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International

GAAP 2011 速

Generally Accepted Accounting Practice under International Financial Reporting Standards

Mike Bonham Angela Covic Richard Crisp Matthew Curtis Tai Danmola Mike Davies Tim Denton Lindy Ellis Kevin Guckian Meredith Lloyd

James Luke Robert McCracken Richard Moore Robert Overend Margaret Pankhurst Inayatullah Qureshi Hedy Richards Tim Rogerson Matt Williams

A John Wiley and Sons, Ltd, Publication


List of chapters

 

List of chapters Volume 1 1 International GAAP ............................................................................................... 1  2 The IASB’s Conceptual Framework ................................................................... 41  3 Presentation of financial statements and accounting policies .......................... 87  4 Non-current assets held for sale and discontinued operations ....................... 157  5 First-time adoption ........................................................................................... 187  6 Consolidated financial statements .................................................................. 327  7 Consolidation procedures and non-controlling interests................................ 371  8 Separate and individual financial statements .................................................. 413  9 Business combinations ...................................................................................... 461  10 Common control business combinations.......................................................... 609  11 Associates ........................................................................................................... 647  12 Joint ventures .................................................................................................... 727  13 Foreign exchange ............................................................................................... 791  14 Hyperinflation ................................................................................................... 861  15 Intangible assets ................................................................................................ 893  16 Property, plant and equipment ........................................................................ 979  17 Investment property ....................................................................................... 1027  18 Impairment of fixed assets and goodwill ........................................................ 1075  19 Capitalisation of borrowing costs .................................................................... 1167  20 Inventories ....................................................................................................... 1189  21 Construction contracts .................................................................................... 1209  22 Leases .............................................................................................................. 1235  23 Government grants .......................................................................................... 1321  24 Service concession arrangements.................................................................... 1337  25 Provisions, contingent liabilities and contingent assets ............................... 1375  26 Revenue recognition........................................................................................ 1455  27 Income taxes .................................................................................................... 1547  Index of extracts from financial statements ...................................................... index 1  Index of standards ............................................................................................... index 7  Index .................................................................................................................. index 67  The list of chapters in volume 2 follows overleaf.

 

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International GAAP

viii Volume 2

28 Share-based payment ...................................................................................... 1665  29 Employee benefits........................................................................................... 1889  30 Financial instruments: Introduction .............................................................. 1975  31 Financial instruments: Definitions and scope ............................................... 1993  32 Financial instruments: Derivatives and embedded derivatives .................... 2029  33 Financial instruments: Financial liabilities and equity ................................. 2071  34 Financial instruments: Classification (IAS 39) .............................................. 2175  35 Financial instruments: Classification (IFRS 9) ............................................. 2201  36 Financial instruments: Recognition and initial measurement ...................... 2229  37 Financial instruments: Subsequent measurement ........................................ 2249  38 Financial instruments: Derecognition ............................................................ 2323  39 Financial instruments: Hedge accounting ..................................................... 2405  40 Financial instruments: Presentation and disclosure ...................................... 2521  41 Operating segments ........................................................................................ 2613  42 Earnings per share ........................................................................................... 2647  43 Events after the reporting period ................................................................... 2711  44 Related party disclosures ................................................................................ 2727  45 Statement of cash flows .................................................................................. 2783  46 Interim financial reporting .............................................................................. 2825  47 Agriculture ....................................................................................................... 2897  48 Extractive industries ....................................................................................... 2931  49 Insurance contracts ......................................................................................... 3139  Index of extracts from financial statements ..................................................... index 1  Index of standards ............................................................................................... index 7  Index .................................................................................................................. index 67 


Detailed contents: Volume 1 CHAPTER 1

INTERNATIONAL GAAP

1  WHY INTERNATIONAL FINANCIAL REPORTING STANDARDS MATTER ..............3  2

THE IFRS FOUNDATION AND THE IASB ................................................................5 2.1 The standard setting structure .....................................................................5 2.1.1 The IFRS Foundation ........................................................................5 2.1.2 The Monitoring Board........................................................................7 2.1.3 The International Accounting Standards Board (IASB)...................9 2.1.4 The IASB’s Due Process Handbook ................................................10 2.1.5 The IFRS Advisory Council (the Advisory Council) ......................12 2.1.6 The IFRS Interpretations Committee (the Interpretations Committee) ......................................................................................12

3

THE IASB’S TECHNICAL AGENDA AND GLOBAL CONVERGENCE ......................13 3.1 The IASB’s current priorities ......................................................................13 3.2 IFRS/US GAAP convergence ......................................................................14 3.2.1 Convergence with US GAAP: The Norwalk Agreement ................14 3.2.2 Memorandum of Understanding between the FASB and the IASB ..................................................................................................14 3.2.3 SEC Concept Release on allowing US issuers to prepare financial statements in accordance with IFRS................................16 3.2.4 The proposed Roadmap ...................................................................17 3.2.5 The future for convergence .............................................................19 3.3 The impact of the financial crisis ...............................................................20 3.4 The IASB’s current agenda .........................................................................22 3.5 The IASB’s ‘Annual Improvements Process’..............................................24

4

FINANCIAL REPORTING IN COMPLIANCE WITH INTERNATIONAL FINANCIAL REPORTING STANDARDS ..................................................................24 4.1 Statement of compliance with IFRS ..........................................................24 4.2 Fair presentation and compliance with IFRS.............................................25 4.3 The fair presentation override ....................................................................25

5

THE ADOPTION OF IFRS AROUND THE WORLD ................................................29 5.1 Worldwide adoption .....................................................................................29 5.2 Europe ..........................................................................................................29 5.3 Australia ........................................................................................................31

 

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Detailed contents – Volume 1 5.4 Brazil .............................................................................................................32 5.5 Canada ..........................................................................................................32 5.6 China and Hong Kong .................................................................................34 5.6.1 China .................................................................................................34 5.6.2 Hong Kong ........................................................................................35 5.7 India..............................................................................................................35 5.8 Japan .............................................................................................................36 5.9 South Africa ..................................................................................................37 6

SUMMARY .............................................................................................................38

CHAPTER 2

THE IASB’S CONCEPTUAL FRAMEWORK

1

INTRODUCTION ..................................................................................................43 1.1 What is a conceptual framework? ................................................................44 1.2 Why is a conceptual framework necessary? ................................................44

2

THE IASB’S CONCEPTUAL FRAMEWORK ............................................................46 2.1 Introduction .................................................................................................46 2.2 The contents of the IASB’s Framework .....................................................46 2.2.1 The objective and underlying assumptions of financial statements ........................................................................................47 2.2.2 The qualitative characteristics of financial statements ..................48 2.2.2.A Understandability .............................................................49 2.2.2.B Relevance ..........................................................................49 2.2.2.C Reliability ..........................................................................50 2.2.2.D Comparability ....................................................................51 2.2.3 The elements of financial statements .............................................52 2.2.3.A Assets .................................................................................52 2.2.3.B Liabilities...........................................................................53 2.2.3.C Equity ................................................................................53 2.2.3.D Income and expenses ........................................................53 2.2.4 Recognition of the elements of financial statements .....................54 2.2.5 Measurement of the elements of financial statements ..................55 2.2.6 Concepts of capital and capital maintenance .................................55

3

CONVERGENCE AND THE IASB-FASB FRAMEWORK PROJECT ..........................56 3.1 Introduction .................................................................................................56 3.2 IASB-FASB Exposure Draft – An improved conceptual framework for financial reporting ..................................................................................57 3.2.1 The objective of financial reporting ................................................57 3.2.1.A Stewardship .......................................................................59 3.2.1.B The ‘Entity Perspective’ ..................................................59 3.2.1.C Financial performance ......................................................60


Detailed contents – Volume 1

3.3 3.4 3.5 3.6 3.7 4

3.2.2 The qualitative characteristics of decision-useful financial reporting information .......................................................................60 3.2.2.A Verifiability ........................................................................61 3.2.2.B Neutrality and conservatism.............................................62 3.2.2.C Understandability .............................................................62 3.2.2.D Substance over form ..........................................................62 3.2.3 Further considerations by the Boards..............................................63 IASB-FASB Exposure Draft – Conceptual framework for financial reporting – the Reporting Entity ................................................................63 Phase C – Measurement .............................................................................64 Phase B – Elements .....................................................................................65 The status of the framework .......................................................................65 Exposure Draft – Management Commentary ............................................65

MEASUREMENT ...................................................................................................67 4.1 Discussion paper: Measurement bases for financial accounting – measurement on initial recognition ............................................................67 4.1.1 The ‘cash-equivalent expectations attribute’ of assets and liabilities............................................................................................68 4.1.2 Possible bases for measurement on initial recognition ...................70 4.1.3 Market vs. entity-specific measurement objectives .......................72 4.1.4 Value-affecting properties of assets and liabilities .........................73 4.1.5 Fair value ...........................................................................................73 4.1.6 Efficient market price ......................................................................75 4.2 FASB ASC Topic 820 Fair Value Measurements and Disclosures (formerly SFAS No.157 – Fair Value Measurements) ...............................76 4.2.1 The conceptual significance of FASB ASC Topic 820 (formerly SFAS 157) ........................................................................81 4.3 Exposure Draft – Fair Value Measurement ................................................81 4.4 Measurement: current state ........................................................................83

CHAPTER 3

PRESENTATION OF FINANCIAL STATEMENTS AND ACCOUNTING POLICIES

1

INTRODUCTION ..................................................................................................91 1.1 IAS 1 .............................................................................................................91 1.1.1 Background to IAS 1 .........................................................................91 1.1.2 Objective and scope of IAS 1 ...........................................................92 1.2 IAS 8 .............................................................................................................93 1.2.1 Background to IAS 8 .........................................................................93 1.2.2 Objective and scope of IAS 8 ...........................................................93

2

THE PURPOSE AND COMPOSITION OF FINANCIAL STATEMENTS .....................94 2.1 The purpose of financial statements ..........................................................94

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Detailed contents – Volume 1 2.2 2.3 2.4 2.5

Frequency of reporting and period covered ...............................................95 The components of a complete set of financial statements ......................95 Comparative information.............................................................................97 Identification of the financial statements and accompanying information ...................................................................................................99 2.5.1 Identification of financial statements .............................................99 2.5.2 Statement of compliance with IFRS .............................................100

3

THE STRUCTURE OF FINANCIAL STATEMENTS ...............................................100 3.1 The balance sheet (or statement of financial position)...........................101 3.1.1 The distinction between current/non-current assets and liabilities..........................................................................................101 3.1.1.A General ............................................................................101 3.1.1.B Settlement of a liability by issuing of equity .................103 3.1.2 Non-current assets and disposal groups held for sale ...................103 3.1.3 Current assets .................................................................................104 3.1.4 Current liabilities ...........................................................................104 3.1.5 Information required on the face of the balance sheet ................106 3.1.6 Information required either on the face of the balance sheet or in the notes .................................................................................107 3.1.7 Illustrative balance sheets..............................................................109 3.2 The statement of comprehensive income and the income statement ...................................................................................................110 3.2.1 Profit and loss and comprehensive income ...................................110 3.2.2 Information required on the face of the income statement .........112 3.2.3 Classification of expenses recognised in profit or loss by nature or function ...........................................................................113 3.2.3.A Analysis of expenses by nature .......................................113 3.2.3.B Analysis of expenses by function ....................................115 3.2.4 The statement of comprehensive income.....................................115 3.2.4.A The face of the statement of comprehensive income .............................................................................115 3.2.4.B Reclassification adjustments ..........................................118 3.2.4.C Tax on items of other comprehensive income ..............119 3.2.5 Discontinued operations ................................................................121 3.2.6 Material, exceptional and extraordinary items..............................121 3.2.6.A Exceptional or material items.........................................121 3.2.6.B Ordinary activities and extraordinary items...................121 3.3 The statement of changes in equity .........................................................122 3.4 The notes to the financial statements......................................................124

4

ACCOUNTING POLICIES ....................................................................................125 4.1 General principles ......................................................................................125 4.1.1 Fair presentation ............................................................................126 4.1.1.A Fair presentation and compliance with IFRS ................126


Detailed contents – Volume 1 4.1.1.B The fair presentation override........................................127 Going concern .................................................................................128 The accrual basis of accounting .....................................................129 Consistency.....................................................................................129 Materiality, aggregation and offset ................................................130 4.1.5.A Materiality and aggregation ............................................130 4.1.5.B Offset ...............................................................................131 4.1.6 Profit or loss for the period ............................................................132 The distinction between accounting policies and accounting estimates ....................................................................................................133 The selection and application of accounting policies ..............................134 Changes in accounting policies .................................................................135 Changes in accounting estimates ..............................................................137 Correction of errors ....................................................................................138 Impracticability of restatement ................................................................140 4.7.1 Impracticability of restatement for a change in accounting policy ...............................................................................................142 4.7.2 Impracticability of restatement for a material error .....................143 4.1.2 4.1.3 4.1.4 4.1.5

4.2 4.3 4.4 4.5 4.6 4.7

5

DISCLOSURE REQUIREMENTS ..........................................................................144 5.1 Disclosures relating to accounting policies ..............................................144 5.1.1 Disclosure of accounting policies ..................................................144 5.1.1.A Summary of significant accounting policies ...................144 5.1.1.B Judgements made in applying accounting policies .......145 5.1.2 Disclosure of changes in accounting policies ................................145 5.1.2.A Accounting policy changes pursuant to the initial application of an IFRS ....................................................146 5.1.2.B Voluntary changes in accounting policy .........................146 5.1.2.C Future impact of a new IFRS .........................................147 5.2 Disclosure of estimation uncertainty and changes in estimates .............147 5.2.1 Sources of estimation uncertainty .................................................147 5.2.2 Changes in accounting estimates ..................................................149 5.3 Disclosure of prior period errors................................................................150 5.4 Disclosures about capital ...........................................................................150 5.4.1 General capital disclosures .............................................................150 5.4.2 Puttable financial instruments classified as equity ......................152 5.5 Other disclosures .......................................................................................153

6

FUTURE DEVELOPMENTS .................................................................................154 6.1 The IASB’s joint project on financial statement presentation ................154 6.1.1 Overview of the project ..................................................................154 6.1.2 Financial statement presentation project Phase B .......................154 6.2 Current proposals to amend the statement of comprehensive income ........................................................................................................155

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Detailed contents – Volume 1 CHAPTER 4

NON-CURRENT ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS

1

INTRODUCTION ................................................................................................159 1.1 Background to IFRS 5 ...............................................................................159 1.2 Objective and scope of IFRS 5 ..................................................................160 1.3 Effective date and transitional provisions ................................................160

2

NON-CURRENT ASSETS (AND DISPOSAL GROUPS) HELD FOR SALE ................161 2.1 Classification of non-current assets (and disposal groups) held for sale or held for distribution to owners ......................................................161 2.1.1 The concept of a disposal group ....................................................161 2.1.2 Classification as held for sale or as held for distribution to owners .............................................................................................162 2.1.2.A Meaning of available for immediate sale ........................163 2.1.2.B Meaning of highly probable ............................................165 2.1.2.C Abandonment ..................................................................168 2.1.3 Partial disposals of operations ........................................................168 2.2 Measurement of non-current assets (and disposal groups) held for sale ..............................................................................................................168 2.2.1 Scope of the measurement requirements .....................................168 2.2.2 Measurement of non-current assets and disposal groups held for sale .............................................................................................169 2.2.2.A Measurement on initial classification as held for sale ...................................................................................169 2.2.2.B Subsequent remeasurement ...........................................171 2.2.3 Impairments and reversals of impairment.....................................171 2.2.4 Balance sheet presentation of non-current assets and disposal groups held for sale...........................................................173 2.2.5 Changes to a plan of sale ................................................................176

3

DISCONTINUED OPERATIONS ..........................................................................177 3.1 Definition of a discontinued operation.....................................................177 3.2 Presentation of discontinued operations ..................................................178 3.3 Trading between continuing and discontinued operations .....................181

4

COMPARATIVE INFORMATION ..........................................................................182 4.1 Treatment of comparative information on initial classification as held for sale ................................................................................................182 4.1.1 The income statement (or combined statement of comprehensive income) .................................................................182 4.1.2 The balance sheet ..........................................................................182 4.2 Treatment of comparative information on the cessation of classification as held for sale......................................................................183 4.2.1 General requirements ....................................................................183 4.2.2 The treatment of associates and joint ventures............................183


Detailed contents – Volume 1 5

DISCLOSURE REQUIREMENTS ..........................................................................184 5.1 Requirements of IFRS 5............................................................................184

6

FUTURE DEVELOPMENTS .................................................................................184 6.1 Joint project with the FASB ......................................................................184 6.2 Allocation of impairment losses ................................................................185 6.3 Classification of associates and jointly controlled ventures as held for sale ........................................................................................................185

CHAPTER 5

FIRST-TIME ADOPTION

1

INTRODUCTION ................................................................................................195 1.1 Background.................................................................................................195 1.1.1 SIC-8 – First-Time Application of IASs as the Primary Basis of Accounting ..................................................................................195 1.1.2 The need for IFRS 1 ......................................................................196 1.1.3 IFRS 1 (as revised in 2008)............................................................197 1.1.4 Terminology and references ..........................................................197 1.2 Objective ....................................................................................................198 1.3 Scope and definitions ................................................................................198 1.3.1 Who is a first-time adopter? ...........................................................198 1.3.2 When should IFRS 1 be applied?...................................................201 1.3.3 Defined terms.................................................................................201 1.3.3.A Determining the previous GAAP ...................................201 1.3.3.B Transition to IFRSs from a similar GAAP......................203 1.3.4 Defined terms: First-time adoption timeline ...............................204 1.3.5 Defined terms: Fair value and deemed cost .................................205

2

EFFECTIVE DATE ...............................................................................................206 2.1 First-time adoption under IFRS 1 (as revised in 2008), as amended .....206 2.1.1 Recent amendments to IFRS 1 .....................................................206

3

RECOGNITION AND MEASUREMENT ................................................................206 3.1 Opening IFRS statement of financial position and accounting policies........................................................................................................206 3.2 Transitional provisions in other standards ...............................................209 3.3 Departures from full retrospective application ........................................209 3.3.1 Exceptions to retrospective application of other IFRS ................210 3.3.2 Exemptions from other IFRS.........................................................210

4

EXCEPTIONS TO RETROSPECTIVE APPLICATION OF OTHER IFRSS ...............212 4.1 Introduction ...............................................................................................212 4.2 Estimates....................................................................................................212 4.3 Derecognition of financial assets and liabilities .......................................215

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Detailed contents – Volume 1 4.4 Hedge accounting ......................................................................................216 4.4.1 Hedge accounting: Prohibition on retrospective application.......216 4.4.2 Hedge accounting: opening IFRS statement of financial position............................................................................................217 4.4.2.A Measurement of derivatives and elimination of deferred gains and losses ................................................217 4.4.2.B Hedge relationships reflected in the opening IFRS statement of financial position .......................................220 4.4.2.C Reflecting cash flow hedges in the opening IFRS statement of financial position .......................................221 4.4.2.D Reflecting fair value hedges in the opening IFRS statement of financial position .......................................222 4.4.2.E Reflecting foreign net investment hedges in the opening IFRS statement of financial position ...............223 4.4.3 Hedge accounting: subsequent treatment....................................223 4.4.4 Hedge accounting: examples .........................................................224 4.5 Non-controlling interests ..........................................................................226 4.6 Classification and measurement of financial assets .................................227 5

VOLUNTARY EXEMPTIONS FROM THE REQUIREMENTS OF CERTAIN IFRSS .................................................................................................................227 5.1 Introduction ...............................................................................................227 5.2 Business combinations and acquisitions of associates and joint ventures ......................................................................................................227 5.2.1 Option to restate business combinations retrospectively ............228 5.2.1.A Associates and joint ventures .........................................229 5.2.2 Classification of business combinations ........................................229 5.2.2.A Definition of a ‘business’ under IFRSs ..........................229 5.2.2.B Asset acquisitions ............................................................230 5.2.3 Recognition and measurement of assets and liabilities ................230 5.2.3.A Derecognition of assets and liabilities ...........................230 5.2.3.B Recognition of assets and liabilities ...............................230 5.2.3.C Subsequent measurement under IFRSs not based on cost ..............................................................................232 5.2.3.D Subsequent measurement on a cost basis under IFRSs ...............................................................................232 5.2.3.E Measurement of items not recognised under previous GAAP ................................................................234 5.2.3.F Example of recognition and measurement requirements ...................................................................234 5.2.4 Restatement of goodwill ................................................................236 5.2.4.A Mandatory adjustments of goodwill ...............................236 5.2.4.B Prohibition of other adjustments of goodwill ................239 5.2.4.C Transition accounting for contingent consideration .....240 5.2.4.D Derecognition of negative goodwill................................240 5.2.4.E Goodwill previously deducted from equity....................241


