IFRS for SMEs IFRS Foundation-World Bank

Transcription

1 !International Financial Reporting Standards 1 IFRS for SMEs IFRS Foundation-World Bank January 2011 Astana, Kazakhstan Copyright 2010 IFRS Foundation. All rights reserved.

2 The IFRS for SMEs 2 Topic 2.1(b) Section 12 Other Financial Instruments Issues Section 22 Liabilities and Equity Michael Wells

3 Section 12 Scope All FI not covered by Section 11 (and not scoped out of Sections 11 and 12) Contract to buy or sell non-financial item (commodity, inventory, PP&E) is not a FI. But if it has exotic feature and acts as a derivative, it is in scope of Sec 12. Also it is in Sec 12 if it can be settled net in cash and was not entered into to buy or sell non-financial item to meet the entity s expected sale or usage requirements. 3

4 Section 12 Recognition and measurement Initial recognition: When entity becomes a party to the contractual provisions of the instrument Initial measurement: At FV (normally the transaction price) Transaction costs are charged to expense 4

5 Section 12 Recognition and measurement Subsequent measurement: At FVTPL except: Equity instrument that is not publicly traded and cannot get FV reliably, then measure at cost less impairment Also measure a contract linked to such equity instrument that if exercised will result in delivery of those instruments (ie not settled net in cash) at cost less impairment If previously at FVTPL, but now a reliable FV measure is no longer available, treat most recent FV measure as cost going forward. 5

6 Section 12 Hedge accounting Hedging and hedge accounting are two different things What is hedging? Managing risks by using one financial instrument ( hedging instrument ) purposely to offset the variability in FV or cash flows of a recognised asset or liability, firm commitment, or future cash flows ( hedged item ) 6

7 Section 12 Hedge accounting What is hedge accounting? Matching the change in FV of the hedging instrument and the hedged item in the same income statement Hedge accounting is only an issue when normal accounting would put the two FV changes in different periods sometimes referred to as an accounting mismatch 7

8 Section 12 Hedge accounting 8 The hedger s accounting dilemma: I have a risk in an asset or liability measured at amortised cost Any change in FV or cash flows from that asset or liability is recognised only when realised in cash (asset is sold, liability is settled, cash flows occur) To hedge, I buy a derivative, which is measured at FVTPL at each reporting date I need special hedge accounting to fix this mismatch

9 Section 12 Hedge accounting The hedger s accounting dilemma an illustration: Entity has note payable in a foreign currency due in 3 years. Note measured amortised cost. Signs FX forward contract (derivative) to hedge FX risk. Contract is measured at FVTPL. End of year 1, foreign currency weaker compared to entity s home currency. Therefore loss on derivative but it will take fewer home currency to pay off the note when it becomes due at end of year 3 (gain on payable). 9

10 Section 12 Hedge accounting To achieve hedge accounting, either... Defer recognising change in FV of hedging instrument to same period in which change in FV of the hedged item is recognised under the IFRS for SMEs; or Recognise the change in FV of the hedged item earlier. IFRS for SMEs permits both, depending on circumstances. Hedge accounting is optional. 10

11 Section 12 Hedge accounting 11 To qualify for hedge accounting: Designate and document hedging relationship up front Clearly identify the hedged risk Hedged risk is listed in Hedging instrument is listed in Entity expects hedging instrument to be highly effective in offsetting the designated hedged risk.

12 Section 12 Hedge accounting Hedged risk must be (12.17): Interest rate risk in debt measured at cost FX or interest rate risk in firm commitment or highly probable forecast transaction Price risk in a commodity owned or to be acquired in a firm commitment or highly probable forecast transaction FX risk in a net investment in a foreign operation 12

13 Section 12 Hedge accounting 13 Hedged risk must be (12.17): FX risk in debt instrument measured at cost is not in this list. Why? Under (FX) the debt is translated at spot rate and FX gain or loss is recognised in profit or loss Change in FV of the swap (hedging instrument) is also recognised in profit or loss (measured using forward rate) Natural hedge

14 Section 12 Hedge accounting 14 Hedging instrument must be (12.18): Interest rate swap, FX swap, FX forward, commodity forward Entered into with external party Notional amount = designated principal or notional amount of hedged item Specified maturity not later than maturity or settlement of hedged item Cannot be prepaid or terminated early

15 Section 12 Hedge accounting Hedge of fixed interest rate risk and commodity price risk of commodity held Recognise hedging instrument as asset or liability Change in FV of hedging instrument in P&L Change in FV of hedged item in P&L and adjustment of carrying amount of hedged item even though hedged item is otherwise measured at cost This is called Fair Value Hedge in IAS

