use cost as value for unquoted equities and derivatives on unquoted equities but provides guidance on when cost may be an appropriate estimate of fair value. An entity shall use all information about performance and operations of the investee that becomes available after date of initial recognition. To the extent that any such relevant factors exist, they may indicate that cost might not be representative of fair value. In such cases, the entity must estimate fair value. 2.7 Indicators that cost might not be representative of fair value due to changes in the entity and the economic environment include significant changes in Performance of the investee Expectation that the investee s technical product milestones will be achieved Market for the investee s equity or its products or potential products Global economy or the economic environment in which the investee operates Performance of comparable entities, or in the valuations implied by the overall market Internal matters of the investee, such as fraud, commercial disputes, litigation, changes in management or strategy Evidence from external transactions in the investee s equity, either by the investee or by transfers of equity instruments between third parties 2.8 Financial liabilities held for trading are measured at FVTPL. All other financial liabilities are measured at unless the fair value option is applied.

5 Appendix A: Financial Instruments (IFRS 9) The Standard requires a hybrid contract to be classified in its entirety at either amortized cost or fair value. Separation of the embedded derivatives from the financial asset hosts is not required If a financial instrument that was previously recognized as a financial asset is measured at fair value and its fair value decreases below zero, it is a financial liability Reclassification of financial instruments can be done prospectively only in cases where an entity s business model objectives for its financial assets change, making the previous model assessment invalid. Reclassification is prohibited in cases where the other comprehensive income or the fair value option has been exercised For derecognition of financial assets that have been transferred, the entity can derecognize the financial assets only if it has transferred substantially all of the risks and rewards of ownership of the asset. If the entity has relinquished all control over the asset, it may be entirely derecognized; otherwise, continuing involvement of the entity in the financial asset would be recognized. A financial liability should be removed from the balance sheet when it is extinguished or when the obligation specified in the contract is discharged, canceled, or expires Application of IFRS 9, including the amendments to fair value option for financial liabilities, should be applied retrospectively as required by IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors. The Standard contains various exceptions to this retrospective application, including the exception from the requirement to restate comparative information as described in At the date of initial application of IFRS 9 to financial liabilities, the entity may choose to designate the financial liability as fair value through profit or loss if it eliminates or reduces significantly a measurement or recognition inconsistency. It may revoke an existing designation of a financial liability if it as originally designated based on applicable criteria which no longer exist. It may also revoke an existing designation even when the criteria continue to be met The requirements of IFRS 9 are not applied to liabilities that have been derecognized at the date of initial recognition of IFRS 9 (2010) Derivative liabilities linked to unquoted equity instruments that previously were accounted for at cost are measured at fair value at the date of initial application of IFRS 9 (2010). Difference between the carrying amount and the fair value are recognized in the opening retained earnings of the reporting period that includes the date of initial application An entity is not required to restate prior periods if the requirements of IFRS 9 are adopted for reporting periods beginning before January, 1, DISCLOSURE REQUIREMENTS The disclosure requirements of this Standard are presented next. 3.1 IFRS 9 requires additional disclosures in IFRS 7. These are stated next. 3.2 For financial assets designated at fair value through profit and loss that would otherwise be measured at, disclosures should include Exposure to credit risk Credit derivatives or similar instruments used for mitigating credit risk and their fair value Changes in fair value caused by change in credit risk associated with the financial asset 3.3 For financial assets at fair value through other comprehensive income, the disclosure includes Reasons for using this presentation alternative Fair value of each such investment at the end of the reporting period