Detailed contents – Volume 1 5.2.5 5.2.6 5.2.7 5.2.8

5.3

5.4 5.5

5.6

5.7

5.8 5.9

Currency adjustments to goodwill .................................................242 Previously unconsolidated subsidiaries .........................................243 Previously consolidated entities that are not subsidiaries ...........245 Measurement of deferred taxation and non-controlling interests ..........................................................................................245 Share-based payment transactions ............................................................246 5.3.1 Use of previously published fair values .........................................249 5.3.2 Restatement of costs recognised under previous GAAP ..............250 Insurance contracts ....................................................................................250 Deemed cost ..............................................................................................251 5.5.1 Background .....................................................................................251 5.5.2 Fair value or revaluation as deemed cost.......................................251 5.5.2.A Scope of ‘fair value or revaluation as deemed cost’ exemption ........................................................................251 5.5.2.B Determining deemed cost ..............................................253 5.5.2.C Deemed cost determined before the date of transition to IFRSs ..........................................................254 5.5.2.D Summary ..........................................................................254 5.5.3 Event-driven fair value measurement as deemed cost .................255 5.5.3.A ‘Push down’ accounting ..................................................256 5.5.3.B ‘Fresh start’ accounting ..................................................257 5.5.3.C Extension of the scope of the event-driven deemed cost exemption ................................................................257 5.5.4 Deemed cost for oil and gas assets ................................................258 5.5.5 Deemed cost for assets used in operations subject to rate regulation ........................................................................................259 Leases .........................................................................................................260 5.6.1 IAS 17 and SIC-15 ..........................................................................260 5.6.2 IFRIC 4 ...........................................................................................261 5.6.2.A IFRIC 4 transitional provisions ......................................261 5.6.2.B Arrangements assessed for leases under previous GAAP ...............................................................................261 Employee benefits .....................................................................................262 5.7.1 Full actuarial valuations .................................................................262 5.7.2 Actuarial assumptions.....................................................................263 5.7.3 Unrecognised past service costs ....................................................263 5.7.4 Exemption from presenting historical summary information ......263 Cumulative translation differences...........................................................264 5.8.1 Gains and losses arising on related hedges ....................................265 Investments in subsidiaries, jointly controlled entities and associates ....................................................................................................266 5.9.1 Consolidated financial statements: Subsidiaries and Special Purpose Entities .............................................................................266 5.9.2 Separate financial statements: Cost of an investment in a subsidiary, jointly controlled entity or associate ...........................267

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Detailed contents – Volume 1 5.10 Assets and liabilities of subsidiaries, associates and joint ventures.........267 5.10.1 Subsidiary becomes a first-time adopter later than its parent .....268 5.10.2 Parent becomes a first-time adopter later than its subsidiary .....270 5.10.3 Implementation guidance on accounting for assets and liabilities of subsidiaries, associates and joint ventures ................271 5.10.4 Adoption of IFRSs on different dates in separate and consolidated financial statements .................................................271 5.11 Compound financial instruments .............................................................272 5.12 Designation of previously recognised financial instruments ...................272 5.12.1 Available-for-sale financial assets ...................................................272 5.12.2 Financial asset or financial liability at fair value through profit or loss ....................................................................................273 5.12.3 Implementation guidance on other categories of financial instruments .....................................................................................273 5.12.3.A Held-to-maturity investments .......................................273 5.12.3.B Financial assets or financial liabilities at fair value through profit or loss .......................................................273 5.12.3.C Loans and receivables .....................................................274 5.12.3.D Financial assets and financial liabilities measured at amortised cost .................................................................274 5.12.3.E Available-for-sale financial assets ...................................274 5.12.3.F Derivatives.......................................................................275 5.12.3.G Embedded derivatives ....................................................275 5.12.4 Loan impairments ..........................................................................276 5.12.5 Future development – IFRS 9 and designation of financial assets ...............................................................................................276 5.13 Fair value measurement of financial assets or financial liabilities at initial recognition .......................................................................................277 5.14 Decommissioning liabilities included in the cost of property, plant and equipment ...........................................................................................277 5.14.1 IFRIC 1 exemption ........................................................................277 5.14.2 IFRIC 1 exemption for oil and gas assets at deemed cost ...........280 5.15 Financial assets or intangible assets accounted for in accordance with IFRIC 12 ............................................................................................280 5.16 Borrowing costs ..........................................................................................280 5.17 Transfers of assets from customers ...........................................................281 5.18 Extinguishing financial liabilities with equity instruments ....................281 5.19 Limited exemption from comparative IFRS 7 disclosure .......................282 5.20 Short-term exemption from the requirement to restate comparative information .................................................................................................282 6

PRESENTATION AND DISCLOSURE ...................................................................283 6.1 Comparative information...........................................................................283 6.2 Non-IFRS comparative information and historical summaries ...............283 6.3 Explanation of transition to IFRSs ...........................................................284


Detailed contents – Volume 1

6.4 6.5

6.6 6.7 7

6.3.1 Disclosure of reconciliations ..........................................................288 6.3.2 Line-by-line reconciliations and detailed explanations ................289 6.3.3 Recognition and reversal of impairments ......................................296 6.3.4 Inclusion of IFRS 1 reconciliations by cross reference .................296 Designation of financial instruments ........................................................296 Disclosures regarding deemed cost...........................................................297 6.5.1 Use of fair value as deemed cost ....................................................297 6.5.2 Use of deemed cost for investments in subsidiaries, jointly controlled entities and associates ..................................................298 6.5.3 Use of deemed cost for oil and gas assets......................................298 6.5.4 Use of deemed cost for assets used in operations subject to rate regulation .................................................................................298 Interim financial reports ............................................................................298 Disclosure of IFRS information before adoption of IFRSs ......................300

ACCOUNTING POLICIES AND PRACTICAL APPLICATION ISSUES .....................301 7.1 IAS 7 – Statement of cash flows................................................................302 7.2 IAS 8 – Accounting policies, changes in accounting estimates and errors ...........................................................................................................303 7.2.1 Changes in IFRS accounting policies before first IFRS financial statements .......................................................................303 7.2.2 Changes in estimates and correction of errors ..............................304 7.3 IAS 11 – Construction contracts ...............................................................304 7.4 IAS 12 – Income taxes ...............................................................................304 7.4.1 Previously revalued plant, property and equipment treated as deemed cost on transition .........................................................305 7.4.2 Share-based payment transactions subject to transitional provisions of IFRS 1 and IFRS 2....................................................306 7.4.3 Retrospective restatements or applications ..................................306 7.4.4 Defined benefit pension plans ......................................................307 7.5 IAS 16 – Property, plant and equipment ..................................................308 7.5.1 Depreciation method and rate .......................................................309 7.5.2 Estimates of useful life and residual value ....................................309 7.5.3 Revaluation model ..........................................................................309 7.5.4 Parts approach ................................................................................310 7.6 IAS 17 – Leases ..........................................................................................310 7.6.1 Assets held under finance leases ...................................................311 7.7 IAS 18 – Revenue recognition ...................................................................311 7.8 IAS 19 – Employee benefits ......................................................................311 7.8.1 Cumulative amount of actuarial gains and losses recognised in other comprehensive Income ....................................................311 7.9 IAS 21 – The effects of changes in foreign exchange rates .....................312 7.9.1 Functional currency ........................................................................312 7.10 IAS 23 – Borrowing costs ...........................................................................313

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Detailed contents – Volume 1 7.11 IAS 28 – Investments in associates ...........................................................313 7.11.1 General ............................................................................................313 7.11.2 Transition impairment review .......................................................314 7.12 IAS 29 – Financial reporting in hyperinflationary economies..................314 7.13 IAS 31 – Interests in joint ventures ..........................................................314 7.14 IAS 36 – Impairment of assets ..................................................................315 7.15 IAS 37 – Provisions, contingent liabilities and contingent assets ...........315 7.16 IAS 38 – Intangible assets .........................................................................316 8

REGULATORY ISSUES .........................................................................................318 8.1 First-time adoption by foreign private issuers that are SEC registrants ...................................................................................................318 8.1.1 SEC guidance .................................................................................318 8.1.2 IPTF guidance ................................................................................319 8.2 Disclosure of IFRS information in financial statements for periods prior to an entity’s first IFRS reporting period ........................................321 8.2.1 CESR recommendation..................................................................321 8.2.2 IFRS guidance ................................................................................322

9

FUTURE DEVELOPMENTS .................................................................................323 9.1 Limited amendments to IFRS 1 ...............................................................323 9.2 Consequential amendments .....................................................................323 9.3 Transitional relief for newly converting countries ...................................323

10 A ‘LIVING’ DOCUMENT ......................................................................................323 CHAPTER 6

CONSOLIDATED FINANCIAL STATEMENTS

1

THE CONCEPT OF A GROUP ..............................................................................331 1.1 Background.................................................................................................331 1.2 The objectives of consolidated financial statements ...............................332 1.3 How consolidated and separate financial statements are dealt with in Chapters 6 to 8 ......................................................................................332

2

DEFINITIONS IN IAS 27 ....................................................................................333 2.1 Control .......................................................................................................333 2.1.1 Primary indicators of control ..........................................................333 2.1.2 Potential voting rights ....................................................................335 2.1.2.A Potential voting rights over associates and joint ventures ...........................................................................335 2.1.2.B What rights are ‘currently exercisable’? .........................336 2.1.2.C Management intention and ability to exercise potential ownership rights ..............................................337 2.1.3 De facto control ..............................................................................338 2.1.3.A IASB statement on de facto control ...............................338


Detailed contents – Volume 1 2.1.3.B EY views on the IASB’s statement on de facto control ..............................................................................339 2.1.4 Investments held as a trustee or fiduciary ....................................341 2.2 Special purpose entities ............................................................................342 2.2.1 Description of an SPE ....................................................................342 2.2.2 Determining whether an entity controls an SPE..........................343 2.2.2.A Benefits need not necessarily be financial .....................344 2.2.2.B Majority of the benefits and risks ..................................347 2.2.3 Subsequent reassessment of control of an SPE ............................347 2.2.4 Securitisation transactions .............................................................349 3

REQUIREMENT TO PREPARE CONSOLIDATED FINANCIAL STATEMENTS .......349 3.1 Exemption from preparing consolidated financial statements................349 3.1.1 Condition (a) – consent of non-controlling shareholders .............350 3.1.2 Condition (b) – securities not traded in a public market ............351 3.1.3 Condition (c) – not filing of financial statements for listing securities .........................................................................................351 3.1.4 Condition (d) – parent’s IFRS financial statements are publicly available ............................................................................351 3.2 Entity no longer a parent at the end of the reporting period ..................352 3.3 Interaction of IAS 27 and EU law .............................................................352 3.4 Combined and carve-out financial statements .........................................352 3.4.1 Common control .............................................................................353 3.4.2 Purpose and users of combined financial statements ...................354 3.4.3 Preparation of combined financial statements .............................354 3.4.4 When combined financial statements are not generalpurpose ............................................................................................356

4

SCOPE OF CONSOLIDATED FINANCIAL STATEMENTS .....................................356 4.1 Venture capital organisations and similar entities ...................................357 4.2 Entities with dissimilar activities .............................................................357 4.3 Entities subject to restrictions ..................................................................357

5

DISCLOSURE IN CONSOLIDATED FINANCIAL STATEMENTS ...........................358

6

FUTURE DEVELOPMENTS .................................................................................361 6.1 Conceptual framework for financial reporting: the reporting entity ......361 6.2 Consolidated financial statements............................................................362 6.2.1 Tentative decisions reached on ED 10 .........................................362 6.2.1.A Definition of control .......................................................362 6.2.1.B Potential voting rights ....................................................363 6.2.1.C Less than a majority of voting rights ..............................364 6.2.1.D Protective rights ..............................................................364 6.2.1.E Principal – agency relationships .....................................365 6.2.1.F Structured entities ..........................................................365 6.2.1.G Disclosures ......................................................................366

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Detailed contents – Volume 1 6.2.1.H Transitional provisions....................................................366 6.2.2 Investment entities ........................................................................366 CHAPTER 7

CONSOLIDATION PROCEDURES AND NONCONTROLLING INTERESTS

1

INTRODUCTION ................................................................................................375

2

CONSOLIDATION PROCEDURES .......................................................................376 2.1 Basic principles ..........................................................................................376 2.2 Proportion consolidated.............................................................................376 2.2.1 Interaction with accounting for financial instruments .................377 2.3 Consolidating foreign operations ..............................................................377 2.4 Intragroup eliminations .............................................................................378 2.5 Non-coterminous accounting periods .......................................................379 2.6 Consistent accounting policies .................................................................380

3

CHANGES IN OWNERSHIP INTERESTS ..............................................................380 3.1 Commencement of consolidation .............................................................380 3.1.1 Acquisition of a subsidiary that is not a business ..........................381 3.2 Accounting for a loss of control .................................................................381 3.2.1 Interest retained in the former subsidiary ....................................382 3.2.2 Other comprehensive income ........................................................383 3.2.3 Deemed disposal ............................................................................385 3.2.4 Presentation of comparative information for a former subsidiary ........................................................................................385 3.3 Changes in ownership interest without a loss of control .........................386 3.3.1 Reattribution of other comprehensive income .............................386 3.3.2 Goodwill attributable to non-controlling interests .......................388 3.4 Step-disposal of a subsidiary .....................................................................389 3.5 Demergers and distributions of non-cash assets to owners .....................391 3.5.1 Scope of IFRIC 17 ..........................................................................391 3.5.2 Recognition and measurement in IFRIC 17 .................................392 3.5.3 Presentation and disclosure ...........................................................393

4

NON-CONTROLLING INTERESTS .....................................................................393 4.1 The definition of non-controlling interest ...............................................393 4.2 Initial measurement of non-controlling interests in a business combination................................................................................................394 4.3 Presentation of non-controlling interests .................................................396 4.4 Non-controlling interests classified as financial instruments .................396 4.5 Subsequent measurement of non-controlling interests...........................397 4.5.1 Loss-making subsidiaries ...............................................................397


Detailed contents – Volume 1 5

CALL AND PUT OPTIONS OVER NON-CONTROLLING INTERESTS...................399 5.1 Call options only ........................................................................................399 5.1.1 Options giving the acquirer present access to benefits associated with that ownership interest ........................................399 5.1.2 Options not giving the acquirer present access to benefits associated with that ownership interest ........................................400 5.2 Put options only .........................................................................................401 5.2.1 Put options over non-controlling interests....................................402 5.2.1.A Non-controlling interest is not recognised – financial liability recognised ...........................................403 5.2.1.B Full recognition of non-controlling interest ..................404 5.2.1.C Partial recognition of non-controlling interest ..............405 5.2.1.D Non-controlling interest is subsequently derecognised ....................................................................405 5.2.2 Assessing when multiple transactions are accounted for as a single arrangement .........................................................................406 5.2.3 Transitional issues for put options – IAS 27 (2007) to IAS 27 ....408 5.2.3.A Non-controlling interest is not recognised – financial liability recognised ...........................................409 5.2.3.B Full recognition of non-controlling interest ..................409 5.2.3.C Partial recognition of non-controlling interest ..............409 5.2.3.D Non-controlling interest is subsequently derecognised ....................................................................409 5.2.3.E Contingent consideration under IFRS 3 (2007) ...........410 5.2.4 Put options – current developments .............................................410 5.3 Combination of call and put options ........................................................411 5.4 Call and put options entered into in relation to existing noncontrolling interests ...................................................................................411

6

FUTURE DEVELOPMENTS .................................................................................411

CHAPTER 8 1

SEPARATE AND INDIVIDUAL FINANCIAL STATEMENTS

SEPARATE AND INDIVIDUAL FINANCIAL STATEMENTS ...................................417 1.1 Consolidated financial statements and separate financial statements ..................................................................................................418 1.1.1 Separate financial statements and interests in associates and joint ventures ..................................................................................419 1.1.2 Publishing separate financial statements without consolidated financial statements .................................................421 1.2 Entities incorporated in the EU and consolidated and separate financial statements...................................................................................421 1.2.1 Issuing separate financial statements before consolidated statements ......................................................................................421 1.2.2 Differences between scope of consolidation under IAS 27 and European Union national legislation ......................................422

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Detailed contents – Volume 1 2

REQUIREMENTS OF SEPARATE FINANCIAL STATEMENTS ...............................422 2.1 Cost method...............................................................................................423 2.1.1 Cost of investment .........................................................................424 2.1.1.A Investments acquired for own shares or other equity instruments ..........................................................425 2.1.1.B Common control transactions.........................................425 2.1.1.C Cost of subsidiary acquired in stages .............................425 2.1.1.D Formation of a new parent..............................................426 2.1.1.E Formation of a new parent: calculating the cost and measuring equity .............................................................427 2.1.2 Deemed cost on transition to IFRS...............................................429 2.2 IAS 39 method ...........................................................................................429 2.3 Dividends and other distributions ............................................................430 2.3.1 Dividends from subsidiaries, jointly controlled entities or associates .........................................................................................430 2.3.1.A The dividend exceeds the total comprehensive income .............................................................................431 2.3.1.B The carrying amount exceeds the consolidated net assets ................................................................................432 2.3.1.C Returns of capital ............................................................432 2.3.2 Distributions of Non-cash Assets to Owners (IFRIC 17) ............433 2.3.2.A Scope................................................................................433 2.3.2.B Recognition, measurement and presentation ................434

3

DISCLOSURE ......................................................................................................436 3.1 Separate financial statements prepared by parent electing not to prepare consolidated financial statements ...............................................436 3.2 Separate financial statements prepared by an entity other than a parent electing not to prepare consolidated financial statements ..........437 3.2.1 Entities with no subsidiaries but exempt from applying IAS 28 or IAS 31 .............................................................................438

4

INDIVIDUAL FINANCIAL STATEMENTS.............................................................438 4.1 Introduction ...............................................................................................438 4.2 Recognition ................................................................................................440 4.3 Measurement .............................................................................................441 4.3.1 Fair value in intra-group transactions ............................................442 4.4 Accounting for common control transactions ...........................................443 4.4.1 Transactions involving non-monetary assets.................................443 4.4.1.A Sale of PP&E from the parent to the subsidiary for an amount of cash not representative of the value of the asset. .....................................................................444 4.4.1.B The parent exchanges PP&E for a non-monetary asset of the subsidiary. ....................................................445 4.4.1.C Acquisition of assets for shares .......................................447 4.4.1.D Contribution of assets .....................................................448


Detailed contents – Volume 1 4.4.1.E Transfers between subsidiaries ......................................448 4.4.2 Acquiring and selling investments and businesses .......................450 4.4.2.A Has a business been acquired? .......................................450 4.4.2.B If a business has been acquired, how should it be accounted for? .................................................................450 4.4.2.C Purchase and sale of a business for equity or cash not representative of the fair value of the business ......451 4.4.2.D If the net assets are not a business, how should the transactions be accounted for? .......................................451 4.4.3 Transfers of businesses without consideration .............................451 4.4.3.A Distributions of businesses.............................................451 4.4.3.B Contributions of businesses ...........................................454 4.4.3.C Legal merger of parent and subsidiary ...........................454 4.4.4 Incurring expenses and settling liabilities without recharges ......455 4.4.5 Financial instruments within the scope of IAS 39 ........................456 4.4.5.A Interest free or non-market interest rate loans .............456 4.4.5.B Financial guarantee contracts: Parent guarantee issued on behalf of subsidiary .........................................458 4.5 Disclosures .................................................................................................459 CHAPTER 9

