Inventories The objective of IAS 2 is to prescribe the accounting treatment for inventories. It provides guidance for determining the cost of inventories and for subsequently recognising an expense, including any write-down to net realisable value. It also provides guidance on the cost formulas that are used to assign costs to inventories. However, IAS 2 excludes certain inventories from its scope: [IAS 2.2] work in process arising under construction contracts (see IAS 11 Construction Contracts financial instruments (see IAS 39 Financial Instruments: Recognition and Measurement) biological assets related to agricultural activity and agricultural produce at the point of harvest (see IAS 41 Agriculture). Cost should include all: [IAS 2.10] costs of purchase (including taxes, transport, and handling) net of trade discounts received costs of conversion (including fixed and variable manufacturing overheads) and other costs incurred in bringing the inventories to their present location and condition Inventory cost should not include: [IAS 2.16 and 2.18] abnormal waste storage costs administrative overheads unrelated to production selling costs foreign exchange differences arising directly on the recent acquisition of inventories invoiced in a foreign currency interest cost when inventories are purchased with deferred settlement terms. Disclosure Required disclosures: [IAS 2.36] -accounting policy for inventories -Carrying amount, generally classified as merchandise, supplies, materials, work in progress, and finished goods. The classifications depend on what is appropriate for the entity carrying amount of any inventories carried at fair value less costs to sell amount of any write-down of inventories recognised as an expense in the period amount of any reversal of a writedown to NRV and the circumstances that led to such reversal carrying amount of inventories pledged as security for liabilities cost of inventories recognised as expense (cost of goods sold). acknowledges that some enterprises classify income statement expenses by nature (materials, labour, and so on) rather than by function (cost of goods sold, selling expense, and so on). Accordingly, as an alternative to disclosing cost of goods sold expense, IAS 2 allows an entity to disclose operating costs recognised during the period by nature of the cost (raw materials and consumables, labour costs, other operating costs) and the amount of the net change in inventories for the period). [IAS 2.39] This is consistent with IAS 1 Presentation of Financial Statements, which allows presentation of expenses by function or nature.
Statement of cash flows Format The objective of IAS 7 is to require the presentation of information about the historical changes in cash and cash equivalents of an entity by means of a statement of cash flows, which classifies cash flows during the period according to operating, investing, and financing activities. The direct method shows each major class of gross cash receipts and gross cash payments. The operating cash flows section of the statement of cash flows under the direct method would appear something like this: Cash receipts from customers xx,xxx Cash paid to suppliers xx,xxx Cash paid to employees xx,xxx Cash paid for other operating expenses xx,xxx Interest paid xx,xxx Income taxes paid xx,xxx Net cash from operating activities xx,xxx The indirect method adjusts accrual basis net profit or loss for the effects of non-cash transactions. The operating cash flows section of the statement of cash flows under the indirect method would appear something like this: Profit before interest and income taxes xx,xxx Add back depreciation xx,xxx Add back amortisation of goodwill xx,xxx Increase in receivables xx,xxx Decrease in inventories xx,xxx Increase in trade payables xx,xxx Interest expense xx,xxx Less Interest accrued but not yet paid xx,xxx Interest paid xx,xxx Income taxes paid xx,xxx Net cash from operating activities xx,xxx
Events after the reporting period Adjust assets and liabilities where events after the end of the reporting period provide further evidence of conditions existing at the end of the reporting period Do not adjust but disclose important events after the end of the reporting period that do not affect conditions of assets or liabilities at balance sheet date Dividends proposed or declared for the reporting period should not be as a liability at end of reporting period
Income taxes The objective of IAS 12 (1996) is to prescribe the accounting treatment for income taxes. Temporary difference: a difference between the carrying amount of an asset or liability and its tax base. Taxable temporary difference: a temporary difference that will result in taxable amounts in the future when the carrying amount of the asset is recovered or the liability is settled. Deductible temporary difference: a temporary difference that will result in amounts that are tax deductible in the future when the carrying amount of the asset is recovered or the liability is settled.