6 582 Wiley International Trends in Financial Reporting under IFRS All dividends recognized during the period, showing separately those related to investments derecognized during the reporting period and those related to investments held at the end of the reporting period All transfers of the cumulative gain or loss within equity during the period and the reason for such transfers For all equity investments derecognized during the period, the reason for their disposal, fair value of those investments at the date of derecognition, and the cumulative gain or loss arising on disposal 3.4 Disclosure requirements for assets reclassified under IFRS 9 because of the change in business model include Date of reclassification Detailed explanation of the change in business model and a qualitative description of its effect on the entity s financial statements Amount reclassified into and out of each category Effective interest rate determined on the date of reclassification and the interest income or expense recognized for each reporting period following reclassification until derecognition 3.5 Wherever the entity, since the last annual reporting date, has reclassified financial assets for measurement at, the entity needs to disclose Fair value of the financial asset at the end of the reporting period Fair value gain or loss that would have been recognized in profit or loss during the reporting period if the financial assets were not reclassified 3.6 An analysis of the gain or loss recognized in the statement of comprehensive income arising from derecognizing the financial assets measured at is to be included, wherever applicable. This disclosure should include reasons for derecognizing those financial assets. The analysis should show separately gains and losses arising from derecognition of those financial assets. 3.7 Entities that have designated a financial liability at fair value through profit or loss, in addition to the requirement to disclose changes in their own credit risk for liabilities separately in other comprehensive income, are required to provide Details of transfers of cumulative gains/losses within equity and the reasons for the transfer Amount presented in other comprehensive income that was realized on derecognition of liabilities during the period 3.8 On the date of initial application of IFRS 9 by an entity, there are additional disclosures requirement for each class of financial assets. These disclosures include Original measurement category and carrying amount determined in accordance with IAS 39 New measurement category and carrying amount determined in accordance with IFRS 9 Carrying amount of any financial assets in the statement of financial position that were previously designated as measured at fair value through profit or loss but that are no longer so designated, identifying separately those that IFRS 9 requires an entity to reclassify and those that an entity elects to reclassify Qualitative information about how the entity applied the classification requirements in IFRS 9 to those financial assets whose classification has changed as a result of applying IFRS 9 Qualitative information about the reasons for any designation or de-designation of financial assets or financial liabilities as measured at fair value through profit or loss

7 Appendix A: Financial Instruments (IFRS 9) Where financial assets have been derecognized upon transfer but the entity remains exposed to certain risks and rewards associated with the transferred asset, additional disclosure requirements include Carrying amount and fair value of recognized assets or liabilities that give rise to the ongoing involvement in the transferred asset Information on maximum exposure to loss Timing and amount of potential and contractual cash outflows that may be necessary because of the ongoing involvement. The gain or loss on the transferred assets and on any retained interest in those assets should also be disclosed Additional disclosures are required where the total amount of proceeds from transfer activity that qualifies for derecognition is not evenly distributed throughout the reporting period. 4. ILLUSTRATIVE DISCLOSURES IFRS 9, Financial Instruments The company has implemented IFRS 9, Financial Instruments, opting for early adoption with effect from year ended December 31, 2011, ahead of the effective date. The company has applied IFRS 9 retrospectively. Where appropriate, comparative amounts have not been restated. However, the company has chosen to restate the comparative periods (applying IFRS 9 retrospectively in full). Financial Assets All financial assets are classified and subsequently measured at either or fair value on the basis of the entity s business model for managing the financial assets and the contractual cash flow characteristics of the financial assets. The company recognizes that keeping in view the liquidity perspective occasional disinvestment decisions have been taken for instruments held for collecting their contractual cash flows, and such sales are not in conflict with the larger objective of collecting contractual cash flows. The company measures debt instruments at only if both the next conditions are satisfied. The asset is held within a business model whose objective is to hold assets in order to collect contractual cash flows, and The contractual terms of the financial asset give rise to cash flows on specified dates and such cash flows are solely payments of principal and interest on the principal amount outstanding. Wherever either of the two criteria has not been met, the debt instruments have been classified as at FVTPL. The company reserves the option to designate, at initial recognition, a debt instrument that meets the criteria as at FVTPL if such treatment eliminates or significantly reduces an accounting mismatch. In the year under report, the company has not designated any debt instruments that meet the criteria as at FVTPL. Debt instruments that are subsequently measured at are tested for impairment at every reporting date. Investments in equity instruments are classified and measured as at FVTPL unless these are held for trading and are designated by the group to be recognized at FVTOCI. In case of equity investment designated as at FVTOCI, all gains and losses are recognized in other comprehensive income and are not subsequently reclassified to profit or loss, except for dividend income, which is recognized in profit or loss in accordance with IAS 18, Revenue. All existing financial assets of the company have been reviewed and assessed by the board of directors as of December 31, During adoption of IFRS 9, investments in redeemable deposits that were originally classified as available-for-sale financial assets under IAS 39 have been reclassified as financial assets at fair value through profit or loss since they fail to meet the classification