BUSINESS COMBINATIONS

1

INTRODUCTION ................................................................................................467 1.1 Background.................................................................................................467 1.2 Development of an international standard ...............................................468 1.2.1 IAS 22 and related SIC Interpretations ........................................468 1.2.2 IASB’s project .................................................................................468 1.2.2.A Phase I .............................................................................469 1.2.2.B Phase II ............................................................................469 1.2.3 IFRS 3 (as revised in 2008)............................................................470 1.2.3.A Reasons for revising IFRS 3 ............................................470 1.2.3.B Main changes introduced ...............................................471 1.2.3.C Subsequent amendments to IFRS 3 ..............................473 1.2.4 Future developments .....................................................................473

2

EFFECTIVE DATE, OBJECTIVE AND SCOPE OF IFRS 3 ......................................474 2.1 Effective date .............................................................................................474 2.2 Objective ....................................................................................................474 2.3 Scope ..........................................................................................................475

3

IDENTIFYING A BUSINESS COMBINATION ........................................................476 3.1 Identifying a business combination ..........................................................477 3.2 Definition of a business .............................................................................477 3.2.1 Inputs, processes and outputs .......................................................478 3.2.2 ‘Capable of’ from the viewpoint of a market participant..............479

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Detailed contents – Volume 1 3.2.3 Development stage entities ...........................................................479 3.2.4 Presence of goodwill .......................................................................481 3.2.5 Application of the definition of a business ....................................481 4

ACQUISITION METHOD OF ACCOUNTING........................................................483

5

IDENTIFYING THE ACQUIRER ...........................................................................484

6

DETERMINING THE ACQUISITION DATE .........................................................488

7

RECOGNISING AND MEASURING THE IDENTIFIABLE ASSETS ACQUIRED, THE LIABILITIES ASSUMED, AND ANY NON-CONTROLLING INTEREST IN THE ACQUIREE...................................................................................................490 7.1 General principles ......................................................................................490 7.2 Recognition conditions for identifiable assets acquired and liabilities assumed......................................................................................490 7.3 Acquisition-date fair values of identifiable assets acquired and liabilities assumed......................................................................................491 7.4 Classifying or designating identifiable assets acquired and liabilities assumed ......................................................................................................492 7.5 Recognising and measuring particular assets acquired and liabilities assumed ......................................................................................................494 7.5.1 Operating leases .............................................................................494 7.5.2 Intangible assets .............................................................................495 7.5.2.A What is an identifiable intangible asset?........................495 7.5.2.B Examples of identifiable intangible assets.....................497 7.5.2.C Customer relationship intangible assets acquired in a business combination ...................................................502 7.5.2.D Combining an intangible asset with a related contract, identifiable asset or liability ............................505 7.5.2.E In-process research or development project expenditure .....................................................................506 7.5.2.F Emission rights acquired in a business combination .....508 7.5.2.G Determining the fair values of intangible assets ...........508 7.5.3 Reacquired rights............................................................................513 7.5.4 Assembled workforce and other items that are not identifiable ......................................................................................513 7.5.4.A Assembled workforce ......................................................514 7.5.4.B Items not qualifying as assets .........................................515 7.5.5 Assets with uncertain cash flows (valuation allowances) .............515 7.5.6 Assets that the acquirer intends not to use or to use in a way that is different from other market participants ...........................516 7.5.7 Investments in equity-accounted entities ....................................517 7.5.8 Deferred revenue............................................................................517 7.6 Exceptions to the recognition and/or measurement principles...............518 7.6.1 Contingent liabilities .....................................................................518 7.6.1.A Initial recognition and measurement .............................519


Detailed contents – Volume 1 xxvii 7.6.1.B Subsequent measurement and accounting ....................519 7.6.2 Income taxes ...................................................................................520 7.6.3 Employee benefits ..........................................................................521 7.6.4 Indemnification assets ...................................................................522 7.6.4.A Initial recognition and measurement .............................522 7.6.4.B Subsequent measurement and accounting ....................523 7.6.5 Reacquired rights............................................................................523 7.6.5.A Initial recognition and measurement .............................523 7.6.5.B Subsequent measurement and accounting ....................524 7.6.6 Assets held for sale .........................................................................524 7.6.7 Share-based payment transactions ................................................524 8

RECOGNISING AND MEASURING GOODWILL OR A GAIN IN A BARGAIN PURCHASE ..........................................................................................................525

9

CONSIDERATION TRANSFERRED ......................................................................528 9.1 Contingent consideration ..........................................................................530 9.1.1 Initial recognition and measurement ............................................532 9.1.2 Classification of a contingent consideration obligation ................533 9.1.3 Subsequent measurement and accounting ...................................536 9.1.4 Contingent consideration balances arising from business combinations preceding IFRS 3 (as revised in 2008) ...................537 9.2 Share-based payment awards exchanged for awards held by the acquiree’s employees .................................................................................538 9.3 Acquisition-related costs ...........................................................................539 9.4 Business combinations achieved without the transfer of consideration ..............................................................................................539 9.4.1 Business combinations by contract alone ......................................540 9.5 Combinations involving mutual entities ..................................................541

10 RECOGNISING AND MEASURING NON-CONTROLLING INTERESTS IN ACQUIREE...........................................................................................................542 10.1 Option 1 – Measuring qualifying non-controlling interests at acquisition-date fair value .........................................................................544 10.2 Option 2 – Measuring qualifying non-controlling interests at the proportionate share of the value of net identifiable assets acquired ......544 10.3 Implications of method chosen for measuring non-controlling interests ......................................................................................................545 10.4 Applying the IFRS 3 requirements for measuring different components of non-controlling interests ..................................................547 10.5 Call and put options over non-controlling interests ................................549 11 BUSINESS COMBINATIONS ACHIEVED IN STAGES (‘STEP ACQUISITIONS’) .....549 12 BARGAIN PURCHASE TRANSACTIONS ................................................................556 13 ASSESSING WHAT IS PART OF THE EXCHANGE FOR THE ACQUIREE ................559


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Detailed contents – Volume 1 13.1 Effective settlement of pre-existing relationships ..................................561 13.2 Remuneration for future services of employees or former owners of the acquiree................................................................................................563 13.2.1 Arrangements for contingent payments to employees (or selling shareholders) .......................................................................563 13.2.2 Share-based payment awards exchanged for awards held by the acquiree’s employees ...............................................................568 13.3 Reimbursement to the acquiree or its former owners for paying the acquirer’s acquisition-related costs ...........................................................569 13.4 Restructuring plans....................................................................................569 14 MEASUREMENT PERIOD....................................................................................571 14.1 Adjustments made during measurement period to provisional amounts ......................................................................................................572 14.2 Adjustments made after end of measurement period..............................574 15 SUBSEQUENT MEASUREMENT AND ACCOUNTING ..........................................574 16 REVERSE ACQUISITIONS ....................................................................................575 16.1 Measuring the consideration transferred..................................................576 16.2 Measuring goodwill ....................................................................................578 16.3 Preparation and presentation of consolidated financial statements .......579 16.4 Non-controlling interest ............................................................................581 16.5 Earnings per share......................................................................................583 16.6 Cash consideration .....................................................................................584 16.7 Share-based payments ...............................................................................586 16.8 Reverse acquisitions involving a non-trading shell company...................586 17 PUSH DOWN ACCOUNTING ...............................................................................588 18 DISCLOSURES ....................................................................................................589 18.1 Nature and financial effect of business combinations .............................590 18.1.1 Business combinations during the current reporting period ........590 18.1.2 Business combinations effected after the end of the reporting period ..............................................................................592 18.2 Financial effects of adjustments recognised in the current reporting period relating to business combinations .................................................592 18.3 Other necessary information .....................................................................594 18.4 Illustrative disclosures ...............................................................................594 19 TRANSITIONAL ARRANGEMENTS......................................................................597 19.1 Transitional arrangements under the original IFRS 3 for entities already reporting under IFRS....................................................................597 19.2 Transitional arrangements under IFRS 3 (as revised in 2008) for entities already reporting under IFRS ......................................................597


Detailed contents – Volume 1 19.2.1 Business combinations accounted for under the previous version of IFRS 3 ............................................................................597 19.2.2 Entities previously outwith the scope of the previous version of IFRS 3 .........................................................................................598 19.2.3 Asset brought forward relating to directly attributable costs of a probable business combination ...............................................599 19.3 Transitional arrangements relating to May 2010 Annual Improvements amendments for entities already reporting under IFRS ...........................................................................................................600 19.3.1 Contingent consideration balances arising from business combinations preceding IFRS 3 (as revised in 2008) ...................600 20 FUTURE DEVELOPMENTS .................................................................................604 20.1 Formation of joint ventures and business combinations involving entities under common control .................................................................604 20.2 Contingencies ............................................................................................605 20.3 Fair value measurement ............................................................................605 20.4 Improvements to IFRSs ............................................................................606 20.4.1 Regrouping and consistency of contingent consideration guidance ..........................................................................................606 20.5 Other projects ............................................................................................606 20.6 Post-implementation review of IFRS 3 (as revised in 2008) and IAS 27 (as amended in 2008) ....................................................................607 CHAPTER 10

COMMON CONTROL BUSINESS COMBINATIONS

1

INTRODUCTION ................................................................................................611 1.1 Background.................................................................................................611 1.2 Interpretations Committee discussions on common control transactions ................................................................................................612 1.3 Development of the IFRS 3 exemption for business combinations involving entities or businesses under common control ..........................612 1.4 Possible future developments: IASB project on common control transactions ................................................................................................613 1.5 Scope of this chapter .................................................................................614

2

THE IFRS 3 EXEMPTION FOR BUSINESS COMBINATIONS INVOLVING ENTITIES OR BUSINESSES UNDER COMMON CONTROL ..................................615 2.1 Common control exemption .....................................................................616 2.1.1 Common control by an individual or group of individuals............616 2.1.2 Transitory control ...........................................................................618

3

ACCOUNTING FOR BUSINESS COMBINATIONS INVOLVING ENTITIES OR BUSINESSES UNDER COMMON CONTROL .........................................................621 3.1 Pooling of interests method or acquisition method .................................622 3.2 Application of the acquisition method under IFRS 3 ..............................625

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Detailed contents – Volume 1 3.3 Application of the pooling of interests method........................................628 3.3.1 General requirements ....................................................................628 3.3.2 Carrying amounts of assets and liabilities .....................................628 3.3.3 Restatement of financial information for periods prior to the date of the combination .................................................................630 3.3.4 Acquisition of a non-controlling interest as part of a common control business combination ........................................................633 4

GROUP REORGANISATIONS ...............................................................................635 4.1 Introduction ...............................................................................................635 4.2 Setting up a new top holding company ....................................................636 4.3 Inserting a new intermediate parent within an existing group ...............640 4.4 Transferring businesses outwith an existing group using a Newco ........641 4.5 Transferring associates/jointly controlled entities within an existing group ...........................................................................................................643

CHAPTER 11

ASSOCIATES

1

INTRODUCTION ................................................................................................651 1.1 The origins of equity accounting ..............................................................651 1.2 Development of IAS 28 .............................................................................652 1.3 Other applicable IFRSs .............................................................................652 1.4 Future developments ................................................................................653

2

SCOPE OF IAS 28 ...............................................................................................654 2.1 Exemption for venture capital organisations and similar entities ...........654 2.1.1 Application of IAS 39 to associates exempt from IAS 28 .............654 2.1.1.A Entities with a mix of activities......................................655 2.1.1.B Designation of investments as ‘at fair value through profit or loss’ ....................................................................656 2.1.1.C Availability of fair value information ..............................657 2.1.1.D Disclosure of interests in associates ...............................657 2.1.2 Venture capital consolidations and partial use of fair value through profit or loss ......................................................................657 2.2 Definition of ‘associate’ and related terms ...............................................660 2.2.1 Significant influence ......................................................................661 2.2.1.A Lack of significant influence ..........................................662 2.2.1.B Holdings of less than 20% of the voting power .............662 2.2.1.C Holdings of more than 50% of the voting power ...........663 2.2.1.D Potential voting rights ....................................................663 2.2.1.E Voting rights held in a fiduciary capacity .......................664 2.2.1.F Long-term restrictions over associate’s ability to transfer funds to investor ................................................664 2.3 Requirement to apply the equity method ................................................664


Detailed contents – Volume 1 2.3.1 Associates held for sale ...................................................................666 2.4 Separate financial statements ...................................................................666 2.4.1 Impairment of investments in associates in separate financial statements ......................................................................................667 3

APPLICATION OF THE EQUITY METHOD ..........................................................668 3.1 Overview ....................................................................................................668 3.2 Similarities of equity accounting and consolidation ................................670 3.2.1 Differences between equity accounting and consolidation .........671 3.3 Date of commencement of equity accounting .........................................671 3.4 Initial carrying amount of an associate......................................................672 3.4.1 Retained interest in an associate following loss of control or joint control in an entity ................................................................672 3.4.2 Piecemeal acquisition of an associate ............................................674 3.4.2.A Financial instrument becoming an associate .................674 3.4.2.B Step increase in an existing associate ............................680 3.5 Share accounted for ...................................................................................682 3.5.1 Contingent voting rights ................................................................682 3.5.2 Cumulative preference shares held by parties other than the investor............................................................................................682 3.5.3 Several classes of equity .................................................................683 3.5.4 Where the reporting entity or the associate is a group .................683 3.5.5 Non-controlling interests in an associate’s consolidated financial statements .......................................................................684 3.6 Transactions between the reporting entity and associates .....................685 3.6.1 Elimination of ‘upstream’ and ‘downstream’ transactions ...........685 3.6.1.A Elimination of ‘downstream’ unrealised profits in excess of the investment ................................................687 3.6.1.B Transactions between associates and/or joint ventures ...........................................................................689 3.6.2 Reciprocal interests ........................................................................689 3.6.2.A Reciprocal interests in reporting entity accounted for under the equity method by the associate ...............689 3.6.2.B Reciprocal interests in reporting entity not accounted for under the equity method by the associate ...........................................................................693 3.6.3 Loans and borrowings between the reporting entity and associates .........................................................................................694 3.6.4 Statement of cash flows .................................................................695 3.6.5 Contributions of non-monetary assets to an associate..................695 3.7 Non-coterminous accounting periods .......................................................695 3.8 Consistent accounting policies .................................................................696 3.9 Loss-making associates ..............................................................................697 3.10 Distributions received in excess of the carrying amount .........................698 3.11 Equity transactions in an associate’s financial statements ......................698

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Detailed contents – Volume 1 3.11.1 3.11.2 3.11.3 3.11.4

Dividends or other forms of distributions .....................................699 Issues of equity instruments ..........................................................699 Equity-settled share-based payment transactions ........................699 Effects of changes in parent/non-controlling interests in subsidiaries......................................................................................703 3.12 Cessation of equity accounting .................................................................705 3.12.1 Date of cessation ............................................................................705 3.12.2 Accounting for loss of significant influence ..................................706 3.12.3 Partial disposals of interests in associates without loss of significant influence .......................................................................707 3.12.4 Deemed disposals ...........................................................................708 4

IMPAIRMENT LOSSES ........................................................................................711 4.1 General .......................................................................................................711 4.2 Goodwill .....................................................................................................712 4.3 Allocation and reversal of impairment ......................................................715

5

PRESENTATION AND DISCLOSURE ...................................................................717 5.1 Presentation ...............................................................................................717 5.1.1 Balance sheet ..................................................................................717 5.1.2 Profit or loss ....................................................................................717 5.1.2.A Impairment of associates ................................................718 5.1.3 Other items of comprehensive income .........................................719 5.2 Disclosures .................................................................................................719 5.2.1 Requirements of IAS 28 .................................................................719 5.2.1.A Summarised financial information of associates ............722 5.2.2 IAS 37 – Provisions, Contingent Liabilities and Contingent Assets ..............................................................................................723

6

TRANSITIONAL ISSUES ......................................................................................723 6.1 General .......................................................................................................723 6.2 Upon application of IAS 27 (as amended in 2008) and IFRS 3 (as revised in 2008) .........................................................................................724

CHAPTER 12

JOINT VENTURES

1

INTRODUCTION ................................................................................................731 1.1 The nature of joint ventures .....................................................................731 1.2 Development of IAS 31 .............................................................................732 1.3 Other applicable IFRS ...............................................................................732 1.4 Future developments ................................................................................733

2

SCOPE OF IAS 31 ...............................................................................................733 2.1 Exemption for venture capital organisations and similar entities ...........734 2.2 Definition of ‘joint venture’ and related terms ........................................734


Detailed contents – Volume 1 xxxiii 2.2.1 ‘Venturer’ versus ‘investor’.............................................................735 2.2.2 Joint control ....................................................................................735 2.2.2.A Contractual arrangement ................................................735 2.2.2.B Legal and other restrictions on investee ........................736 2.2.2.C Potential voting rights ....................................................736 2.3 Requirement to apply IAS 31 to jointly controlled entities ....................737 2.4 Separate financial statements ...................................................................738 2.4.1 Impairment of interests in jointly controlled entities in a venturer’s separate financial statements .......................................739 2.5 ‘Pseudo’ joint ventures ..............................................................................740 3

JOINTLY CONTROLLED OPERATIONS ...............................................................741

4

JOINTLY CONTROLLED ASSETS ........................................................................742

5

JOINTLY CONTROLLED ENTITIES ....................................................................744 5.1 Definition ...................................................................................................744 5.2 Accounting treatment – summary.............................................................745 5.2.1 Difference between allowed treatments .......................................746 5.2.1.A Loss-making joint ventures ............................................746 5.2.1.B Capitalisation of borrowing costs ...................................746 5.2.1.C Hedging of the joint ventures ........................................746 5.2.1.D Impairment of a jointly controlled entity ......................747 5.2.1.E Acquisition of a jointly controlled entity .......................747 5.2.2 Consistency of treatment ...............................................................747 5.3 Proportionate consolidation ......................................................................748 5.4 Equity method ...........................................................................................750 5.5 Date of commencement of accounting for a jointly controlled entity ....752 5.5.1 Jointly controlled entity previously accounted for under IFRS 5 .............................................................................................752 5.6 Accounting for the acquisition of an interest in a jointly controlled entity ..........................................................................................................753 5.6.1 Venturers applying the equity method .........................................753 5.6.2 Venturers applying proportionate consolidation ...........................754 5.6.3 Retained interest in a jointly controlled entity following loss of control in an entity .....................................................................755 5.7 Piecemeal acquisition of a jointly controlled entity.................................757 5.7.1 Financial instrument becoming a jointly controlled entity ..........757 5.7.1.A Venturers applying the equity method ..........................757 5.7.1.B Venturers applying proportionate consolidation............757 5.7.2 Step acquisition from an associate to a jointly controlled entity ...............................................................................................758 5.7.3 Step increase in an existing jointly controlled entity ...................759 5.7.3.A Venturers applying the equity method ..........................759 5.7.3.B Venturers applying proportionate consolidation............759


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Detailed contents – Volume 1 5.8 Cessation of joint control over a jointly controlled entity .......................760 5.8.1 Date of cessation ............................................................................760 5.8.2 Accounting for loss of joint control ................................................761 5.8.3 Partial disposals of interests in jointly controlled entities without loss of joint control ...........................................................762 6

TRANSACTIONS BETWEEN A VENTURER AND A JOINT VENTURE ....................764 6.1 Background.................................................................................................764 6.2 IAS 31 requirements ..................................................................................764 6.3 Non-monetary contributions to joint ventures – SIC-13.........................768 6.3.1 ‘Commercial substance’ .................................................................768 6.3.2 Applying SIC-13 in practice ...........................................................770 6.3.2.A ‘Artificial’ transactions ....................................................773 6.3.2.B Accounts of JV Co ...........................................................773 6.3.3 Conflict between SIC-13 and IAS 27 ............................................774 6.4 Loans and borrowings between the reporting entity and joint ventures ......................................................................................................776