16 Section 12 Hedge accounting Hedge of fixed interest rate risk and commodity price risk of commodity held (continued) If hedged risk was fixed interest in debt measured at cost, recognise in P&L the periodic net settlements from the derivative (interest rate swap) in the period in which the net settlements occur. 16

17 Section 12 Hedge accounting 17 Example Assumptions: Entity borrows 1,000, 3 years, 5% fixed rate, payable measured at amortised cost Hedged with a derivative whose value is linked to an interest rate index End of year 1, market rate = 6%. FV of 1,000 payable 2 years 6% = 1,000 x = 890, but this 110 gain is not recognised Value of the derivative declines to -112 Note there is small ineffectiveness = 2

18 Section 12 Hedge accounting 18 Balance sheet at time loan is made: Cash 1,000 Loan payable 1,000 Adjust loan end of year 1 to reflect rate change: Loan payable 890 P&L ( Derivative (Liability) 112 Balance sheet end of year 1: Cash 1,000 Equity (P+L) 2 Derivative (Liability) 112 Loan payable 890

19 Section 12 Hedge accounting Conceptual question regarding the previous example: Does the 890 carrying amount of the loan payable at end of year 1 represent the Fair Value of the loan? Hint: Does the 890 reflect change in credit risk or prepayment risk? If 890 is not Fair Value, what is it? 19

20 Section 12 Hedge accounting 20 Hedge of fixed interest rate risk and commodity price risk (continued) Discontinue hedge accounting when: Hedging instrument expires Hedge no longer meets conditions Entity revokes designation Any gain or loss that was included in the carrying amount of the hedged item is amortised to P&L over remaining life of hedged item.

21 Section 12 Hedge accounting Hedge of variable interest rate risk, FX or commodity price risk of highly probable forecast transaction, or net investment in foreign operation Recognise change in FV of hedging instrument in OCI (assuming it was effective; ineffectiveness reported in P&L) 'Recycle' amount recognised in OCI when hedged item hits P&L or hedging relationship ends. 21

22 Section 12 Hedge accounting Hedge of variable interest rate risk, FX or commodity price risk of highly probable forecast transaction, or net investment in foreign operation (continued) If hedged risk was variable interest in debt measured at cost, recognise in P&L the periodic net settlements from the interest rate swap in the period in which the net settlements occur. This is called Cash Flow Hedge in IAS

23 Section 12 Hedge accounting Example Assumptions: Entity sells goods for 1,000 floating rate 3- year note receivable Interest rate risk managed with a derivative (interest rate swap) End of year 1 interest rates increase PV of cumulative cash flows increase by 100 But FV of swap decreases by 105 Note: Some hedge ineffectiveness 23

24 Section 12 Hedge accounting 24 Opening balance sheet: Receivable 1,000 Equity 1,000 Ineffective portion of hedge: P&L* 5* OCI (Equity) 100 Derivative (Liability) 105 *Ineffective portion of hedge example continued next slide...

25 Section 12 Hedge accounting 25 Closing balance sheet: Receivable 1,000 Equity (OCI)* 100* Derivative (Liability) 105 Equity 995 *Effective portion of the hedge (loss on derivative), which will be amortised to P&L as the higher floating rate interest payments are earned and recognised in P&L in years 2 & 3

26 Section 12 Hedge accounting Hedge of variable interest rate risk etc... Discontinue hedge accounting when: Hedging instrument expires Hedge no longer meets conditions Forecast transaction no longer probable Entity revokes designation Any prior gain or loss on forecast transaction that was recognised in OCI is recycled to P&L 26

27 Section 12 Hedge accounting Disclosures relating to hedge accounting For each type of hedge: Description of hedge (risk, hedged item, instrument) Special disclosures for hedge of fixed interest rate risk and commodity price risk of commodity held Special disclosures for hedge of variable interest rate risk, FX or commodity price risk of commodity held, highly probable forecast transaction, or net investment in foreign operation 27

28 Section 22 Liabilities and equity Scope of Section 22 Principles for classifying an instrument as debt or equity Original issuance of shares and other equity instruments Sale of options, rights, warrants Bonus issues and share splits Issuance of convertible debt continues... 28

29 Section 22 Liabilities and equity Scope of Section 22, continued Treasury shares Distributions to owners Non-controlling interest and transactions in shares of a consolidated subsidiary 29

30 Section 22 Liabilities and equity Principles for classifying an instrument as debt or equity Equity = residual interest in assets minus liabilities Liability is a present obligation (entity does not have a right to avoid paying cash) 30