Property, plant and equipment Property, plant and equipment are tangible items that: (a) are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and (b) are expected to be used during more than one period. The cost of an item of property, plant and equipment shall be recognised as an asset if, and only if: (a) it is probable that future economic benefits associated with the item will flow to the entity; and (b) the cost of the item can be measured reliably. Measurement at recognition: An item of property, plant and equipment that qualifies for recognition as an asset shall be measured at its cost. The cost of an item of property, plant and equipment is the cash price equivalent at the recognition date. If payment is deferred beyond normal credit terms, the difference between the cash price equivalent and the total payment is recognised as interest over the period of credit unless such interest is capitalised in accordance with IAS 23. The cost of an item of property, plant and equipment comprises: (a) its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates. (b) any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management.
Leases The classification of leases adopted in this Standard is based on the extent to which risks and rewards incidental to ownership of a leased asset lie with the lessor or the lessee.
Employee benefits Covers all employee Benefit costs, except share based payment, not only retirement benefits costs Liability if employee has provided service in exchange benefits to be received in future Expense if entity enjoys economic benefits from a service provided by an employee Immediate recognition of gains and losses to pensions in the "other comprehensive income" section of the statement of comprehensive income Problems Presentation makes treatment hard to understand the splitting up of various components Fair value of plan assets volatile Could be argued that plan asset should be valued on actuarial basis Problems of determining discount rate used in measuring the DB obligation
Accounting for government grants and disclosure of government assistance Recognise government grants and forgivable loans once conditions complied with and receipt or waiver is assured Disclosure Accounting policy note (income basis) Nature and extent of government grant and other forms of assistance received Unfulfilled conditions and other contingencies attached to recognised government assistance
The effects of change in foreign exchange rates Functional currency - of economic environment Presentation currency - financial statements Foreign op same business as Parent then same functional currency otherwise different All differences w/o to I/S to Exchange Gains and Losses Functional currency is the currency of the primary economic environment in which the entity operates. The primary economic environment in which an entity operates is normally the one in which it primarily generates and expends cash. Short comings of IAS 21: - transactions recorded at date transaction occurs BUT is the order or invoice date? - average rate used BUT what if there are massive fluctuations and material transactions?
Borrowing costs Borrowing costs interests and other costs incurred by entity in connection with borrowing of funds Qualifying asset asset that necessarily takes a substantial period of time to get ready for its intended use or site Borrowing costs must be capitalised as part of cost of asset Capitalisation suspended is active development interrupted for extended periods Capitalisation ceases when asset complete Disclosure Accounting policy note Amount of borrowing costs capitalised during the period Capitalisation rate used to determine borrowing costs eligible for capitalisation
Related party disclosures A related party is a person or entity that is related to the entity that is preparing its financial statements. (a) A person or a close member of that person’s family is related to a reporting entity if that person: (i) has control or joint control over the reporting entity; (ii) has significant influence over the reporting entity; or (iii) is a member of the key management personnel of the reporting entity or of a parent of the reporting entity. (b) An entity is related to a reporting entity if any of the following conditions applies: (i) The entity and the reporting entity are members of the same group (which means that each parent, subsidiary and fellow subsidiary is related to the others). (ii) One entity is an associate or joint venture of the other entity (or an associate or joint venture of a member of a group of which the other entity is a member). (iii) Both entities are joint ventures of the same third party. (iv)One entity is a joint venture of a third entity and the other entity is an associate of the third entity. (v) The entity is a post-employment benefit plan for the benefit of employees of either the reporting entity or an entity related to the reporting entity. If the reporting entity is itself such a plan, the sponsoring employers are also related to the reporting entity. (vi) The entity is controlled or jointly controlled by a person identified in (a). (vii) A person identified in (a)(i) has significant influence over the entity or is a member of the key management personnel of the entity (or of a parent of the entity). An entity shall disclose key management personnel compensation in total and for each of the following categories: (a) short-term employee benefits; (b) post-employment benefits; (c) other long-term benefits; (d) termination benefits; and (e) share-based payment. Influence and Control can be: - Direct: where entity owns the majority of equity shares in a subs - indirect: entity owns the majority of equity shares in a subs 1 which, in turn, owns the majority of equity shares in subs 2