7

OPERATORS OF JOINT VENTURES .....................................................................777

8

VARIABLE PROFIT SHARE ...................................................................................777

9

RELATED PARTY DISCLOSURES.........................................................................777

10 PRESENTATION AND DISCLOSURE ...................................................................778 10.1 Presentation ...............................................................................................778 10.1.1 Jointly controlled operations and jointly controlled assets...........778 10.1.2 Jointly controlled entities ..............................................................778 10.2 Disclosure ...................................................................................................778 10.2.1 Interests in joint ventures ..............................................................778 10.2.2 Accounting policy for jointly controlled entities...........................780 10.2.3 Contingencies and commitments ..................................................780 10.2.4 Disclosures required when accounting for an interest in a jointly controlled entity at fair value under IAS 39 ......................780 11 TRANSITIONAL ISSUES ......................................................................................781 11.1 General .......................................................................................................781 11.2 Upon application of IAS 27 (as amended in 2008) and IFRS 3 (as revised in 2008) .........................................................................................781 12 FUTURE DEVELOPMENTS IN JOINT VENTURE ACCOUNTING ..........................782 12.1 Exposure Draft 9 (ED 9) – Joint Arrangements ......................................782 12.2 Subsequent developments since publication of ED 9 .............................785 CHAPTER 13 1

FOREIGN EXCHANGE

INTRODUCTION ................................................................................................795


Detailed contents – Volume 1 xxxv 1.1 Background.................................................................................................795 1.2 Development of an international standard ...............................................796 1.2.1 IAS 21 ..............................................................................................796 1.2.2 IAS 21 (Revised 2003) ...................................................................796 1.2.3 Subsequent amendments...............................................................797 1.2.4 SIC and Interpretations Committee pronouncements ................797 2

IAS 21: OBJECTIVE, SCOPE AND DEFINITIONS ...............................................797 2.1 Objective of the standard ..........................................................................797 2.2 Scope ..........................................................................................................798 2.3 Definitions of terms...................................................................................798

3

SUMMARY OF THE APPROACH REQUIRED BY IAS 21 .........................................799

4

DETERMINATION OF AN ENTITY’S FUNCTIONAL CURRENCY .........................800 4.1 General .......................................................................................................800 4.2 Intermediate holding companies or finance subsidiaries.........................802 4.3 Investment holding companies .................................................................803 4.4 Documentation of judgements made .......................................................804

5

REPORTING FOREIGN CURRENCY TRANSACTIONS IN THE FUNCTIONAL CURRENCY OF AN ENTITY .................................................................................804 5.1 Initial recognition ......................................................................................804 5.1.1 Identifying the date of transaction ................................................805 5.1.2 Using average rates .........................................................................806 5.1.3 Dual rates or suspension of rates ...................................................807 5.2 Reporting at the end of subsequent reporting periods ............................807 5.3 Treatment of exchange differences ..........................................................808 5.3.1 Monetary items...............................................................................808 5.3.2 Non-monetary items ......................................................................810 5.4 Determining whether an item is monetary or non-monetary ..................810 5.4.1 Deposits or progress payments ......................................................812 5.4.2 Investments in preference shares ..................................................812 5.4.3 Foreign currency share capital .......................................................813 5.4.4 Deferred tax ....................................................................................814 5.4.5 Post-employment benefit plans – foreign currency assets ...........814 5.4.6 Post-employment benefit plans – foreign currency plans ............815 5.5 Change in functional currency ..................................................................816 5.6 Books and records not kept in functional currency..................................818

6

USE OF A PRESENTATION CURRENCY OTHER THAN THE FUNCTIONAL CURRENCY..........................................................................................................819 6.1 Translation to the presentation currency .................................................820 6.1.1 Functional currency is not that of a hyperinflationary economy ..........................................................................................821


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Detailed contents – Volume 1

6.2

6.3

6.4 6.5 6.6

6.1.2 Functional currency is that of a hyperinflationary economy ........824 6.1.3 Dual rates or suspension of rates ...................................................827 6.1.4 Calculation of average rate .............................................................827 6.1.5 Accounting for foreign operations where sub-groups exist...........829 Translation of equity items .......................................................................831 6.2.1 Share capital....................................................................................831 6.2.2 Other equity balances resulting from transactions with equity holders .................................................................................832 6.2.3 Other equity balances resulting from income and expenses being recognised in other comprehensive income ........................832 Exchange differences on intragroup balances ..........................................832 6.3.1 Monetary items included as part of the net investment in a foreign operation – general.............................................................833 6.3.2 Monetary items included as part of the net investment in a foreign operation – currency of the monetary item ......................835 6.3.3 Monetary items included as part of the net investment in a foreign operation – treatment in the individual financial statements ......................................................................................836 6.3.4 Monetary items transacted by other members of the group ........836 6.3.5 Monetary items becoming part of the net investment in a foreign operation.............................................................................837 6.3.6 Monetary items ceasing to be part of the net investment in a foreign operation.............................................................................839 6.3.7 Dividends ........................................................................................839 6.3.8 Unrealised profits on intragroup transactions ...............................840 Non-coterminous period ends...................................................................840 Goodwill and fair value adjustments .........................................................841 Disposal or partial disposal of a foreign operation ....................................843 6.6.1 Disposals and transactions treated as disposals ............................843 6.6.2 Partial disposals ..............................................................................845 6.6.3 Interpretations Committee discussions about partial disposals ..........................................................................................846 6.6.4 Comparison of the effect of step-by-step and direct methods of consolidation on accounting for disposals .................................848

7

CHANGE OF PRESENTATION CURRENCY ..........................................................851

8

INTRODUCTION OF THE EURO .........................................................................856

9

TAX EFFECTS OF ALL EXCHANGE DIFFERENCES .............................................857

10 DISCLOSURE REQUIREMENTS ..........................................................................857 10.1 Exchange differences .................................................................................857 10.2 Presentation and functional currency .......................................................858 10.3 Convenience translations of financial statements or other financial information .................................................................................................858


Detailed contents – Volume 1 xxxvii CHAPTER 14

HYPERINFLATION

1

INTRODUCTION ................................................................................................863 1.1 Background.................................................................................................863 1.2 Hyperinflationary economies ....................................................................864 1.3 Adjustment approaches .............................................................................865 1.4 The introduction of IAS 29 .......................................................................865

2

THE REQUIREMENTS OF IAS 29 ......................................................................866 2.1 The context of IAS 29 ...............................................................................866 2.2 Scope ..........................................................................................................867 2.3 Definition of hyperinflation ......................................................................867 2.4 The IAS 29 restatement process...............................................................868

3

SELECTION OF A GENERAL PRICE INDEX .........................................................869 3.1 Selecting a general price index .................................................................869 3.2 General price index not available for all periods ......................................869

4

ANALYSIS AND RESTATEMENT OF BALANCE SHEET ITEMS .............................869 4.1 Monetary and non-monetary items ...........................................................871 4.1.1 Monetary or non-monetary ............................................................871 4.1.2 Monetary items...............................................................................873 4.1.3 Non-monetary items carried at current cost .................................873 4.1.4 Non-monetary items carried at historical cost ..............................873 4.2 Inventories .................................................................................................876 4.3 Restatement of investees and subsidiaries...............................................876 4.3.1 Investees accounted for under the equity method.......................877 4.4 Calculation of deferred taxation ...............................................................877 4.5 Restatement of equity ...............................................................................879

5

ANALYSIS AND RESTATEMENT OF ITEMS IN OTHER PRIMARY FINANCIAL STATEMENTS .....................................................................................................880 5.1 Restatement of statements of comprehensive income (and income statements if presented) ...........................................................................880 5.1.1 Restatement of interest and exchange differences ......................882 5.2 Calculation of the gain or loss on the net monetary position ..................882 5.3 Restatement of the statement of cash flows ............................................883 5.4 Restatement of the corresponding figures ...............................................884

6

INTERIM REPORTING ........................................................................................885

7

TRANSITION ......................................................................................................885 7.1 Economies becoming hyperinflationary ....................................................885 7.2 Economies ceasing to be hyperinflationary ..............................................887


xxxviii Detailed contents – Volume 1 8

TRANSLATION TO A DIFFERENT PRESENTATION CURRENCY .........................888

9

DISCLOSURES ....................................................................................................888

CHAPTER 15 1

INTANGIBLE ASSETS

INTRODUCTION ................................................................................................897 1.1 Background.................................................................................................897 1.2 Terms used in IAS 38 ................................................................................898

2

38 .....................................................................899 2.1 What is an intangible asset? ......................................................................900 2.1.1 Identifiability ..................................................................................901 2.1.2 Control ............................................................................................902 2.1.3 Future economic benefits ..............................................................904 2.2 Whether to record a tangible or intangible asset......................................904

3

RECOGNITION AND MEASUREMENT ................................................................905 3.1 Recognition ................................................................................................905 3.2 Measurement .............................................................................................905 3.3 Subsequent expenditure ...........................................................................906

4

SEPARATE ACQUISITION ...................................................................................906 4.1 Recognition ................................................................................................906 4.2 Components of cost ...................................................................................907 4.3 Costs to be expensed .................................................................................908 4.4 Income from incidental operations while an asset is being developed ...................................................................................................908

5

ACQUISITION AS PART OF A BUSINESS COMBINATION .....................................909 5.1 Recognition of intangible assets acquired in a business combination ....910 5.1.1 Probable inflow of benefits ............................................................910 5.1.2 Reliability of measurement ............................................................910 5.1.3 Identifiability in relation to an intangible asset acquired in a business combination .....................................................................910 5.1.3.A Contractual-legal criterion ..............................................911 5.1.3.B Separability criterion .......................................................912 5.2 Examples of intangible assets acquired in a business combination ........912 5.3 Measuring fair value of intangible assets acquired in a business combination................................................................................................914 5.3.1 Reliability of measurement ............................................................914 5.3.2 Hierarchy of reliable sources of evidence of fair value .................914 5.4 Customer relationship intangible assets acquired in a business combination................................................................................................915 5.5 In-process research and development ......................................................917

OBJECTIVE AND SCOPE OF IAS


Detailed contents – Volume 1 xxxix 6

ACQUISITION BY WAY OF GOVERNMENT GRANT ..............................................918

7

EXCHANGES OF ASSETS .....................................................................................918 7.1 Measurement of assets exchanged ...........................................................919 7.2 Commercial substance...............................................................................919

8

INTERNALLY GENERATED INTANGIBLE ASSETS ..............................................920 8.1 Internally generated goodwill ...................................................................920 8.2 Internally generated intangible assets ......................................................920 8.2.1 Research phase ...............................................................................921 8.2.2 Development phase........................................................................921 8.2.3 Internally generated brands, mastheads, publishing titles and customer lists ...........................................................................926 8.2.4 Website costs (SIC-32) ..................................................................926 8.3 Cost of an internally generated intangible asset ......................................929 8.3.1 Establishing the time from which costs can be capitalised ..........929 8.3.2 Determining the costs eligible for capitalisation ..........................929

9

RECOGNITION OF AN EXPENSE ........................................................................930 9.1 Catalogues and other advertising costs .....................................................931

10 MEASUREMENT AFTER INITIAL RECOGNITION ...............................................931 10.1 Cost model for measurement of intangible assets ...................................932 10.2 Revaluation model for measurement of intangible assets .......................932 10.2.1 Revaluation is only allowed if there is an active market...............933 10.2.2 Frequency of revaluations ..............................................................934 10.2.3 Accounting for revaluations............................................................934 10.2.4 No active market for an asset in a class of intangible assets that is revalued ...............................................................................936 11 AMORTISATION OF INTANGIBLE ASSETS..........................................................937 11.1 Assessing the useful life of an intangible asset (finite or indefinite) .....937 11.1.1 Useful life of contractual or other legal rights ..............................940 11.2 Intangible assets with a finite useful life..................................................941 11.2.1 Amortisation period and method ...................................................941 11.2.2 Review of amortisation period and amortisation method.............942 11.2.3 Residual value .................................................................................943 11.3 Intangible assets with an indefinite useful life ........................................943 11.4 Impairment losses ......................................................................................944 11.5 Retirements and disposals.........................................................................944 12 DISCLOSURE ......................................................................................................945 12.1 General disclosures ....................................................................................945 12.2 Balance sheet presentation .......................................................................948 12.3 Income statement presentation ................................................................949


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Detailed contents – Volume 1 12.4 Additional disclosures when the revaluation model is applied................949 12.5 Disclosure of research and development expenditure.............................950 13 PRACTICAL ISSUES ............................................................................................950 13.1 Regulatory assets .......................................................................................950 13.2 Research and development in the pharmaceutical industry ...................951 13.3 Emissions trading schemes (including IFRIC 3) .....................................952 13.3.1 Emissions trading schemes – IFRIC 3 ..........................................953 13.3.2 Emissions trading schemes – Net liability approach ....................955 13.3.2.A Impact of purchased emission rights on the ‘net liability’ approach ............................................................956 13.3.3 Emissions trading schemes – Government grant approach ..........959 13.3.4 Amortisation and impairment testing of emission rights .............960 13.3.5 Emission rights acquired in a business combination ....................961 13.3.6 Sale of emission rights ....................................................................961 13.3.7 Disclosures relating to the choice of accounting treatment adopted ...........................................................................................962 13.3.8 Accounting for emission rights by brokers and traders .................962 13.4 Accounting for green certificates or renewable energy certificates ........962 13.4.1 Accounting by producers using renewable energy sources ...........963 13.4.2 Accounting by distributors of renewable energy ...........................963 13.4.3 Accounting by brokers and traders ................................................963 13.5 Accounting for REACH costs ....................................................................964 13.5.1 Costs of registering a new substance performed by the entity itself ................................................................................................965 13.5.2 Costs of acquiring test data from an existing registrant ...............965 13.5.3 Costs of registering an existing substance performed by the entity itself......................................................................................965 13.5.4 Determining the basis for amortisation .........................................966 13.6 Television and telecommunications programme and broadcast rights ...........................................................................................................966 13.6.1 Classification of programme and other broadcast rights...............966 13.6.2 Recognition of programme and other broadcast rights .................968 13.6.3 Amortisation of programme and other broadcast rights ...............970 13.7 Intangible assets acquired in a business combination .............................972 13.7.1 Valuing intangible assets ................................................................972 13.7.2 Measurement of intangible assets acquired for contingent consideration...................................................................................974 14 TRANSITIONAL ARRANGEMENTS......................................................................974 15 FUTURE DEVELOPMENTS .................................................................................975 15.1 Exposure draft on rate-regulated activities ..............................................975 15.2 Emissions trading schemes........................................................................976


Detailed contents – Volume 1 CHAPTER 16

PROPERTY, PLANT AND EQUIPMENT

1

INTRODUCTION ................................................................................................983

2

THE REQUIREMENTS OF IAS 16 .......................................................................984 2.1 Scope ..........................................................................................................984 2.2 Definitions .................................................................................................984

3

RECOGNITION ...................................................................................................985 3.1 Aspects of recognition ...............................................................................986 3.1.1 Spare parts and minor items ..........................................................986 3.1.2 Environmental and safety equipment ...........................................987 3.1.3 Initial and subsequent expenditure ..............................................988 3.1.3.A Major inspections ............................................................989 3.1.4 Probable economic benefits and property developments ............990

4

MEASUREMENT AT RECOGNITION ...................................................................990 4.1 Elements of cost and cost measurement ..................................................990 4.1.1 ‘Directly attributable’ costs ...........................................................991 4.1.2 Borrowing costs ...............................................................................992 4.1.3 Administration and other general overheads.................................992 4.1.4 Cessation of capitalisation .............................................................992 4.1.5 Self-built assets ..............................................................................992 4.1.6 Deferred payment ..........................................................................993 4.1.7 Land and buildings to be redeveloped ..........................................993 4.1.8 Contributions of PP&E by customers ...........................................994 4.1.9 Accounting for parts (‘components’) of assets ..............................996 4.2 Incidental and non-incidental income ......................................................997 4.2.1 Proceeds from selling items produced while bringing the asset to the location and condition intended by management ....997 4.2.2 Income received during the construction of property ..................998 4.2.3 Other forms of income ...................................................................998 4.3 Accounting for changes in decommissioning and restoration costs ........998 4.4 Exchanges of assets..................................................................................1000 4.5 Assets held under finance leases .............................................................1002 4.6 Assets acquired with the assistance of government grants ....................1002

5

MEASUREMENT AFTER RECOGNITION...........................................................1002

6

COST MODEL ...................................................................................................1002 6.1 Parts of assets ...........................................................................................1003 6.2 Depreciable amount, useful life and residual values .............................1003 6.3 Depreciation charge .................................................................................1004 6.4 Useful lives ...............................................................................................1004 6.4.1 Repairs and maintenance .............................................................1005

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xlii

Detailed contents – Volume 1 6.4.2 Land ..............................................................................................1006 6.4.3 Technological change ...................................................................1006 6.5 When depreciation starts.........................................................................1007 6.6 Depreciation methods .............................................................................1007 6.6.1 Double declining balance .............................................................1007 6.6.2 Sum of the digits ..........................................................................1008 6.6.3 Unit of production method ..........................................................1008 6.7 Impairment ..............................................................................................1009 6.7.1 Compensation for impairment .....................................................1009 7

REVALUATION MODEL ....................................................................................1009 7.1 The meaning of fair value........................................................................1010 7.1.1 Other methods of calculating fair value ......................................1011 7.1.1.A Income approaches........................................................1011 7.1.1.B Depreciated replacement cost .....................................1012 7.2 Accounting for valuation surpluses and deficits .....................................1013 7.3 Reversals of downward valuations ...........................................................1014 7.4 Adopting a policy of revaluation ..............................................................1015 7.5 Assets held under finance leases .............................................................1015

8

DERECOGNITION AND DISPOSAL ...................................................................1016 8.1 IFRS 5 – Non-current assets held for sale and discontinued operations .................................................................................................1016 8.2 Sale of assets held for rental ....................................................................1017

9

IAS 16 DISCLOSURE REQUIREMENTS .............................................................1017 9.1 General disclosures ..................................................................................1018 9.2 Additional disclosures for revalued assets ..............................................1020 9.3 Other disclosures .....................................................................................1021

10 PRACTICAL ISSUES ..........................................................................................1022 10.1 New technology costs – PP&E or intangible assets? .............................1022 10.2 Depreciation of infrastructure assets ......................................................1022 10.3 Amounts charged under operating leases during the construction of an asset .....................................................................................................1023 10.4 Classification of items as inventory or PP&E when minimum levels are maintained .........................................................................................1023 11 FUTURE DEVELOPMENTS ...............................................................................1024 11.1 Disclosures encouraged but not required ...............................................1024 11.2 The fair value exposure draft ..................................................................1024 11.3 Accounting for servicing equipment .......................................................1025 11.4 Production stripping costs of surface mines ...........................................1025


Detailed contents – Volume 1 CHAPTER 17

INVESTMENT PROPERTY

1

INTRODUCTION ..............................................................................................1031

2

DEFINITIONS AND SCOPE ...............................................................................1032 2.1 Acquisition of investment property and the definition of a business ...1033 2.2 Property interests held under operating leases ......................................1033 2.3 Identifying investment property.............................................................1034 2.3.1 Land ..............................................................................................1034 2.3.2 Buildings leased to others ............................................................1034 2.3.3 Property held or being constructed for sale ................................1035 2.3.4 Owner occupation.........................................................................1035 2.3.5 Property in the course of construction and redevelopment .......1036 2.3.6 Properties with dual uses .............................................................1037 2.3.7 Provision of services .....................................................................1037 2.3.8 Group of assets leased out under a single operating lease .........1038

3

RECOGNITION .................................................................................................1040

4

INITIAL MEASUREMENT..................................................................................1041 4.1 Attributable costs.....................................................................................1041 4.2 Start up costs ...........................................................................................1041 4.3 Deferred payments ..................................................................................1041 4.4 Income from tenanted property during development ...........................1041 4.5 Reclassifications from Property, Plant and Equipment .........................1042 4.6 Initial measurement of property held under finance or operating leases ........................................................................................................1042 4.7 Initial measurement of assets acquired in exchange transactions ........1043 4.8 Initial recognition of tenanted investment property subsequently measured using the cost model ...............................................................1043 4.9 Borrowing costs ........................................................................................1044 4.10 Lease incentives and initial costs of leasing a property .........................1044

5

MEASUREMENT AFTER INITIAL RECOGNITION .............................................1045 5.1 Measurement by insurers and similar entities .......................................1045