8 584 Wiley International Trends in Financial Reporting under IFRS criteria of. This has led to the cumulative fair value gains in relation to the company s redeemable deposits as of January 1, 2009, of $2 million being reclassified from the investments revaluation reserve to retained earnings. In 2010, the fair value gains in relation to the redeemable deposits of $1.2 million (2009: $0.7 million) have been reclassified from other comprehensive income to profit or loss. Consequently the profit reported for 2010 has been increased by $1.2 million (2009: $0.7 million) as a result of the change in accounting policy. As of December 31, 2010, the company s investments revaluation reserve has been decreased by $1.9 million (2009: $0.7 million) with corresponding increase in retained earnings. Financial Liabilities Changes in the fair value of the financial liability attributable to changes in credit risk for financial liabilities designated as at fair value through profit or loss are recognized in the comprehensive income except where such recognition creates or enlarges an accounting mismatch in profit or loss. These changes in fair value are not subsequently reclassified to profit or loss. This change has impacted accounting for changes in fair value of redeemable cumulative preference shares in the current year. A total change in fair value of these preference shares attributable amounted to $515,000 in the current year of which $240,000 is attributable to changes in credit risk of the liabilities being recognized in other comprehensive income and the balance, $275000, being recognized in profit or loss. Thus, application of IFRS 9 has resulted in profit reported for 2010 being decreased by $240,000. Profit and other comprehensive income reported for 2009 have not been affected as there were no financial liabilities designated at fair value through profit or loss in that year. Notes to Consolidated Financial Statement for the Year Ended December 31, 2010 Schedule of Financial Assets with Altered Classification and Measurement under IFRS 9 and IAS 39 at the Date of Initial Application, December 31, 2010 Financial Assets Bills of exchange Debentures Redeemable deposits (see note (i) above) Investments in equity instruments (unlisted shares) Current measurement category under IAS 39 Held-to-maturity investments Held-to-maturity investments Available-for-sale investments Available-for-sale investments Revised measurement category under IFRS 9 Financial assets at Financial assets at Financial assets at FVTPL Financial assets at FVTOCI Loans to related parties Loans and receivables Financial assets at Loans to other entities Loans and receivables Financial assets at Cash and bank balances Loans and receivables Financial assets at (including cash and bank balances in a disposal group held for sale) Original carrying amount under IAS 39 (US$ 000) New carrying amount under IFRS 9 (US$ 000) 7,321 7,321 1,900 1,900 23,700 23,700 7,100 7,100 4,200 4,200 28,000 28,000 There were no financial assets that the company previously had designated as at FVTPL under IAS 39 that were subject to reclassification upon the application of IFRS 9. Illustrative Footnotes Investments include bonds issued by five-year EXIM Bank wherein payments of principal and interest on the principal amount outstanding are linked to the national wholesale price index. Such linking preserves the real interest earning from the investment, and contractual cash flows remains solely payments of principal and interest on the principal amount outstanding.

9 Appendix A: Financial Instruments (IFRS 9) 585 Investments in five-year Steel Matrix bonds that are convertible into five equity shares of the issuer have been classified as FVTPL since the contractual cash flows are not payments of principal and interest on the principal amount outstanding. The coupon rate does not only reflect consideration for the time value of money and the credit risk; the return is also linked to the value of the issuer s equity.