Consolidated and separate financial statements Control can usually be assumed to exist when the parent owns more than 50% of the voting power Can exclude a subs under IFRS 10, but then must disclose the below under IAS 27: - Cons FS not been presented - List of significant investments including % shareholdings, principal place of business and country and incorporation - Bases on which those investments listed above have been accounted for in its separate financial statements
IAS 28 Equity method of actg for associates and joint ventures
Investments in associates Associate: entity over which the investor has SI and which is neither a subs not a JV of the investor Significant Influence (SI): -the power to participate in, but not control, the financial and operating policy decisions of an entity -evidenced by BoDs making policy decisions -20-50% voting rights Associated is Significant Influence - 20% + control
Interests in joint ventures Characteristics:- -Limited by time and/or activity -Venturers usually carry on their businesses at the same time -Separate books for the venture are not normally maintained -Venturers usually agree to profit sharing ratio Joint venture - contractual agreement whereby 2+ parties undertake an economic activity which is subject to joint control Joint control - contractually agreed sharing of control over an economic activity Allows proportionate consolidation and equity method
Financial instruments: presentation Must be classified as liabilities or equity according to their substance Critical feature of the financial liability is the contractual obligation to deliver cash or another financial asset Distributions to holders of a financial instrument classified as an equity insurance should be debited directly to Equity by the issuer
Earnings per share prescribes the basis for calculating and presenting earnings per share in the financial statements of entities whose shares are, or will be, publicly traded and other entities that choose to disclose earnings per share. It has the effect of implementing IAS 33 for such entities not preparing their financial statements in accordance with international accounting standards. The standard focuses, with the help of illustrative examples, on the number of shares (the denominator) to be used in the calculation of basic and diluted earnings per share.
Interim financial reporting An interim financial report shall include, at a minimum, the following components: (a) condensed statement of financial position; (b) condensed statement of comprehensive income, presented as either; (i) a condensed single statement; or (ii) a condensed separate income statement and a condensed statement of comprehensive income; (c) condensed statement of changes in equity; (d) condensed statement of cash flows; and (e) selected explanatory notes.
Impairment of assets Impairment - a fall in value of asset such that it's recoverable amount is now less than carrying value in the statement of financial position Carrying amount - net value at which asset is included in statement of financial position Periodic review for impairment Recoverable amount is the higher of: asset fair value less cost to sell or value in use Value in Use - Measured as PV of estimated future cash flows generated by asset including its estimated next disposal value at end of UEL Intangible asset with indefinite life not amortised but test for impairment annually
Provisions, contingent liabilities and contingent assets Provision should be recognised when:- - entity has a present obligation - probable that trf of economic benefits required to settle - reliable estimate can be made of amount Restructuring provision Not recognise contingent asset / liability BUT disclose
Intangible assets - Non-monetary assets without physical substance which must be identifiable, controlled as a result of past events and able to provide future economic benefits Not internally generated Goodwill Measured at cost but subsequently carried at cost or at fair value Can apply cost model or revaluation model
Financial instruments: recognition and measurement Derecognise financial asset when: - Contractual rights to the cash flows from the financial asset expire - Entity transfers substantially all the risks and rewards of ownership of the financial asset to another party Value to derecognise: Carrying amount of asset or liability transferred LESS Proceeds received or paid LESS Cumulative gain or loss reported in equity
Investment property - Property held to earn rentals or for capital appreciation Not investment property: Property held for sale in the ordinary course of business (IAS2 inventories) Property being constructed or developed on behalf of third parties (IAS 11 construction contracts) Owner occupied property (IAS-16 property plant and equipment) Property being constructed or developed for future use as investment property (IAS 16 until construction is complete then treat as investment property) Choice of fair value or cost model (Cost model - Measured at depreciated cost less any accumulated impairment losses) Cost model used IAS 16