6

THE FAIR VALUE MODEL .................................................................................1046 6.1 Transaction costs incurred by the purchaser..........................................1046 6.2 Determining fair value.............................................................................1047 6.2.1 The fair value of investment property under construction ........1048 6.2.2 The fair value exposure draft .......................................................1049 6.3 Assets and liabilities subsumed within fair value ...................................1050 6.4 Prepaid or accrued operating lease income ............................................1050 6.4.1 Accrued rental income and lease incentives ...............................1050

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xliv

Detailed contents – Volume 1 6.4.2 Prepaid rental income ..................................................................1051 6.5 The fair value of properties held under a lease ......................................1052 6.6 Future capital expenditure and development values ............................1054 6.7 Inability to determine fair value of completed investment property ...1054 7

THE COST MODEL...........................................................................................1055 7.1 Initial recognition ....................................................................................1055 7.1.1 Identification of tangible significant parts ..................................1055 7.1.2 Identification of significant intangible parts...............................1056 7.2 Incidence of use of the cost model .........................................................1056 7.3 Impairment ..............................................................................................1058

8

IFRS 5 AND INVESTMENT PROPERTY .............................................................1059

9

TRANSFER OF ASSETS INTO OR FROM INVESTMENT PROPERTY ...................1060 9.1 Transfers to inventory .............................................................................1060 9.2 Transfers from inventory .........................................................................1061 9.3 Treatment of transfers ............................................................................1061 9.4 Transfers of investment property held under operating leases.............1062

10 DISPOSAL OF INVESTMENT PROPERTY...........................................................1063 10.1 Replacement of parts of investment property .......................................1064 10.2 Compensation from third parties ............................................................1064 11 THE DISCLOSURE REQUIREMENTS OF IAS 40 ...............................................1065 11.1 Introduction .............................................................................................1065 11.2 Disclosures under both fair value and cost models ................................1065 11.3 Additional disclosures for the fair value model ......................................1070 11.3.1 Presentation of changes in fair value ...........................................1070 11.3.2 Extra disclosures where fair value cannot be determined reliably ...........................................................................................1072 11.4 Additional disclosures for the cost model ...............................................1072 12 FUTURE DEVELOPMENTS ...............................................................................1073 12.1 Transfers from investment property to inventory .................................1073 12.2 The Fair Value Exposure Draft ...............................................................1074 12.3 The Leasing Project ................................................................................1074 CHAPTER 18

IMPAIRMENT OF FIXED ASSETS AND GOODWILL

1

THE THEORY BEHIND THE IMPAIRMENT REVIEW .........................................1079

2

THE REQUIREMENTS OF IAS 36 .....................................................................1080 2.1 Scope ........................................................................................................1081 2.2 When an impairment test is required .....................................................1082


Detailed contents – Volume 1 2.2.1 Indicators of impairment..............................................................1082 2.2.1.A Market capitalisation ....................................................1083 2.2.1.B Future performance ......................................................1084 2.2.1.C Individual assets or part of CGU? ................................1084 2.2.1.D Interest rates .................................................................1084 2.3 The impairment test ...............................................................................1085 2.3.1 Impairment of assets held for sale ...............................................1085 3

FAIR VALUE LESS COSTS TO SELL ...................................................................1087 3.1 Using FVLCS for the purposes of impairment testing ..........................1088 3.1.1 Estimating FVLCS without an active market .............................1088 3.1.2 Exposure Draft – Fair Value Measurement – and IAS 36 ..........1090

4

DETERMINING VALUE IN USE (VIU) ..............................................................1091 4.1 Dividing the entity into cash-generating units (CGUs)........................1092 4.1.1 Active markets and identifying CGUs.........................................1094 4.2 Identifying the carrying amount of CGU assets.....................................1096 4.2.1 Consistency and the impairment test .........................................1096 4.2.1.A Environmental provisions and similar provisions and liabilities .................................................................1097 4.2.1.B Finance leases ...............................................................1098 4.2.1.C Trade debtors and creditors .........................................1098 4.2.1.D Pensions .........................................................................1098 4.2.1.E Cash flow hedges...........................................................1098 4.2.2 Corporate assets ...........................................................................1099 4.3 Estimating the future pre-tax cash flows of the CGU under review ....1101 4.3.1 Budgets and cash flows ................................................................1101 4.3.1.A Cash inflows and outflows from improvements and enhancements ...............................................................1102 4.3.1.B Restructuring.................................................................1105 4.3.1.C Terminal values .............................................................1105 4.3.1.D Foreign currency cash flows ..........................................1106 4.4 Identifying an appropriate discount rate and discounting the future cash flows .................................................................................................1107 4.4.1 Discount rates and the weighted average cost of capital ...........1110 4.4.2 Calculating a pre-tax discount rate ..............................................1111 4.4.3 Calculating VIU using post-tax cash flows ..................................1113 4.4.4 Approximations and short cuts ....................................................1117 4.4.5 Disclosing pre-tax discount rates when using a post-tax methodology .................................................................................1118 4.4.6 Determining pre-tax rates taking account of tax losses .............1119 4.4.7 Entity-specific WACCs and different project risks within the entity .............................................................................................1119 4.4.8 Entity-specific WACCs and capital structure .............................1120 4.4.9 Use of discount rates other than the WACC ..............................1121

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Detailed contents – Volume 1 4.5 Recognition of impairment losses ...........................................................1122 4.5.1 Impairment losses on individual assets .......................................1122 4.5.2 Impairment losses and CGUs ......................................................1124 5

IMPAIRMENT OF GOODWILL ...........................................................................1126 5.1 Goodwill and its allocation to cash-generating units .............................1126 5.1.1 The effect of IFRS 8 – Operating Segments – on impairment tests ..........................................................................1127 5.1.2 Aggregation of operating segments for disclosure purposes .......1128 5.2 Goodwill initially unallocated to cash-generating units.........................1129 5.3 Testing cash-generating units with goodwill for impairment ...............1130 5.3.1 Timing of impairment tests .........................................................1131 5.3.2 Sequence of impairment tests for goodwill and other assets .....1132 5.3.3 Carry forward of a previous impairment test calculation ............1132 5.3.4 Reversal of impairment loss for goodwill prohibited ..................1132 5.4 Impairment of assets and goodwill recognised on acquisition ..............1133 5.4.1 Testing goodwill ‘created’ by deferred tax for impairment .......1133 5.4.2 Assets whose fair value reflects tax benefits ...............................1135 5.4.3 Deferred tax assets and losses of acquired businesses ...............1136 5.5 Non-controlling (minority) interests ......................................................1137 5.5.1 Testing for impairment in entities with non-controlling (minority) interests measured at the proportionate share of net assets.......................................................................................1138 5.5.1.A Acquisitions of non-controlling (minority) interests measured at the proportionate share of net assets, .....1140 5.5.2 Testing for impairment in entities with non-controlling interests initially measured at fair value .....................................1140 5.6 Disposal of operation within a cash-generating unit to which goodwill has been allocated .....................................................................1141 5.6.1 Changes in composition of cash-generating units ......................1143 5.7 Impairment of intangible assets with an indefinite useful life .............1143

6

REVERSING IMPAIRMENT LOSSES ...................................................................1145 6.1 Reversal of impairment loss relating to goodwill prohibited .................1145 6.2 Reversal of impairment losses relating to assets other than goodwill ...1145 6.2.1 Reversals of impairments – cash-generating units ......................1148 6.2.2 Reversals of impairments – revalued assets ................................1148

7

DISCLOSURES REQUIRED BY IAS 36 ...............................................................1149 7.1 Introduction .............................................................................................1149 7.2 IAS 36 disclosures ....................................................................................1149 7.2.1 Disclosures required for impairment losses or reversals .............1149 7.2.2 Material impairments ...................................................................1150 7.3 Annual impairment disclosures required for goodwill and intangible assets with an indefinite useful life. .......................................................1151


Detailed contents – Volume 1 8

TESTING FOR IMPAIRMENT: GROUP ISSUES ..................................................1158 8.1 Issues affecting the group’s consolidated financial statements ............1159 8.1.1 Associates and jointly controlled entities and testing goodwill for impairment ...............................................................1159 8.1.2 Acquisitions by subsidiaries and determining the level at which the group tests goodwill for impairment ..........................1160 8.2 Testing investments in subsidiaries, jointly controlled entities and associates for impairment in separate financial statements ..................1161 8.2.1 Applying an IAS 36 methodology .................................................1161 8.2.2 IAS 28’s approach to impairment ................................................1162 8.2.3 Group reorganisations and the carrying value of investments in subsidiaries ...............................................................................1163 8.3 Testing for impairment in separate and individual financial statements ................................................................................................1164 8.4 Transfer pricing .......................................................................................1165

CHAPTER 19

CAPITALISATION OF BORROWING COSTS

1

INTRODUCTION ..............................................................................................1169

2

THE REQUIREMENTS OF IAS 23 .....................................................................1170 2.1 Accounting policy.....................................................................................1170 2.2 Scope and definitions ..............................................................................1170 2.2.1 Scope .............................................................................................1170 2.2.2 Qualifying assets ...........................................................................1170 2.2.2.A Inventories.....................................................................1170 2.2.2.B Assets measured at fair value ........................................1170 2.2.2.C Construction contracts .................................................1171 2.2.2.D Financial assets..............................................................1171 2.2.3 Borrowing costs .............................................................................1171 2.3 Capitalisation of borrowing costs ............................................................1171 2.3.1 Directly attributable borrowing costs ..........................................1171 2.3.2 General borrowings .......................................................................1172 2.3.2.A Group considerations ....................................................1173 2.3.3 Impairment and capitalisation of borrowing costs ......................1173 2.3.4 Capitalisation of borrowing costs in hyperinflationary economies .....................................................................................1173 2.4 Commencement, suspension and cessation of capitalisation ................1174 2.4.1 Commencement of capitalisation ................................................1174 2.4.2 Suspension of capitalisation .........................................................1175 2.4.3 Cessation of capitalisation ...........................................................1175 2.5 Disclosure requirements .........................................................................1176 2.5.1 The requirements of IAS 23 ........................................................1176 2.5.2 Other requirements ......................................................................1176

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Detailed contents – Volume 1 3

4

PRACTICAL ISSUES ..........................................................................................1176 3.1 Exchange differences as a borrowing cost ..............................................1176 3.2 Other finance costs ..................................................................................1178 3.2.1 Derivative financial instruments .................................................1178 3.2.2 Gains and losses on derecognition of borrowings ........................1181 3.2.3 Gains or losses on termination of derivative financial instruments ...................................................................................1181 3.2.4 Dividends payable on shares classified as financial liabilities ....1182 3.2.5 Unwinding discounts on provisions classified as finance costs in profit or loss ..............................................................................1182 3.3 Borrowings and capitalisation rate ..........................................................1183 3.3.1 Definition of general borrowings .................................................1183 3.3.2 Calculation of capitalisation .........................................................1184 3.4 Accrued costs ...........................................................................................1186 3.5 Assets carried in the balance sheet below cost.......................................1186 3.6 Group financial statements .....................................................................1187 3.6.1 Borrowings in one company and development in another..........1187 3.6.2 Qualifying assets held by joint ventures......................................1187 TRANSITION TO THE NEW IAS

CHAPTER 20

23 ..................................................................1187

INVENTORIES

1

INTRODUCTION ..............................................................................................1191 1.1 Objectives of inventory measurement ....................................................1191

2

THE SCOPE OF IAS 2.......................................................................................1192

3

MEASUREMENT ...............................................................................................1193 3.1 What may be included in cost?................................................................1193 3.1.1 Distribution and storage costs .....................................................1195 3.1.2 General and administrative overheads ........................................1196 3.1.3 Borrowing costs .............................................................................1196 3.1.4 Service providers...........................................................................1197 3.2 Cost measurement methods ...................................................................1197 3.3 Transfers of rental assets to inventory....................................................1199 3.4 Net realisable value .................................................................................1199

4

RECOGNITION IN PROFIT OR LOSS ................................................................1200

5

DISCLOSURE REQUIREMENTS OF IAS 2 .........................................................1201

6

PRACTICAL ISSUES ..........................................................................................1203 6.1 Forward contracts to purchase inventory ...............................................1203 6.2 Manufacturer dealer transactions and goods on consignment...............1203


Detailed contents – Volume 1 6.3 Core inventories .......................................................................................1203 6.4 Real estate inventory ...............................................................................1204 6.4.1 Classification.................................................................................1204 6.4.2 Allocation of costs to individual units in multi-unit developments................................................................................1205 6.4.3 Property demolition and operating lease costs ...........................1206 6.5 Broadcast rights........................................................................................1206 6.6 Drug production costs within the pharmaceutical industry ..................1208 6.7 Revaluation effects on inventory valuations ...........................................1208 CHAPTER 21

CONSTRUCTION CONTRACTS

1

INTRODUCTION ..............................................................................................1211 1.1 Scope and definitions of IAS 11 ..............................................................1211

2

COMBINATION AND SEGMENTATION OF CONTRACTS ..................................1212 2.1 Options for the construction of an additional asset ...............................1214

3

CONTRACT REVENUE, COSTS AND EXPENSES ................................................1214 3.1 Contract revenue .....................................................................................1214 3.2 Contract costs ..........................................................................................1216 3.2.1 Borrowing costs .............................................................................1217 3.3 The recognition of contract revenue and expenses ...............................1218 3.3.1 Types of construction contract ....................................................1219 3.3.1.A Fixed price contracts ....................................................1219 3.3.1.B Cost plus contracts........................................................1219 3.3.2 The stage of completion method ................................................1219 3.3.3 Changes in estimates ...................................................................1223 3.3.4 The determination of contract revenue and expenses ...............1223 3.3.5 Inability to estimate the outcome of a contract reliably ............1224 3.3.6 Loss-making contracts..................................................................1225 3.3.7 Contract inefficiencies .................................................................1225

4

DISCLOSURE REQUIREMENTS OF IAS 11 .......................................................1226

5

PRACTICAL ISSUES ..........................................................................................1229 5.1 Whether an arrangement is a construction contract and IFRIC 15 – Agreements for the Construction of Real Estate ...................................1229 5.1.1 The features of a construction contract ......................................1230 5.2 Service concession agreements ...............................................................1232 5.3 Treatment of the land element of a construction contract ...................1232

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Detailed contents – Volume 1 CHAPTER 22

LEASES

1

INTRODUCTION ..............................................................................................1239

2

WHAT IS A LEASE? ............................................................................................1240 2. 1 Determining whether an arrangement contains a lease ........................1240 2.1.1 Identification of an asset ..............................................................1242 2.1.2 Parts of assets and the unit of account ........................................1243 2.1.3 The arrangement conveys a right to use the item ......................1243 2.1.4 Fixed or current market prices and control of the asset .............1246 2.1.5 When to assess the arrangements ................................................1247 2.1.6 Separation of leases from other payments within the arrangement ..................................................................................1247 2.1.7 Disclosure requirements ..............................................................1249 2.2 Transactions that are not, in substance, leases ......................................1249

3

SCOPE AND DEFINITIONS OF IAS 17 ..............................................................1254 3.1 Scope of IAS 17 ........................................................................................1254 3.1.1 Leases and licences – IAS 17 and arrangements over intangible assets ...........................................................................1254 3.2 Lease classification ..................................................................................1255 3.2.1 Finance and operating leases .......................................................1255 3.2.2 Determining the substance of transactions ................................1256 3.2.3 Changes to lease provisions .........................................................1258 3.3 Leases of land – finance or operating leases? .........................................1259 3.3.1 Lessors and land leases ................................................................1260 3.3.2 Classification of leases over land – effective date and transition .......................................................................................1260 3.3.3 Measurement and presentation – operating leases over land ....1260 3.3.4 Separating land and buildings ......................................................1261 3.3.5 Leases and investment properties ...............................................1263 3.4 Defined terms ..........................................................................................1264 3.4.1 Inception and commencement of the lease ................................1264 3.4.2 Fair value .......................................................................................1265 3.4.3 Minimum lease payments ............................................................1265 3.4.4 Lease term and non-cancellable period ......................................1266 3.4.5 Interest rate implicit in the lease and incremental borrowing rate ................................................................................................1266 3.4.6 Residual value ...............................................................................1266 3.4.6.A Residual value guarantors .............................................1267 3.4.7 Contingent rents ..........................................................................1267 3.4.7.A Contingent rents and operating leases ........................1268 3.4.8 Initial direct costs .........................................................................1268 3.4.9 Calculation of the implicit interest rate and present value of minimum lease payments ............................................................1268


Detailed contents – Volume 1 3.5 Leases as financial instruments ..............................................................1269 4

ACCOUNTING FOR FINANCE LEASES ..............................................................1270 4.1 Accounting by lessees ..............................................................................1271 4.1.1 Initial recognition .........................................................................1271 4.1.2 Allocation of finance costs ............................................................1271 4.1.3 Recording the liability ..................................................................1273 4.1.4 Accounting for the leased asset ...................................................1273 4.2 Accounting by lessors...............................................................................1274 4.2.1 The lessor’s net investment in the lease ....................................1274 4.2.2 Allocation of finance income ........................................................1275 4.2.3 Residual values .............................................................................1276 4.2.3.A Unguaranteed residual values.......................................1276 4.2.3.B Residual value guarantees by the lessee ......................1277 4.2.3.C Rental rebates ...............................................................1277 4.2.4 Disposals by lessors of assets held under finance leases ............1278 4.3 Termination of finance leases .................................................................1278 4.3.1 Termination of finance leases by lessees ....................................1279 4.3.1.A Early termination by lessees .........................................1279 4.3.2 Termination and impairment of finance leases by lessors .........1280 4.3.3 Impairment of lease receivables ..................................................1280 4.4 Manufacturer or dealer lessors ................................................................1281

5

ACCOUNTING FOR OPERATING LEASES..........................................................1282 5.1 Operating leases in the financial statements of lessees ........................1282 5.1.1 Leases that include payments for services ..................................1282 5.1.2 Straight-line recognition over the lease term..............................1282 5.1.3 Notional or actual interest paid to lessors ...................................1283 5.1.4 Lease incentives – accounting by lessees....................................1284 5.1.5 Onerous contracts .........................................................................1285 5.2 Operating leases in the financial statements of lessors .........................1286 5.2.1 Accounting for assets subject to operating leases .......................1286 5.2.2 Lease incentives – accounting by lessors ....................................1287 5.3 Payments made in connection with the termination of operating leases ........................................................................................................1287

6

MODIFYING THE TERMS OF LEASES ...............................................................1290 6.1 IAS 17 and accounting for renegotiations ...............................................1290 6.1.1 Determining whether there is a different classification.............1290 6.1.2 Accounting for reclassified leases ................................................1293 6.1.3 Accounting for modifications to finance leases ...........................1294 6.1.4 Tax and interest variation clauses and similar modifications .....1295

7

SALE AND LEASEBACK TRANSACTIONS ...........................................................1296 7.1 Sale and finance leaseback ......................................................................1297

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Detailed contents – Volume 1 7.2 Operating leaseback ................................................................................1298 7.3 Sale and leaseback arrangements including repurchase agreements and options ...............................................................................................1299 7.3.1 Sale and leaseback arrangements with put and call options ......1300 8

SUB-LEASES AND BACK-TO-BACK LEASES........................................................1302 8.1 Introduction .............................................................................................1302 8.1.1 The original lessor and the ultimate lessee ................................1303 8.1.2 The intermediate party ................................................................1303

9

DISCLOSURES REQUIRED BY IAS 17 ...............................................................1305 9.1 Disclosures relating to financial assets and liabilities ............................1305 9.2 Disclosure by lessees ...............................................................................1305 9.2.1 Disclosure of finance leases .........................................................1305 9.2.2 Disclosure by lessees: operating leases .......................................1307 9.3 Disclosure by lessors: ...............................................................................1309 9.3.1 Disclosure of finance leases .........................................................1309 9.3.2 Disclosure of operating leases ......................................................1311