31 Section 22 Liabilities and equity The following are equity: Puttable instrument that entitles holder to pro rata share of net assets on liquidation Instrument that is automatically redeemed if an uncertain future event occurs or death or retirement of holder Subordinated instrument payable only on liquidation 31

32 Section 22 Liabilities and equity The following are liabilities: Instrument is payable on liquidation, but the amount is subject to a maximum ceiling Entity is obliged to make payments before liquidation such as mandatory dividend Mandatorily redeemable preference shares 32

33 Section 22 Liabilities and equity Members shares in a cooperative are equity only if: Coop has unconditional right to refuse redemption of members shares, or Redemption is unconditionally prohibited by law or entity s charter Otherwise liability 33

34 Section 22 Liabilities and equity 34 Original issuance of shares and other equity instruments Recognise when equity is issued and subscriber is obligated to invest If equity is issued before the entity gets cash, the receivable is an offset to equity (not an asset) If entity gets (nonrefundable) cash before equity is issued, equity is increased No increase in equity is recognised for subscribed shares that have not been issued and entity has not received cash

35 Section 22 Liabilities and equity Sale of options, rights, warrants Same principles as for original issuance of shares (previous slide) Transaction costs in issuing equity instruments Accounted for as a reduction of equity (not an expense) 35

36 Section 22 Liabilities and equity Bonus issues (stock dividends) and share splits These do not change equity Accounted for as reclassification of amounts within equity (out of retained earnings and into permanent capital) Amounts reclassified should be based on local laws 36

37 Section 22 Liabilities and equity Issuance of convertible debt Must account separately for debt component and equity component (conversion right) Debt proceeds = FV of similar risk debt without conversion feature (PV calculation) Equity proceeds are the residual Recorded at issuance; not subsequently revised Subsequently, debt discount = additional interest expense (effective interest method) 37

38 Section 22 Liabilities and equity Issuance of convertible debt - Example 1/1/X1 issue at par a 4% convertible bond, par and maturity amount = 50,000, maturity in 5 years If no conversion feature, would have paid 6% Calculate present value of cash flows at 6%: PV 50,000 due in 5 6% = 37,363 PV annuity 2,000/year 5 6% = 8,425 Total PV = 45,788 Debit cash 50,000 Credit financial liability 45,788 Credit equity (conversion right) 4,212 38

39 Section 22 Liabilities and equity Date Interest Interest 6% Amort. of discount Bond discount 39 Net bond liability 1/1/X1 50,000 4,212 45,788 31/12/X1 2,000 2, ,465 46,535 31/12/X2 2,000 2, ,673 47,327 31/12/X3 2,000 2, ,833 48,167 31/12/X4 2,000 2, ,057 31/12/X5 2,000 2, ,000 31/12/X1: Debit interest expense 2,747 Credit financial liability 747 Credit cash 2,000

40 Section 22 Liabilities and equity Treasury shares Equity instruments entity has issued and later reacquired Measure at cash paid or FV of other consideration given to acquire \ Present as deduction from equity (not asset) No gain or loss recognised on purchase, sale, or cancellation 40

41 Section 22 Liabilities and equity Distributions to owners If cash measurement = cash paid If non-cash measurement = FV of assets distributed Amount reduces equity If entity gets tax deduction for dividend, tax benefit is adjustment of equity Not reduction of income tax expense If entity pays withholding tax on dividends paid, tax reduces equity as part of dividend 41

42 Section 22 Liabilities and equity 42 Non-controlling interest (NCI) and transactions in shares of a consolidated subsidiary In consolidated balance sheet NCI is part of equity (not liability or in between ) Change in parent s controlling interest that does not result in loss of control is a transaction with owners Equity adjustment, not through P&L No adjustment of carrying amounts of assets or goodwill

43 Questions or comments? 43 Expressions of individual views by members of the IASB and its staff are encouraged. The views expressed in this presentation are those of the presenter. Official positions of the IASB on accounting matters are determined only after extensive due process and deliberation.

44 44 This presentation may be modified from time to time. The latest version may be downloaded from: +the+trainer+workshops.htm The accounting requirements applicable to small and medium sized entities (SMEs) are set out in the International Financial Reporting Standard (IFRS) for SMEs, which was issued by the IASB in July The IFRS Foundation, the authors, the presenters and the publishers do not accept responsibility for loss caused to any person who acts or refrains from acting in reliance on the material in this PowerPoint presentation, whether such loss is caused by negligence or otherwise.