First time adoption of international financial reporting standards Since IAS 1 requires that at least one year of comparative prior period financial information be presented, the opening balance sheet will be 1 January 2008 if not earlier. This would mean that an entity's first financial statements should include at least: [IFRS 1.21] -three balance sheets (statements of financial position) -two statements of comprehensive income -two separate income statements (if presented) -two statements of cash flows -two statements of changes in equity and -related notes, including comparative information May have to reclassify and remeasure in accordance with re-doing previous years accounts
Share based payment Recognise in line with receipt of goods or services When the goods or services received or acquired in a share- based payment transaction do not qualify for recognition as assets, they shall be recognised as expenses. Determining FV of equity instruments
Business combinations Goodwill must be reviewed for impairment annually Contingent consideration - obligation of acquirer to trf additional assets or equity interests to former owners of an acquiree as part of the exch for control if specified future events occur or conditions are met Definitions of entity types
Financial instruments: disclosures Requires quantitative and qualitative disclosures about exposure to risks arising from financial instruments and specifies minimum disclosures about credit risk, liquidity risk and market risk
Operating segments IFRS 8 Operating Segments requires particular classes of entities (essentially those with publicly traded securities) to disclose information about their operating segments, products and services, geographical areas in which they operates, and their major customers. Information is based on internal management reports, both in the identification of operating segments and measurement of disclosed segment information. Required disclosure: -general information about how the entity identified its operating segments and the types of products and services from which each operating segment derives its revenues [IFRS 8.22] -information about the reported segment profit or loss, including certain specified revenues and expenses included in segment profit or loss, segment assets and segment liabilities, and the basis of measurement [IFRS 8.21(a) and 27] -reconciliations of the totals of segment revenues, reported segment profit or loss, segment assets, segment liabilities and other material items to corresponding items in the entity's financial statements [IFRS 8.21(b) and 28] -some entity-wide disclosures that are required even when an entity has only one reportable segment, including information about each product and service or groups of products and services [IFRS 8.32] -analyses of revenues and certain non-current assets by geographical area – with an expanded requirement to disclose revenues/assets by individual foreign country (if material), irrespective of the identification of operating segments [IFRS 8.33] information about transactions with major customers [IFRS 8.34] Must report separately if- (a) reported revenue including both sales to external customers and inter segment sales is >=10% of the combined revenue of all operating segments (b) reported profit / loss is >=10% in absolute amount of - combined reported profit of all operating segments that did not report a loss - combined reports loss of all operating segments that reported a loss - its assets are >=10% of the combined assets of all operating segments
IFRS 10 actg for business combinations
When has control been gained or lost Control: comprises 3 elements, power, exposure, exercise Power- over the invested, where the investor has current ability to direct activities that significantly affect the investee's returns Exposure- or tight to, variable returns from involvement in the investee Exercise- power over investee to affect the amount of the investor's returns
Financial instruments -WIP IFRS 9 Financial Instruments sets out the recognition and measurement requirements for financial instruments and some contracts to buy or sell non-financial items. The IASB is adding to the standard as it completes the various phases of its comprehensive project on financial instruments, and so it will eventually form a complete replacement for IAS 39 Financial Instruments: Recognition and Measurement. An embedded derivative is a component of a hybrid contract that also includes a non-derivative host, with the effect that some of the cash flows of the combined instrument vary in a way similar to a stand-alone derivative. A derivative that is attached to a financial instrument but is contractually transferable independently of that instrument, or has a different counterparty, is not an embedded derivative, but a separate financial instrument. [IFRS 9, paragraph 4.3.1] A financial liability should be removed from the balance sheet when, and only when, it is extinguished, that is, when the obligation specified in the contract is either discharged or cancelled or expires
IFRS 10 description