10 UPDATING LEASE ACCOUNTING: EXPOSURE DRAFT – LEASES .....................1312 10.1 Introduction .............................................................................................1312 10.2 Scope and definitions ..............................................................................1313 10.2.1 Short-term leases ..........................................................................1313 10.2.2 Purchases and sales of underlying assets .....................................1313 10.3 Lessee accounting....................................................................................1314 10.3.1 The lease term..............................................................................1314 10.3.2 Expected lease payments .............................................................1315 10.3.3 The incremental borrowing rate ..................................................1315 10.3.4 Subsequent remeasurement ........................................................1316 10.4 Lessor accounting ....................................................................................1316 10.4.1 Performance obligation approach ................................................1317 10.4.2 Derecognition approach ...............................................................1317 10.4.3 Risks and benefits of ownership ..................................................1318 10.4.4 The lessor’s discount rate ............................................................1318 CHAPTER 23

GOVERNMENT GRANTS

1

INTRODUCTION ..............................................................................................1323 1.1 Government grants ..................................................................................1323

2

REQUIREMENTS OF IAS 20 .............................................................................1324 2.1 Nature of government grants and government assistance .....................1324 2.1.1 Government assistance ................................................................1324 2.1.2 Government grants .......................................................................1324 2.2 Scope ........................................................................................................1325


Detailed contents – Volume 1 2.3 Recognition and initial measurement .....................................................1326 2.3.1 Loans at less than market rates of interest .................................1328 2.4 Matching grants against costs .................................................................1329 2.4.1 Achieving the most appropriate matching ..................................1329 2.4.2 The period to be benefited by the grant.....................................1331 2.4.3 Separating grants into elements ..................................................1331 2.5 Repayment of government grants ...........................................................1332 2.6 Government assistance ............................................................................1332 3

PRESENTATION OF GRANTS............................................................................1333 3.1 Presentation of grants related to assets ..................................................1333 3.1.1 Cash flows .....................................................................................1334 3.2 Presentation of grants related to income................................................1334

4

DISCLOSURES ..................................................................................................1335 4.1 Government assistance ............................................................................1335

CHAPTER 24

SERVICE CONCESSION ARRANGEMENTS

1

INTRODUCTION ..............................................................................................1339 1.1 The Interpretations Committee’s approach to accounting for service concessions ..................................................................................1340

2

SCOPE OF IFRIC 12 ........................................................................................1341 2.1 Public-to-private service concession arrangements within scope .........1343 2.1.1 Private sector body .......................................................................1343 2.1.2 Public sector body ........................................................................1344 2.1.3 Service concession arrangement (‘SCA’) ....................................1344 2.1.4 Agent type arrangements .............................................................1345 2.1.5 A contract with the grantor ..........................................................1346 2.2 IFRIC 4 and IFRIC 12: outsourcing arrangements and SCAs ..............1346

3

THE CONTROL MODEL ...................................................................................1348 3.1 Regulation of services ..............................................................................1348 3.2 Control of the residual interest ...............................................................1349 3.3 Assets within scope ..................................................................................1351 3.3.1 Partially regulated assets ..............................................................1351

4

ACCOUNTING FOR THE INFRASTRUCTURE ASSET: CHOOSING BETWEEN THE FINANCIAL ASSET AND INTANGIBLE ASSET MODELS .............................1352 4.1 Consideration for services provided and the choice between the two models ...............................................................................................1352 4.1.1 Allocating the consideration ........................................................1353 4.1.2 Determining the accounting model ............................................1354 4.2 The financial asset model .......................................................................1356

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Detailed contents – Volume 1 4.3 The intangible asset model .....................................................................1358 4.3.1 Amortisation..................................................................................1360 4.3.2 Impairment ...................................................................................1362 4.4 Revenue recognition implications of the two models ............................1362 4.5 ‘Bifurcation’ – single arrangements that contain both financial and intangible assets .......................................................................................1363 5

REVENUE AND EXPENDITURE DURING THE OPERATIONS PHASE OF THE CONCESSION AGREEMENT ..............................................................................1363 5.1 Additional construction and upgrade services ........................................1364 5.1.1 Subsequent construction services that are part of the initial infrastructure asset .......................................................................1365 5.1.2 Subsequent construction services that comprise a new infrastructure asset .......................................................................1366 5.2 Accounting for the operations phase.......................................................1366 5.3 Items provided to the operator by the grantor .......................................1369

6

EFFECTIVE DATE AND TRANSITIONAL ARRANGEMENTS ...............................1369 6.1 Transitional arrangements ......................................................................1369

7

CURRENT DISCLOSURE REQUIREMENTS: SIC-29 .........................................1371

CHAPTER 25

PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS

1

INTRODUCTION ..............................................................................................1379 1.1 Background...............................................................................................1379 1.2 Interpretations related to the application of IAS 37 ..............................1379 1.2.1 IFRIC 1 .........................................................................................1379 1.2.2 IFRIC 3 .........................................................................................1380 1.2.3 IFRIC 5 .........................................................................................1380 1.2.4 IFRIC 6 .........................................................................................1380 1.3 Definitions used in IAS 37 ......................................................................1380

2

OBJECTIVE AND SCOPE OF IAS 37 ..................................................................1381 2.1 Objective ..................................................................................................1381 2.2 Scope of IAS 37 ........................................................................................1381 2.2.1 Items outside the scope of IAS 37 ...............................................1383 2.2.1.A Executory contracts, except where the contract is onerous...........................................................................1383 2.2.1.B Items covered by another standard ..............................1383 2.2.2 Provisions and other liabilities .....................................................1384 2.2.3 Provisions and contingent liabilities ............................................1384

3

RECOGNITION .................................................................................................1385 3.1 Determining when a provision should be recognised ............................1385


Detailed contents – Volume 1 3.1.1 ‘An entity has a present obligation (legal or constructive) as a result of a past event’ ...................................................................1385 3.1.2 ‘It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation’......1389 3.1.3 ‘A reliable estimate can be made of the amount of the obligation’ .....................................................................................1389 3.2 Contingencies ..........................................................................................1389 3.2.1 Contingent liabilities ...................................................................1390 3.2.2 Contingent assets .........................................................................1391 3.2.3 Summary .......................................................................................1392 3.3 Recognising an asset when recognising a provision ...............................1393 4

MEASUREMENT ...............................................................................................1393 4.1 Best estimate of provision .......................................................................1393 4.2 Dealing with risk and uncertainty in measuring a provision .................1395 4.3 Discounting the estimated cash flows to a present value......................1396 4.3.1 Real v. nominal rate ......................................................................1396 4.3.2 Adjusting for risk ..........................................................................1397 4.3.3 Pre-tax discount rate ....................................................................1398 4.3.4 Unwinding of the discount ..........................................................1399 4.3.5 The effect of changes in interest rates on the discount rate applied...........................................................................................1401 4.4 Anticipating future events that may affect the estimate of cash flows..........................................................................................................1403 4.5 Reimbursements and other recoveries from third parties .....................1403 4.6 Joint and several liability .........................................................................1404 4.7 Provisions are not reduced for gains on disposal of related assets ........1405 4.8 Changes and uses of provisions ...............................................................1405 4.9 Changes in contingent liabilities recognised in a business combination..............................................................................................1406

5

SPECIFIC EXAMPLES OF PROVISIONS AND CONTINGENCIES .........................1406 5.1 Entities should not provide for future operating losses .........................1406 5.2 Restructuring provisions ..........................................................................1407 5.2.1 Definition......................................................................................1407 5.2.2 Recognition of a restructuring provision .....................................1408 5.2.3 Recognition of obligations arising from the sale of an operation .......................................................................................1410 5.2.4 Costs that can (and cannot) be included in a restructuring provision ........................................................................................1411 5.3 Onerous contracts ....................................................................................1413 5.3.1 Recognition of provisions for vacant leasehold property ............1414 5.3.2 Recognition of provisions for occupied leasehold property ........1416 5.4 Environmental provisions ........................................................................1417

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Detailed contents – Volume 1 5.5 Decommissioning provisions ...................................................................1420 5.5.1 Changes in estimated decommissioning costs (IFRIC 1) ..........1422 5.5.2 Funds established to meet an obligation (IFRIC 5) ..................1423 5.5.2.A Accounting for an interest in a fund.............................1425 5.5.2.B Accounting for obligations to make additional contributions .................................................................1428 5.6 Emission rights (including IFRIC 3) ......................................................1429 5.7 Green certificates ....................................................................................1430 5.8 EU Directive on ‘Waste Electrical and Electronic Equipment’ (IFRIC 6) .................................................................................................1431 5.9 Entities should not provide for repairs and maintenance of owned assets ........................................................................................................1433 5.10 Dilapidation and other provisions relating to leased assets ...................1434 5.11 Warranty provisions..................................................................................1437 5.12 Litigation and other legal claims.............................................................1438 5.13 Refunds policy .........................................................................................1439 5.14 Staff training costs ...................................................................................1439 5.15 Self insurance ...........................................................................................1440 5.16 Regulatory liabilities ................................................................................1441 5.17 Obligations to make donations to non-profit organisations ...................1442 6

DISCLOSURE REQUIREMENTS ........................................................................1444 6.1 Provisions .................................................................................................1444 6.2 Contingent liabilities ...............................................................................1446 6.3 Contingent assets ....................................................................................1447 6.4 Exemption from disclosure when seriously prejudicial .........................1448

7

TRANSITIONAL ARRANGEMENTS FOR EXISTING IFRS REPORTERS ...............1448

8

FUTURE DEVELOPMENTS ...............................................................................1449 8.1 Liabilities project (amendments to IAS 37) ..........................................1449 8.2 Rate-regulated activities .........................................................................1450 8.3 Emissions trading schemes......................................................................1451 8.4 Revenue recognition – warranty costs ....................................................1452

CHAPTER 26

REVENUE RECOGNITION

1

THE NATURE OF REVENUE .............................................................................1459

2

THE TIMING OF REVENUE RECOGNITION .....................................................1461 2.1 The critical event approach.....................................................................1462 2.1.1 The recognition of revenue at the completion of production ....1462 2.1.2 The recognition of revenue at the time of sale ...........................1462


Detailed contents – Volume 1 2.1.3 The recognition of revenue subsequent to delivery ...................1463 2.2 The accretion approach ...........................................................................1464 3

THE REQUIREMENTS OF IAS 18 .....................................................................1466 3.1 Scope ........................................................................................................1466 3.2 The distinction between income, revenue and gains ............................1467 3.3 Revenue and agency relationships ..........................................................1468 3.4 Income and distributable profits ............................................................1469 3.5 Measurement of revenue.........................................................................1469 3.6 Identification of the transaction .............................................................1470 3.7 The sale of goods .....................................................................................1472 3.8 The rendering of services ........................................................................1475 3.9 Exchanges of goods and services .............................................................1477 3.10 Exchanges of property plant and equipment .........................................1478 3.11 Barter transactions involving advertising services ..................................1479 3.12 Interest, royalties and dividends .............................................................1480 3.13 Uncollectible revenue .............................................................................1482 3.14 Disclosure .................................................................................................1482 3.15 Revenue in the statement of comprehensive income ...........................1482 3.15.1 Interest and other finance income ..............................................1483 3.15.2 Gains on disposal of property, plant and equipment ..................1485

4

REVENUE RECOGNITION UNDER US GAAP ...................................................1486 4.1 Applicability of US literature ..................................................................1486 4.2 The general approach to revenue recognition under US GAAP............1486 4.3 US GAAP requirements for multiple-element transactions ..................1487

5

THE IASB/FASB JOINT REVENUE RECOGNITION PROJECT ..........................1489 5.1 Project background ..................................................................................1489 5.2 Summary of the proposed model ............................................................1489 5.3 Changes to current practice that would result from the proposed model ........................................................................................................1492

6

PRACTICAL ISSUES ..........................................................................................1494 6.1 Sale of goods .............................................................................................1495 6.1.1 ‘Bill and hold’ sales .......................................................................1495 6.1.2 Goods shipped subject to conditions...........................................1496 6.1.3 Layaway sales ................................................................................1496 6.1.4 Payments in advance ....................................................................1497 6.1.5 Sale and repurchase agreements ..................................................1498 6.1.6 Instalment sales ............................................................................1498 6.2 Receipt of initial fees...............................................................................1498 6.2.1 Franchise fees ...............................................................................1498

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Detailed contents – Volume 1 6.2.2 Advance royalty or licence receipts .............................................1500 6.2.3 Financial service fees....................................................................1502 6.2.3.A Fees that are an integral part of the effective interest rate of a financial instrument .........................1502 6.2.3.B Fees earned as services are provided............................1503 6.2.3.C Fees that are earned on the execution of a significant act ................................................................1504 6.2.4 Initial and ongoing fees received by a fund manager..................1505 6.2.5 Insurance agency commissions ....................................................1507 6.2.6 Credit card fees ............................................................................1507 6.2.7 Entrance and membership fees ...................................................1507 6.3 Subscriptions to publications ..................................................................1507 6.4 Installation fees........................................................................................1508 6.5 Advertising revenue .................................................................................1508 6.6 Software revenue recognition..................................................................1509 6.6.1 The basic principles of SOP 97-2, now codified in ASC 985-605 .........................................................................................1509 6.6.2 Accounting for software arrangements with multiple elements........................................................................................1510 6.6.3 Accounting for arrangements which require significant production, modification or customisation of software ..............1511 6.7 Revenue recognition issues in the telecommunications sector.............1512 6.7.1 Recording revenue for multiple service elements (‘bundled offers’) ...........................................................................................1513 6.7.1.A Accounting for handsets and airtime............................1514 6.7.1.B ‘Free’ services ................................................................1515 6.7.1.C Connection and up-front fees ......................................1516 6.7.2 Other ‘gross versus net’ issues .....................................................1517 6.7.2.A Third party content providers ......................................1517 6.7.2.B Number portability .......................................................1518 6.7.3 Accounting for roll-over minutes .................................................1518 6.7.4 Accounting for the sale of pre-paid calling cards ........................1519 6.8 Excise taxes and goods and services taxes: Recognition of gross versus net revenues .................................................................................1520 6.9 Sales incentives ........................................................................................1522 6.10 Film exhibition and television broadcast rights .....................................1524 6.11 The disposal of property, plant and equipment.....................................1525 6.11.1 Sale of assets held for rental ........................................................1527 6.11.2 Pre-completion contracts and IFRIC 15 .....................................1528 6.12 Regulatory assets and liabilities ..............................................................1533 6.13 Transfers of Assets from Customers and IFRIC 18 ...............................1534 6.14 Customer loyalty programmes and IFRIC 13.........................................1539 6.14.1 The scope of IFRIC 13 ................................................................1541 6.14.2 The requirements of IFRIC 13 ...................................................1541


Detailed contents – Volume 1 6.14.3 Measuring the fair value of award credits ...................................1544 CHAPTER 27

INCOME TAXES

1

INTRODUCTION ..............................................................................................1555 1.1 The nature of taxation .............................................................................1555 1.2 Allocation between periods .....................................................................1555 1.2.1 No provision for deferred tax (‘flow through’) ............................1556 1.2.2 Provision for deferred tax (the temporary difference approach) ......................................................................................1557 1.3 The development of IAS 12 ....................................................................1559 1.3.1 References to income taxes in standards other than IAS 12 ......1559

2

OBJECTIVE AND SCOPE OF IAS 12 ..................................................................1559 2.1 Objective ..................................................................................................1559 2.2 Overview ..................................................................................................1561

3

DEFINITIONS ..................................................................................................1561

4

SCOPE ..............................................................................................................1562 4.1 What is an ‘income tax’? ..........................................................................1563 4.2 Withholding and similar taxes .................................................................1564 4.3 Investment tax credits.............................................................................1565 4.4 Interest and penalties..............................................................................1566 4.5 Effectively tax-free entities.....................................................................1567

5

CURRENT TAX .................................................................................................1567 5.1 Enacted or substantively enacted tax legislation ...................................1567 5.2 Uncertain tax positions............................................................................1568 5.3 Intra-period allocation, presentation and disclosure ..............................1568

6

DEFERRED TAX – TAX BASES AND TEMPORARY DIFFERENCES ......................1568 6.1 Tax base ...................................................................................................1570 6.1.1 Tax base of assets .........................................................................1570 6.1.2 Tax base of liabilities....................................................................1571 6.1.3 Assets and liabilities whose tax base is not immediately apparent ........................................................................................1572 6.1.4 Tax base of items not recognised as assets or liabilities in financial statements .....................................................................1572 6.1.5 Equity items with a tax base ........................................................1573 6.1.6 Items with more than one tax base .............................................1573 6.2 Examples of temporary differences ........................................................1573 6.2.1 Taxable temporary differences ....................................................1574 6.2.1.A Transactions that affect profit or loss ..........................1574 6.2.1.B Transactions that affect the balance sheet ..................1575

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Detailed contents – Volume 1 6.2.1.C Revaluations ..................................................................1577 6.2.1.D Tax re-basing .................................................................1577 6.2.1.E Business combinations and consolidation ....................1577 6.2.1.F Foreign currency differences ........................................1578 6.2.1.G Hyperinflation ...............................................................1578 6.2.2 Deductible temporary differences ...............................................1579 6.2.2.A Transactions that affect profit of loss ..........................1579 6.2.2.B Transactions that affect the balance sheet ..................1580 6.2.2.C Revaluations ..................................................................1580 6.2.2.D Tax re-basing .................................................................1580 6.2.2.E Business combinations and consolidation ....................1580 6.2.2.F Foreign currency differences ........................................1581 6.2.3 Assets and liabilities with no temporary difference (because tax base equals carrying amount).................................................1581 7

DEFERRED TAX – RECOGNITION ....................................................................1582

7.1 The basic principles.................................................................................1582 7.1.1 Taxable temporary differences (Deferred tax liabilities) ..........1582 7.1.2 Deductible temporary differences (Deferred tax assets)...........1582 7.1.3 Interpretation issues ....................................................................1583 7.1.3.A Accounting profit ..........................................................1583 7.1.3.B Taxable profit ‘at the time of the transaction’ ............1583 7.2 The initial recognition exception ...........................................................1583 7.2.1 Acquisition of tax losses ...............................................................1585 7.2.2 Initial recognition of goodwill ......................................................1585 7.2.2.A Taxable temporary differences .....................................1585 7.2.2.B Deductible temporary differences ...............................1586 7.2.2.C Tax deductible goodwill ...............................................1587 7.2.3 Initial recognition of other assets and liabilities .........................1587 7.2.4 Changes to temporary differences after initial recognition ........1589 7.2.4.A Depreciation, amortisation or impairment of initial carrying value .................................................................1589 7.2.4.B Change in carrying value due to revaluation ................1590 7.2.4.C Change in tax base due to deductions in tax return ...1591 7.2.4.D Temporary difference altered by legislative change ...1592 7.2.5 Intragroup transfers of assets with no change in tax base ..........1593 7.2.6 Partially deductible and super-deductible assets .......................1594 7.2.7 Transactions involving the initial recognition of an asset and liability ..........................................................................................1597 7.2.7.A Decommissioning costs.................................................1598 7.2.7.B Finance leases taxed as operating leases......................1599 7.2.8 Initial recognition of compound financial instruments ..............1600 7.3 Assets carried at fair value or revalued amount ......................................1602 7.4 Restrictions on recognition of deferred tax assets .................................1603 7.4.1 Sources of ‘probable’ future taxable profit ..................................1603


Detailed contents – Volume 1 7.4.2 Future deductible temporary differences ignored ......................1604 7.4.3 Tax planning opportunities .........................................................1604 7.4.3.A Available-for-sale debt securities..................................1605 7.4.4 Unused tax losses and unused tax credits ...................................1605 7.4.5 Re-assessment of deferred tax assets ..........................................1607 7.4.5.A Previously recognised assets .........................................1607 7.4.5.B Previously unrecognised assets.....................................1607 7.5 ‘Outside’ temporary differences relating to subsidiaries, branches, associates and joint ventures ...................................................................1607 7.5.1 Calculation of ‘outside’ temporary differences ...........................1608 7.5.1.A Consolidated financial statements ...............................1609 7.5.1.B Separate financial statements ......................................1609 7.5.2 Taxable temporary differences ....................................................1610 7.5.3 Deductible temporary differences ...............................................1611 7.5.4 Anticipated intragroup dividends in future periods ...................1611 7.5.4.A Consolidated financial statements of receiving entity..............................................................................1611 7.5.4.B Separate financial statements of paying entity ...........1612 7.5.5 Unpaid intragroup interest, royalties, management charges etc. .................................................................................................1612 7.5.6 Other overseas income taxed only on remittance .......................1612 7.5.7 ‘Tax-transparent’ (‘flow-through’) entities.................................1613 7.6 Deferred taxable gains .............................................................................1613 8

DEFERRED TAX – MEASUREMENT..................................................................1614 8.1 Legislation at the end of the reporting period .......................................1614 8.2 Uncertain tax positions............................................................................1614 8.3 Expected manner of recovery of assets or settlement of liabilities.......1614 8.3.1 Tax planning strategies ................................................................1615 8.3.2 Carrying amount ...........................................................................1615 8.3.3 Assets and liabilities with more than one tax base .....................1616 8.3.4 Determining the expected manner of recovery of assets ...........1617 8.3.5 Depreciable PP&E, investment properties and intangible assets .............................................................................................1617 8.3.6 Non-depreciable PP&E, investment properties and intangible assets ...........................................................................1619 8.3.6.A Revalued assets (SIC-21) .............................................1619 8.3.6.B Investment properties accounted for at fair value (SIC-21) ........................................................................1619 8.3.6.C Non-amortised intangible assets ..................................1620 8.3.7 Other assets and liabilities ...........................................................1620 8.3.8 ‘Outside’ temporary differences relating to subsidiaries, branches, associates and joint ventures .......................................1621 8.3.9 ‘Single asset’ entities....................................................................1622

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Detailed contents – Volume 1 8.3.10 Change in expected manner of recovery of an asset or settlement of a liability ................................................................1622 8.3.11 Possible future developments......................................................1622 8.4 Different tax rates applicable to retained and distributed profits ........1623 8.4.1 Effectively tax-free entities .........................................................1623 8.4.2 Withholding tax or distribution tax? ............................................1624 8.5 Discounting ..............................................................................................1625 8.6 Unrealised intragroup profits and losses in consolidated financial statements ................................................................................................1625 8.6.1 Intragroup transfers of goodwill and intangible assets ...............1626 8.6.1.A Individual financial statements of buyer .....................1627 8.6.1.B Individual financial statements of seller ......................1627 8.6.1.C Consolidated financial statements ...............................1627 9

UNCERTAIN TAX POSITIONS ...........................................................................1628 9.1 ‘One-step’ and ‘two-step’ approaches to measurement ........................1629 9.2 Unit of account ........................................................................................1629 9.3 Methodologies used in practice ..............................................................1630 9.4 Tax authority practice .............................................................................1630 9.5 Detection risk ..........................................................................................1631

10 ALLOCATION OF TAX CHARGE OR CREDIT .....................................................1631 10.1 Revalued and rebased assets ...................................................................1632 10.2 Retrospective restatements or applications ...........................................1633 10.3 Dividends .................................................................................................1634 10.3.1 Dividend subject to differential tax rate .....................................1634 10.3.2 Dividend subject to withholding tax ...........................................1634 10.3.3 Intragroup dividend subject to withholding tax .........................1635 10.3.4 Incoming dividends ......................................................................1635 10.4 Gains and loss reclassified (’recycled’) to profit or loss .........................1635 10.5 Gain/loss in profit or loss and loss/gain outside profit or loss offset for tax purposes ........................................................................................1636 10.6 Defined benefit pension plans ................................................................1638 10.6.1 Tax on refund of pension surplus ................................................1640 10.7 Share-based payment transactions ..........................................................1640 10.7.1 Determining the tax base ............................................................1640 10.7.2 Allocation of tax deduction between profit or loss and equity...1641 10.7.3 Allocation when more than one award is outstanding ................1643 10.7.4 Staggered exercise of awards........................................................1644 10.7.5 Replacement awards in a business combination .........................1647 10.7.6 Share-based payment transactions subject to transitional provisions of IFRS 1 and IFRS 2..................................................1649 10.8 Change in tax status of entity or shareholders .......................................1649 10.9 Previous revaluation of PPE treated as deemed cost on transition.......1649


Detailed contents – Volume 1 11 CONSOLIDATED TAX RETURNS AND OFFSET OF TAXABLE PROFITS AND LOSSES WITHIN GROUPS .................................................................................1649 12 BUSINESS COMBINATIONS ..............................................................................1650 12.1 Apparent immediate impairment of goodwill created by deferred tax .............................................................................................................1651 12.2 Deferred tax assets ..................................................................................1651 12.2.1 Assets of the acquirer ...................................................................1651 12.2.2 Assets of the acquiree...................................................................1651 12.3 Deferred tax liabilities of acquired entity ..............................................1652 12.4 Tax deductions for acquisition costs (entities applying ‘old’ IFRS 3 only)..........................................................................................................1652 12.5 Tax deductions for replacement share-based payment awards in a business combination ..............................................................................1653 13 PRESENTATION ...............................................................................................1653 13.1 Balance sheet ...........................................................................................1653 13.1.1 Offset ............................................................................................1653 13.1.1.A Current tax ....................................................................1653 13.1.1.B Deferred tax ..................................................................1654 13.2 Statement of comprehensive income .....................................................1654 13.3 Statement of cash flows...........................................................................1655 14 DISCLOSURE ....................................................................................................1655 14.1 Components of tax expense ....................................................................1655 14.2 Other disclosures .....................................................................................1656 14.2.1 Tax (or tax rate) reconciliation ....................................................1657 14.2.2 Temporary differences relating to subsidiaries, associates, branches and joint ventures .........................................................1659 14.3 Reason for recognition of certain tax assets ...........................................1659 14.4 Dividends .................................................................................................1659 14.5 Example of disclosures ............................................................................1660 14.6 Discontinued operations – interaction with IFRS 5 ..............................1662 15 POSSIBLE FUTURE DEVELOPMENTS ...............................................................1663

The detailed table of contents of volume 2 follows overleaf.

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Detailed contents – Volume 1


Detailed contents: Volume 2 CHAPTER 28

SHARE-BASED PAYMENT

1

INTRODUCTION ..............................................................................................1677 1.1 Background...............................................................................................1677 1.2 Development of IFRS 2 ..........................................................................1678 1.3 Scope of the chapter and referencing convention..................................1679 1.4 Overall approach of IFRS 2 .....................................................................1680 1.4.1 Classification differences between IFRS 2 and IAS 32/IAS 39 ..1680

2

THE OBJECTIVE AND SCOPE OF IFRS 2..........................................................1681 2.1 Objective ..................................................................................................1681 2.2 Scope ........................................................................................................1681 2.2.1 Definitions ....................................................................................1681 2.2.2 Transactions within the scope of IFRS 2 ....................................1682 2.2.2.A Transactions by shareholders and other group entities ...........................................................................1683 2.2.2.B Transactions with employee benefit trusts and similar vehicles ..............................................................1689 2.2.2.C Transactions where the identifiable consideration received appears to be less than the consideration given...............................................................................1689 2.2.2.D ‘All employee’ share plans.............................................1691 2.2.2.E Vested transactions .......................................................1691 2.2.3 Transactions not within the scope of IFRS 2 .............................1691 2.2.3.A Transactions with shareholders as a whole ..................1692 2.2.3.B Business combinations ..................................................1692 2.2.3.C Common control transactions and formation of joint ventures ................................................................1692 2.2.3.D Transactions in the scope of IAS 32 and IAS 39 .........1693 2.2.3.E Transactions in financial assets not in the scope of IAS 32 and IAS 39 .........................................................1693 2.2.4 Some practical applications of the scope requirements .............1693 2.2.4.A Remuneration in non-equity shares .............................1693 2.2.4.B Equity-settled award of subsidiary with put option against the parent – treatment in consolidated accounts of parent .........................................................1694 2.2.4.C Jointly owned equity arrangements (‘JOEs’)...............1695

 

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Detailed contents – Volume 2 2.2.4.D Awards for which the counterparty has paid ‘fair value’ ..............................................................................1695 2.2.4.E Cash bonus dependent on share price performance ...1695 2.2.4.F Cash-settled awards based on ‘enterprise value’ .........1695 2.2.4.G Employment taxes relating to share-based payment transactions....................................................................1696 2.2.4.H Awards with a foreign currency strike price .................1696 2.2.4.I Holding own shares to satisfy or ‘hedge’ awards .........1697 2.2.4.J Convertible bonds and limited recourse loans ............1697 3

GENERAL RECOGNITION PRINCIPLES ............................................................1698 3.1 Vesting conditions ...................................................................................1698 3.2 Conditions that are neither service conditions nor performance conditions (‘non-vesting’ conditions) .....................................................1699 3.2.1 Vesting and non-vesting conditions: possible future developments................................................................................1702 3.3 Vesting period ..........................................................................................1703

4

EQUITY-SETTLED TRANSACTIONS – OVERVIEW ............................................1703 4.1 Summary of accounting treatment .........................................................1703 4.2 The credit entry.......................................................................................1705

5

EQUITY-SETTLED TRANSACTIONS – COST OF AWARDS .................................1705 5.1 Cost of awards – overview .......................................................................1705 5.2 Transactions with employees ..................................................................1707 5.2.1 Who is an ‘employee’? ..................................................................1707 5.2.2 Basis of measurement ...................................................................1708 5.3 Grant date ................................................................................................1708 5.3.1 Determination of grant date ........................................................1709 5.3.2 Communication of awards to employees .....................................1709 5.3.3 Exercise price dependent on share price ....................................1710 5.3.4 Exercise price paid in shares ........................................................1710 5.3.5 Award of equity instruments to a fixed monetary value .............1711 5.3.6 Awards with multiple service periods ..........................................1711 5.3.7 Awards subject to modification by entity after original grant date................................................................................................1712 5.3.7.A Significant equity restructuring or transactions ..........1712 5.3.7.B Interpretation of general terms ....................................1713 5.3.7.C ‘Good leaver’ clauses .....................................................1713 5.3.7.D Discretion to make further awards ...............................1714 5.4 Transactions with non-employees ..........................................................1714 5.4.1 Effect of change of status from employee to non-employee (or vice versa) ...............................................................................1715 5.5 Determining the fair value of equity instruments .................................1715 5.5.1 Reload features .............................................................................1716


Detailed contents – Volume 2 6

EQUITY-SETTLED TRANSACTIONS – ALLOCATION OF EXPENSE ..................1717 6.1 Overview ..................................................................................................1717 6.1.1 The continuous estimation process of IFRS 2 ............................1718 6.1.2 Vesting and forfeiture...................................................................1719 6.1.3 Accounting after vesting ..............................................................1719 6.2 Vesting conditions other than market conditions ..................................1720 6.2.1 Awards with service conditions ....................................................1720 6.2.2 Equity instruments vesting in instalments (‘graded’ vesting)...1721 6.2.3 Transactions with variable vesting periods due to nonmarket vesting conditions ............................................................1723 6.2.4 Transactions with variable number of equity instruments awarded depending on non-market vesting conditions ..............1725 6.2.5 Transactions with variable exercise price due to non-market vesting conditions .........................................................................1726 6.3 Market conditions ....................................................................................1727 6.3.1 What is a ‘market condition’? .......................................................1727 6.3.2 Summary of accounting treatment ..............................................1728 6.3.3 Transactions with market conditions and known vesting periods ...........................................................................................1730 6.3.4 Transactions with variable vesting periods due to market conditions......................................................................................1731 6.3.5 Transactions with multiple outcomes depending on market conditions......................................................................................1733 6.3.6 Transactions with independent market conditions and nonmarket vesting conditions ............................................................1733 6.3.7 Transactions with hybrid or interdependent market conditions and non-market vesting conditions ...........................1735 6.3.8 Awards based on the market value of a subsidiary or business unit ................................................................................................1735 6.4 Non-vesting conditions ...........................................................................1736 6.4.1 Awards with no conditions other than non-vesting conditions ..1737 6.4.2 Awards with non-vesting conditions and variable vesting periods ...........................................................................................1737 6.4.3 Failure to meet non-vesting conditions ......................................1737

7

EQUITY-SETTLED TRANSACTIONS – MODIFICATION, CANCELLATION AND SETTLEMENT ..........................................................................................1738 7.1 Background...............................................................................................1738 7.2 Valuation requirements when an award is modified, cancelled or settled.......................................................................................................1739 7.3 Modification .............................................................................................1740 7.3.1 Modifications that increase the value of an award ......................1741 7.3.1.A Increase in fair value of equity instruments granted...1741 7.3.1.B Increase in number of equity instruments granted .....1742 7.3.1.C Removal or mitigation of non-market related vesting conditions .........................................................1742

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lxviii Detailed contents – Volume 2

7.4

7.5 7.6 7.7 7.8 8

7.3.2 Modifications that decrease the value of an award .....................1743 7.3.2.A Decrease in fair value of equity instruments granted ...........................................................................1743 7.3.2.B Decrease in number of equity instruments granted ...1744 7.3.2.C Additional or more onerous non-market related vesting conditions .........................................................1744 7.3.3 Modifications with altered vesting period ..................................1744 7.3.4 Modifications that reduce the number of equity instruments granted but maintain or increase the value of an award .............1746 7.3.5 Modification of award from equity-settled to cash-settled (and vice versa).............................................................................1748 Cancellation and settlement ...................................................................1748 7.4.1 Distinction between cancellation and forfeiture ........................1749 7.4.1.A Termination of employment by entity ........................1749 7.4.1.B Termination of employment by entity: possible future developments .....................................................1750 7.4.2 Distinction between cancellation and modification ...................1751 7.4.3 Calculation of the expense on cancellation.................................1751 7.4.4 Replacement awards.....................................................................1752 7.4.4.A Designation of award as replacement award ................1753 7.4.4.B Incremental fair value of replacement award ..............1753 7.4.4.C Replacement of vested awards .....................................1755 Replacement award on termination of employment..............................1756 Possible future modification or replacement of award – impact on estimation process at reporting date.......................................................1757 Two awards running ‘in parallel’ .............................................................1759 Share splits and consolidations ...............................................................1760

EQUITY-SETTLED TRANSACTIONS – VALUATION ..........................................1761 8.1 Introduction .............................................................................................1761 8.2 Options .....................................................................................................1762 8.2.1 Call options – overview ................................................................1762 8.2.2 Call options – valuation ................................................................1762 8.2.3 Factors specific to employee share options .................................1764 8.2.3.A Non-transferability ........................................................1765 8.2.3.B Continued employment requirement ..........................1765 8.2.3.C Vesting conditions .........................................................1765 8.2.3.D Periods during which exercise is restricted .................1765 8.2.3.E Limited ability to hedge option values ........................1765 8.2.3.F Dilution effects .............................................................1766 8.3 Selection of an option-pricing model ......................................................1766 8.3.1 The Black-Scholes-Merton formula ............................................1767 8.3.2 The binomial model .....................................................................1769 8.3.2.A Lattice models – number of time steps .......................1772 8.3.3 Monte Carlo Simulation ...............................................................1773


Detailed contents – Volume 2 8.4 Adapting option-pricing models for share-based payment transactions ..............................................................................................1775 8.4.1 Non-transferability .......................................................................1775 8.4.2 Treatment of vesting conditions .................................................1775 8.4.2.A Market-based performance measures and nonvesting conditions .........................................................1776 8.4.2.B Non market-based vesting conditions .........................1776 8.5 Selecting appropriate assumptions for option-pricing models ..............1776 8.5.1 Expected term of the option .......................................................1777 8.5.1.A Expected term under the Black-Scholes-Merton formula ...........................................................................1778 8.5.2 Exercise and termination behaviour ............................................1779 8.5.2.A Grouping employees with homogeneous exercise behaviour .......................................................................1781 8.5.2.B Post-vesting termination behaviour .............................1781 8.5.3 Expected volatility of share price ................................................1781 8.5.3.A Newly listed entities .....................................................1783 8.5.3.B Unlisted entities ...........................................................1783 8.5.3.C Listed entities that have undergone significant restructuring ..................................................................1784 8.5.3.D Expected volatility under the Black-ScholesMerton formula .............................................................1784 8.5.3.E Expected volatility under lattice models .....................1784 8.5.4 Expected dividends ......................................................................1784 8.5.4.A Expected dividends under the Black-ScholesMerton formula .............................................................1785 8.5.4.B Expected dividends under the binomial model and other lattice models ......................................................1785 8.5.5 Risk-free interest rate ..................................................................1786 8.5.5.A Risk-free interest rate under the Black-ScholesMerton formula .............................................................1786 8.5.5.B Risk-free interest rate under binomial and other lattice models ................................................................1786 8.6 Capital structure effects and dilution.....................................................1786 8.7 Other awards requiring the use of option valuation models ..................1787 8.7.1 Shares ............................................................................................1787 8.7.2 Non-recourse loans .......................................................................1788 8.7.3 Share appreciation rights (SARs).................................................1788 8.7.4 Performance rights .......................................................................1788 8.8 Awards whose fair value cannot be measured reliably ...........................1788 8.8.1 Intrinsic value method – the basic accounting treatment..........1789 8.8.2 Modification, cancellation and settlement .................................1790 8.9 Awards with reload features ....................................................................1791 8.10 Awards of equity instruments to a fixed monetary value.......................1792 9

CASH-SETTLED TRANSACTIONS.....................................................................1793

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Detailed contents – Volume 2 9.1 Scope of requirements .............................................................................1793 9.2 Required accounting ................................................................................1794 9.2.1 Basic accounting treatment .........................................................1794 9.2.2 Application of the accounting treatment ....................................1795 9.2.2.A Determining the vesting period ...................................1796 9.2.2.B Periodic allocation of cost .............................................1796 9.2.2.C Non-market vesting conditions ....................................1796 9.2.2.D Market conditions and non-vesting conditions ...........1797 9.2.2.E Modification, cancellation and settlement ..................1797 9.3 What constitutes a cash-settled award? ..................................................1797 9.3.1 Market purchases of own equity used to satisfy awards .............1798 9.3.2 Market purchases of own equity following equity-settlement of award .........................................................................................1799 9.3.3 Broker settlement.........................................................................1799 9.3.4 Modification of award from equity-settled to cash-settled or from cash-settled to equity-settled .............................................1801 9.3.4.A Equity-settled award modified to cash-settled ...........1802 9.3.4.B Cash-settled award modified to equity-settled ...........1806 10 TRANSACTIONS WITH CASH ALTERNATIVES ..................................................1807 10.1 Transactions where the counterparty has choice of settlement ...........1808 10.1.1 Transactions in which the fair value is measured directly .........1808 10.1.2 Other transactions ........................................................................1808 10.1.3 Accounting treatment ..................................................................1809 10.1.3.A During vesting period ...................................................1809 10.1.3.B Settlement.....................................................................1811 10.1.4 Transactions with cash-settlement alternative for employee introduced after grant date ..........................................................1811 10.1.5 ‘Backstop’ cash settlement rights ................................................1813 10.1.6 Convertible bonds issued to acquire goods or services...............1813 10.2 Transactions where the entity has choice of settlement .......................1813 10.2.1 Transactions treated as cash-settled ...........................................1814 10.2.1.A Economic compulsion for cash settlement ..................1814 10.2.2 Transactions treated as equity-settled ........................................1815 10.2.3 Change in classification of award after grant date ......................1816 10.3 Awards requiring cash settlement in specific circumstances ................1816 10.3.1 Analysis 1 – Treat as cash-settled if contingency is outside entity’s control ..............................................................................1816 10.3.2 Analysis 2 – Treat as cash-settled if contingency is outside entity’s control and probable .......................................................1817 10.3.3 Awards requiring cash settlement on a change of control ..........1818 10.3.4 Manner of settlement contingent on future events: possible future developments ....................................................................1818 10.4 Cash settlement alternative not based on share price ...........................1819 10.5 Matching share awards ............................................................................1819