Describes circumstances under which to consider whether control over an investee has been gained or lost eg -exercise of the majority of voting rights in an investee -contractual arrangements between the investor and other parties -holding < 50% of the voting shares, with all other equity interests held by a numerically large, dispersed and unconnected group -potential voting rights may result in an investor gaining/losing control at some specific date -nature of investors relationship with other parties may enable that investor to exercise control -the exercise of control over a portion of another entity could lead to consolidation of only part of a separate entity over which control is exercised (=SILO)
IFRS 10 permitted exclusions from Group Accs
Must meet all criteria:- 1. Wholly owned subs or partially owned where owners of the NCI do not object to non preparation 2. debt/equity instruments not current and/or in the process of being traded on a domestic / foreign market 3. ultimate parent entity produces COns FS that comply with IFRS and which are available to the public If all above apply, then must apply IAS 27 which requires disclosure
IFRS 11 Actg methods that related to interests in joint ventures
Defn JV: - form of joint arrangement where 2+ parties have joint control which ONLY applies if relevant activities require unanimous consent of those who collectively control the arrangement - JV and JA (JO) - JO - where parties that have joint control have rights to the assets and obligations for the liabilities. Requires that joint operators each recognise their share of assets / liabilities / revenue / expenses. Example: A and B jointly manufacture goods and have an arrangement to take % sales revenue - JV: where parties have joint control of the arrangement and have rights to the NA of the arrangement. This is normally established in the form of a separate entity to conduct the joint venture activities. Equity method accounted for. Example: A and B decide to set up C for JV. A will own 55% equity capital and B remainder, decision making unanimous - JC: contractually agreed sharing of control of an arrangement which exists only when the decisions about the relevant activities require the unanimous consent of the parties sharing control. Key aspects: of JV, contractually agreed, control and relevant activities, unanimous consent
IFRS 12 Interests in other entities
Disclosure requirements for group accounts and associates and JVs Requires disclosure of:- - significant assumptions. And judgements made - nature, extent and financial effects of JA and A
For small and medium sized entities does not contain a limit on the size of an entity that may use the IFRS for SMEs provided that it does not have public accountability NOR is there a restriction on its use by a public utility, not-for-profit entity, or public sector entity A subsidiary whose parent or group uses full IFRSs may use the IFRS for SMEs if the subsidiary itself does not have public accountability - does not require any special approval by the owners of an SME for it to be eligible to use the IFRS for SME. Listed companies, no matter how small, may not use the IFRS for SMEs Basic recognition concept – An item that meets the definition of an asset, liability, income, or expense is recognised in the financial statements if: probable that future benefits associated with the item will flow to or from the entity, and the item has a cost or value that can be measured reliably Basic measurement concepts: Historical cost and fair value are described Basic financial assets and liabilities are generally measured at amortised cost Other financial assets and liabilities are generally measured at fair value through profit or loss Non-financial assets are generally measured using a cost-based measure Non-financial liabilities are generally measured at settlement amount
Framework for the preparation an presentation of financial statements
The IFRS Framework describes the basic concepts that underlie the preparation and presentation of financial statements for external users. The IFRS Framework serves as a guide to the Board in developing future IFRSs and as a guide to resolving accounting issues that are not addressed directly in an International Accounting Standard or International Financial Reporting Standard or Interpretation. Qualitative characteristics of accounts
ED simplifying earnings per share: proposed amendments to IAS 33
Proposes to use a simplification of the calculation of diluted EPS with share options. End of period price would be used, rather than average market price during the period when calculating the dilutive effect of share options
ED improvements to IFRS5
The amendments specify that: ● if an entity is committed to a plan to sell a subsidiary, then classify all of that subsidiary’s assets / liabilities as held for sale when the held for sale criteria of IFRS 5 are met; this applies regardless of the entity retaining an interest (other than control) in the subsidiary; and ● disclosures for discontinued operations are required by the parent when a subsidiary meets the definition of a discontinued operation.
ED An improved conceptual framework for financial reporting. chapters 1 & 2
decided that an entity’s financial reporting should be prepared from the perspective of the entity (entity perspective) rather than the perspective of its owners have identified two fundamental qualitative characteristics— relevance and faithful representation Financial reporting should include management’s explanations and other information needed to enable users to understand the information provided.
ED fair value measurement
replace existing guidance on fair value measurement in several different IFRSs with a single, unified definition of fair value and a framework for measuring and disclosing fair values. Proposals define fair value as the exit price. Proposals do not introduce new fair value measurements but explain “how” to measure fair value when it is required already in existing IFRSs. Proposals are not just limited to financial instruments, they also impact fair value measurement in other IFRSs. The ED proposes that a fair value measurement assumes that “the asset or liability is exchanged in an orderly transaction between market participants to sell the asset or transfer the liability at the measurement date.”
ED management commentary
The ED proposes a framework to assist in the preparation of management commentary that accompanies financial statements prepared in accordance with IFRSs. The framework proposes three principles that should be followed in order to have decision-useful management commentary. The ED proposes certain elements that should be included in order to have decision-useful management commentary. The proposals in the ED will not result in an IFRS
ED Financial instruments: amortised cost an impairment
Currently, IAS 39 Financial Instruments: Recognition and Measurement recognises impairment of financial assets using an 'incurred loss model'. An incurred loss model assumes that all loans will be repaid until evidence to the contrary (known as a loss or trigger event) is identified. Only at that point is the impaired loan (or portfolio of loans) written down to a lower value. This project is considering various forms of the 'expected loss' approach, whereby expected losses are recognised throughout the life of a loan or other financial asset measured at amortised cost, not just after a loss event has been identified. Under the expected loss approach, losses are recognised earlier than the incurred loss model - believe it better reflects the lending decision.
ED measurement of liabilities in IAS 37
Two aspects of the IAS 37 vague: • requires an entity to measure a liability at the ‘best estimate’ of the expenditure required to settle the present obligation. It is not clear to all what the term ‘best estimate’ means. • does not specify the costs that entities should include in the measurement of a liability. In practice, some entities include only incremental costs. Some include all direct costs. Some add indirect costs and overheads. Some use the prices they would pay contractors to fulfil the obligation on their behalf.
ED Conceptual framework the reporting entity
Aims to provide a more consistent definition of reporting entity The objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful in making decisions about providing resources to the entity and in assessing whether the management and the governing board of that entity have made efficient and effective use of the resources provided. The reporting entity concept is intended to further this objective. Control of an entity refers to both power and benefits.
ED defined benefit plans
Propose - entities should recognise all changes in defined benefit obligations and in the fair value of plan assets when those changes occur. IAS 19 already permits entities to recognise all gains and losses when they occur, but also permits another option: to leave actuarial gains and losses unrecognised if they are within a ‘corridor’ and to defer recognition of actuarial gains and losses outside the corridor. Recognise termination benefits as employee benefits Remove corridor
ED fair value option for financial liabilities
Currently difficult to understand and interpret Perhaps to be valued at amortised cost if particular conditions are met IAS 39 Financial Instruments: Recognition and Measurement - sets out requirements for recognising and measuring financial assets / liabilities and some contracts to buy or sell non-financial items. Users of financial statements have told the Board that IAS 39 rqmts are difficult to understand, apply and interpret. Propose - develop new standard of financial reporting for financial instruments that is principle-based and less complex.
ED presentation of items in other comprehensive income
Lack of consistency currently Requires reclassification of income
Planned to change to a "right of use" approach in the accounts
ED Insurance contracts
Plan to replace IFRS 4 - discussed the time value of money in the premium allocation approach, participating contracts and the presentation in the statement of comprehensive income (the ‘earned premium approach’).
DP preliminary views on amendments to IAS 19 employee benefits
Improve the quality and transparency of financial statements as regards Employee Benefits. Fundamental change in the definition of schemes - is it something that should be made as a short term project. Concern that, in making such a large change in order to accommodate certain specific schemes, other unanticipated and unconsidered areas of uncertainty might arise. Propose to remove the current smoothing recognition and address particular types of scheme, such as guaranteed return, as a short term measure pending the longer term review of accounting for pension schemes.