Detailed contents – Volume 2 11 REPLACEMENT SHARE-BASED PAYMENT AWARDS ISSUED IN A BUSINESS COMBINATION .................................................................................................1825 11.1 Background...............................................................................................1825 11.1.1 Effective date of the May 2010 amendment to IFRS 3 .............1826 11.2 Replacement awards in business combinations accounted for under IFRS 3 (revised 2008) .............................................................................1826 11.2.1 Awards that the acquirer is ‘obliged’ to replace ..........................1826 11.2.1.A Illustrative examples of awards that the acquirer is ‘obliged’ to replace ........................................................1828 11.2.2 Awards that the acquirer is not ‘obliged’ to replace ...................1829 11.2.2.A Voluntary replacement of awards following the May 2010 amendment to IFRS 3 .................................1829 11.2.2.B Voluntary replacement of awards prior to the May 2010 amendment to IFRS 3 .................................1830 11.3 Replacement awards in business combinations accounted for under the original version of IFRS 3..................................................................1830 11.4 Acquiree award not replaced ...................................................................1831 11.4.1 Accounting following the May 2010 amendment to IFRS 3 ......1832 11.4.2 Accounting prior to the May 2010 amendment to IFRS 3 .........1832 11.5 Financial statements of the acquired entity ..........................................1833 12 GROUP SHARE SCHEMES .................................................................................1833 12.1 Typical features of a group share scheme...............................................1833 12.2 Accounting treatment of group share schemes – summary ...................1834 12.2.1 Background ...................................................................................1834 12.2.2 Scope of IFRS 2 for group share schemes ...................................1835 12.2.3 Entity receiving goods or services................................................1835 12.2.4 Entity settling the transaction .....................................................1836 12.2.5 Transactions settled in equity of the entity or its parent ..........1836 12.2.5.A Awards settled in equity of subsidiary .........................1836 12.2.5.B Awards settled in equity of the parent ........................1837 12.2.6 Cash-settled transactions not settled by the entity receiving goods or services ...........................................................................1837 12.2.7 Intragroup management charges and other recharge arrangements ................................................................................1838 12.3 Employee benefit trusts (‘EBTs’) and similar entities .........................1839 12.3.1 Background ...................................................................................1839 12.3.2 Accounting for EBTs ....................................................................1840 12.3.3 Illustrative Examples – awards satisfied by shares purchased by, or issued to, an EBT ...............................................................1842 12.3.4 Separate financial statements ......................................................1844 12.3.5 Financial statements of the EBT ................................................1845 12.4 Illustrative example of group share scheme – equity-settled award satisfied by market purchase of shares ...................................................1845 12.4.1 Consolidated financial statements ..............................................1846

lxxi


lxxii

Detailed contents – Volume 2 12.4.2 Parent ............................................................................................1847 12.4.2.A EBT treated as separate entity ....................................1847 12.4.2.B EBT treated as extension of the parent ......................1848 12.4.2.C Parent company as employing company ......................1849 12.4.3 Employing subsidiary ...................................................................1849 12.5 Illustrative example of group share scheme – equity-settled award satisfied by fresh issue of shares .............................................................1850 12.5.1 Consolidated financial statements ..............................................1850 12.5.2 Parent ............................................................................................1851 12.5.2.A EBT treated as separate entity ....................................1851 12.5.2.B EBT treated as extension of parent .............................1852 12.5.2.C Parent company as employing company ......................1853 12.5.3 Employing subsidiary ...................................................................1854 12.6 Illustrative example – cash-settled transaction not settled by the entity receiving goods or services............................................................1855 12.6.1 Consolidated financial statements ..............................................1856 12.6.2 Parent company ............................................................................1856 12.6.3 Employing subsidiary ...................................................................1857 12.7 Employee transferring between group entities ......................................1858 12.8 Share-based payments to employees of joint ventures or associates ....1858 12.8.1 Financial statements of the associate ..........................................1858 12.8.2 Consolidated financial statements of the investor .....................1859 12.8.3 Separate financial statements of the investor .............................1860 13 DISCLOSURES ..................................................................................................1860 13.1 Nature and extent of share-based payment arrangements ....................1861 13.2 Valuation of share-based payment arrangements ...................................1862 13.3 Impact of share-based payment transactions on financial statements ................................................................................................1863 13.4 Example of IFRS 2 disclosures................................................................1864 14 TAXES RELATED TO SHARE-BASED PAYMENT TRANSACTIONS ......................1868 14.1 Income tax deductions for the entity .....................................................1868 14.2 Employment taxes of the employer ........................................................1868 14.2.1 Applicable standard ......................................................................1868 14.2.1.A IAS 37 ............................................................................1869 14.2.1.B IFRS 2 ............................................................................1869 14.2.1.C IAS 19 ............................................................................1870 14.2.2 Recovery of taxes from employees...............................................1870 14.2.3 Holding of own shares to ‘hedge’ tax liabilities ..........................1872 14.3 Sale of shares by employee to meet employee’s tax liability .................1872 15 OTHER PRACTICAL ISSUES..............................................................................1875 15.1 Limited recourse and full recourse loans................................................1875 15.2 Awards entitled to dividends during the vesting period .......................1876


Detailed contents – Volume 2 lxxiii 15.3 Awards vesting or exercisable on flotation (or change of control, trade sale etc.) .........................................................................................1879 15.3.1 Grant date .....................................................................................1879 15.3.2 Vesting period ...............................................................................1879 15.3.3 Is flotation or sale a vesting condition? .......................................1879 15.3.4 Awards requiring achievement of a minimum price ...................1880 15.3.5 Awards ‘purchased for fair value’ .................................................1881 15.3.6 ‘Drag along’ and ‘tag along’ rights ................................................1882 15.4 South African black economic empowerment (‘BEE’) and similar arrangements ............................................................................................1883 15.4.1 Nature of the trust .......................................................................1884 15.4.2 Measurement and timing of the accounting cost .......................1884 15.4.3 Classification of awards as equity- or cash-settled......................1885 16 FIRST-TIME ADOPTION AND TRANSITIONAL PROVISIONS.............................1886 16.1 First-time adoption provisions ................................................................1886 16.2 Transitional provisions ............................................................................1887 CHAPTER 29

EMPLOYEE BENEFITS

1

INTRODUCTION ..............................................................................................1893

2

OBJECTIVE AND SCOPE OF IAS 19 ..................................................................1894 2.1 Objective ..................................................................................................1894 2.2 Scope ........................................................................................................1895

3

PENSIONS AND OTHER POST-EMPLOYMENT BENEFITS – DEFINED CONTRIBUTION AND DEFINED BENEFIT PLANS ............................................1897 3.1 The distinction between defined contribution plans and defined benefit plans ............................................................................................1897 3.2 Insured benefits .......................................................................................1898 3.3 Multi-employer plans ..............................................................................1900 3.3.1 Multi-employer plans other than those sharing risks between entities under common control....................................................1900 3.3.1.A The treatment of multi-employer plans ......................1900 3.3.1.B What to do when ‘sufficient information’ becomes available .........................................................................1902 3.3.2 Multi-employer plans sharing risks between entities under common control ............................................................................1902 3.4 State plans ................................................................................................1904 3.5 Plans that would be defined contribution plans but for the existence of a minimum return guarantee..............................................1905 3.6 Death-in-service benefits ........................................................................1906

4

DEFINED CONTRIBUTION PLANS ...................................................................1909 4.1 Accounting requirements ........................................................................1909


lxxiv Detailed contents – Volume 2 5

DEFINED BENEFIT PLANS ...............................................................................1910 5.1 General .....................................................................................................1910 5.2 Valuation of the plan surplus or deficit...................................................1911 5.2.1 Plan assets .....................................................................................1911 5.2.1.A Definition of plan assets ...............................................1911 5.2.1.B Measurement of plan assets .........................................1912 5.2.1.C Contributions to defined benefit funds .......................1913 5.2.2 Plan liabilities ...............................................................................1913 5.2.2.A Legal and constructive obligations ...............................1913 5.2.2.B Actuarial methodology ..................................................1914 5.2.2.C Attributing benefit to years of service .........................1916 5.2.2.D Actuarial assumptions ...................................................1919 5.2.2.E Discount rate .................................................................1921 5.2.2.F Frequency of valuations ................................................1923 5.3 Balance sheet treatment of the plan surplus or deficit..........................1924 5.3.1 Actuarial gains and losses .............................................................1924 5.3.1.A Recognition in profit and loss .......................................1925 5.3.1.B Recognition in other comprehensive income ..............1926 5.3.2 Restriction of assets to their recoverable amounts .....................1926 5.3.2.A IFRIC Interpretation 14 – general requirements concerning the limit on a defined benefit asset ..........1928 5.3.2.B Economic benefits available as reduced future contributions when there are no minimum funding requirements for future service ....................................1930 5.3.2.C IFRIC Interpretation 14 – The effect of a minimum funding requirement on the economic benefit available as a reduction in future contributions .................................................................1930 5.3.2.D IFRIC Interpretation 14 – When a minimum funding requirement may give rise to a liability ..........1933 5.3.2.E IFRIC Interpretation 14 – disclosure requirements ...1935 5.3.3 Restriction of the recognition of profits (losses) solely as a result of actuarial losses (gains) ...................................................1935 5.3.4 Business combinations .................................................................1937 5.4 Presentation of balance sheet amounts ..................................................1937 5.5 Treatment of defined benefit plans in profit or loss .............................1940 5.5.1 Current service cost .....................................................................1941 5.5.2 Interest cost ..................................................................................1941 5.5.3 Expected return on plan assets (and any reimbursement rights) ............................................................................................1942 5.5.4 Actuarial gains and losses .............................................................1944 5.5.5 Settlements and curtailments .....................................................1944 5.5.5.A Meaning of settlement .................................................1944 5.5.5.B Meaning of curtailment ................................................1945


Detailed contents – Volume 2 5.5.5.C Recognition of gains and losses from settlements and curtailments ...........................................................1945 5.5.6 Past service costs ..........................................................................1947 6

OTHER EMPLOYEE BENEFITS .........................................................................1949 6.1 Short-term employee benefits ................................................................1949 6.1.1 General recognition criteria for short-term employee benefits .........................................................................................1950 6.1.2 Short-term compensated absences ..............................................1950 6.1.2.A Accumulating absences .................................................1950 6.1.2.B Non-accumulating absences .........................................1951 6.1.3 Profit sharing and bonus plans .....................................................1951 6.1.3.A Present legal or constructive obligation .......................1951 6.1.3.B Reliable estimate of provision ......................................1952 6.2 Long-term employee benefits other than post-employment benefits.....................................................................................................1953 6.2.1 Meaning of other long-term employee benefits .........................1953 6.2.2 Recognition and measurement ....................................................1953 6.2.2.A Annually determined bonuses with a loyalty period greater than one year.....................................................1954 6.2.2.B Long-term disability benefit ........................................1955 6.3 Termination benefits...............................................................................1955 6.3.1 Recognition ...................................................................................1955 6.3.2 Measurement ................................................................................1956

7

DISCLOSURE REQUIREMENTS 1957 7.1 Defined contribution plans .....................................................................1957 7.2 Defined benefit plans ..............................................................................1957 7.3 Short-term employee benefits ................................................................1970 7.4 Long-term employee benefits .................................................................1970 7.5 Termination benefits...............................................................................1970

8

TRANSITIONAL ARRANGEMENTS....................................................................1970

9

POSSIBLE FUTURE DEVELOPMENTS ...............................................................1971 9.1 The long-term intentions of the IASB ...................................................1971 9.2 Termination benefits...............................................................................1972

CHAPTER 30 1

FINANCIAL INSTRUMENTS: INTRODUCTION

INTRODUCTION ..............................................................................................1977 1.1 IAS 32 .......................................................................................................1977 1.2 IAS 39 .......................................................................................................1978 1.3 IFRS 7 ......................................................................................................1979 1.4 IFRS 9 ......................................................................................................1979

lxxv


lxxvi Detailed contents – Volume 2 2

HOW FINANCIAL INSTRUMENTS ARE DEALT WITH IN CHAPTERS 30 TO 40 ...............................................................................................................1980

3

EVOLUTION OF A FULL FAIR VALUE MODEL ..................................................1982

4

ADOPTION OF IFRS IN THE EUROPEAN UNION ............................................1983

5

IMPACT OF THE FINANCIAL CRISIS ON ACCOUNTING FOR FINANCIAL INSTRUMENTS .................................................................................................1984 5.1 5.2 5.3 5.4

The start of the crisis ..............................................................................1984 Autumn 2008: the worst of the crisis? ....................................................1985 Immediate consequences of the crisis ....................................................1986 The IASB’s longer-term responses to the crisis .....................................1989

CHAPTER 31

FINANCIAL INSTRUMENTS: DEFINITIONS AND SCOPE

1

INTRODUCTION ..............................................................................................1995

2

WHAT IS A FINANCIAL INSTRUMENT? ............................................................1995 2.1 Definitions ...............................................................................................1995 2.2 Applying the definitions ..........................................................................1996 2.2.1 The need for a contract ................................................................1996 2.2.2 Simple examples ...........................................................................1997 2.2.3 Contingent rights and obligations ...............................................1998 2.2.4 Leases............................................................................................1999 2.2.5 Non-financial assets and liabilities and contracts thereon .........1999 2.2.6 Payments for goods and services..................................................2001 2.2.7 Equity instruments.......................................................................2002 2.2.8 Derivative financial instruments .................................................2002 2.2.9 Dividends payable ........................................................................2003

3

SCOPE ..............................................................................................................2004 3.1 Subsidiaries, associates, joint ventures and similar investments ..........2004 3.2 Leases .......................................................................................................2005 3.3 Insurance contracts ..................................................................................2005 3.3.1 Weather derivatives ......................................................................2006 3.3.2 Contracts with discretionary participation features ...................2007 3.4 Financial guarantee contracts..................................................................2007 3.4.1 Definition of a financial guarantee contract................................2007 3.4.1.A Reimbursement for loss incurred .................................2007 3.4.1.B Debt instrument ...........................................................2008 3.4.1.C Form and existence of contract ....................................2009 3.4.2 Issuers of financial guarantee contracts.......................................2009 3.4.3 Holders of financial guarantee contracts .....................................2010 3.4.4 Financial guarantee contracts between entities under common control ............................................................................2011


Detailed contents – Volume 2 lxxvii 3.5 Loan commitments ..................................................................................2011 3.6 Equity instruments ..................................................................................2014 3.6.1 Equity instruments issued ...........................................................2014 3.6.2 Equity instruments held ..............................................................2014 3.7 Business combinations.............................................................................2014 3.7.1 Contingent consideration in a business combination .................2014 3.7.1.A Payable by an acquirer ..................................................2014 3.7.1.B Receivable by a vendor .................................................2015 3.7.2 Contracts between an acquirer and a vendor in a business combination ..................................................................................2015 3.8 Employee benefit plans and share-based payment ................................2016 3.9 Reimbursement rights in respect of provisions ......................................2017 3.10 Disposal groups classified as held for sale and discontinued operations .................................................................................................2017 3.11 Indemnification assets .............................................................................2017 4

CONTRACTS TO BUY OR SELL COMMODITIES AND OTHER NONFINANCIAL ITEMS ............................................................................................2018 4.1 Contracts that may be settled net ..........................................................2019 4.2 Normal sales and purchases (or own use contracts) ..............................2019 4.2.1 Net settlement of similar contracts.............................................2021 4.2.2 Commodity broker-traders and similar entities ..........................2021 4.2.3 Written options that can be settled net ......................................2022 4.2.4 Electricity and similar ‘end-user’ contracts.................................2022 4.2.5 Other contracts containing volume flexibility ............................2024

5

EFFECTIVE DATES AND TRANSITIONAL PROVISIONS.....................................2024 5.1 Effective dates .........................................................................................2025 5.2 Transitional provisions ............................................................................2025

6

FUTURE DEVELOPMENTS ...............................................................................2025

CHAPTER 32

FINANCIAL INSTRUMENTS: DERIVATIVES AND EMBEDDED DERIVATIVES

1

INTRODUCTION ..............................................................................................2033

2

DEFINITION OF A DERIVATIVE ........................................................................2034 2.1 Changes in value in response to changes in underlying.........................2034 2.1.1 Notional amounts .........................................................................2034 2.1.2 Underlying variables .....................................................................2034 2.1.3 Non-financial variables specific to one party to the contract .....2035 2.2 Initial net investment..............................................................................2038 2.3 Future settlement ...................................................................................2040


lxxviii Detailed contents – Volume 2 3

EXAMPLES OF DERIVATIVES.............................................................................2041

3.1 Common derivatives ................................................................................2041 3.2 In-substance derivatives ..........................................................................2042 3.3 Regular way contracts ..............................................................................2043 4

EMBEDDED DERIVATIVES................................................................................2043

5

EMBEDDED DERIVATIVES: THE MEANING OF ‘CLOSELY RELATED’ ..............2044 5.1 Financial instrument hosts ......................................................................2044 5.1.1 Foreign currency monetary items ................................................2045 5.1.2 Interest rate indices .....................................................................2045 5.1.3 Term extension and similar call, put and prepayment options in debt instruments.........................................................2046 5.1.4 Interest rate floors and caps .........................................................2048 5.1.5 Inflation-linked debt instruments ...............................................2048 5.1.6 Commodity- and equity-linked interest and principal payments .......................................................................................2049 5.1.7 Credit-linked notes ......................................................................2050 5.1.8 Convertible and exchangeable debt instruments .......................2050 5.1.9 Puttable instruments ...................................................................2051 5.1.10 Callable equity instruments.........................................................2052 5.2 Contracts for the sale of goods or services ..............................................2053 5.2.1 Foreign currency derivatives ........................................................2053 5.2.1.A Functional currency of counterparty ............................2053 5.2.1.B Routinely denominated in commercial transactions ...2054 5.2.1.C Commonly used currencies ..........................................2054 5.2.1.D Examples and other practical issues.............................2056 5.2.2 Inputs, ingredients, substitutes and other proxy pricing mechanisms ..................................................................................2058 5.2.3 Inflation-linked features ..............................................................2059 5.2.4 Floors and caps .............................................................................2059 5.2.5 Fund performance fees ................................................................2059 5.3 Leases .......................................................................................................2059 5.3.1 Foreign currency derivatives ........................................................2059 5.3.2 Inflation-linked features ..............................................................2060 5.3.3 Contingent rentals based on related sales...................................2060 5.3.4 Contingent rentals based on variable interest rates ...................2060 5.4 Insurance contracts ..................................................................................2060

6

IDENTIFYING THE TERMS OF EMBEDDED DERIVATIVES AND HOST CONTRACTS .....................................................................................................2061 6.1 6.2 6.3 6.4

Embedded non-option derivatives ..........................................................2061 Embedded option-based derivative ........................................................2061 Nature of a financial instrument host .....................................................2062 Multiple embedded derivatives ..............................................................2063


Detailed contents – Volume 2 lxxix 7

REASSESSMENT OF EMBEDDED DERIVATIVES ................................................2064 7.1 IFRIC 9 ....................................................................................................2064 7.2 Acquisition of contracts ...........................................................................2065 7.3 Business combinations.............................................................................2065 7.4 Remeasurement issues arising from reassessment.................................2066

8

LINKED AND SEPARATE TRANSACTIONS AND ‘SYNTHETIC’ INSTRUMENTS .................................................................................................2067

9

EFFECTIVE DATES AND TRANSITIONAL PROVISIONS.....................................2069 9.1 Effective dates .........................................................................................2069 9.2 Transitional provisions ............................................................................2069

CHAPTER 33

FINANCIAL INSTRUMENTS: FINANCIAL LIABILITIES AND EQUITY

1

INTRODUCTION ..............................................................................................2077 1.1 Background...............................................................................................2077 1.2 Development of IFRS on classification of liabilities and equity ...........2078 1.3 Possible future developments .................................................................2079

2

OBJECTIVE, SCOPE AND DEFINITIONS ...........................................................2079 2.1 Objective ..................................................................................................2079 2.2 Scope ........................................................................................................2080 2.3 Definitions ...............................................................................................2080

3

LIABILITIES AND EQUITY ................................................................................2082 3.1 General provisions of IAS 32 ...................................................................2082 3.1.1 Examples of equity instruments ..................................................2084 3.1.2 Comparison with IFRS 2 – Share-based Payment ......................2085 3.2 Contractual obligation to deliver cash or other financial assets ............2086 3.2.1 Preference shares and similar instruments .................................2089 3.2.1.A Instruments redeemable mandatorily or at the holder’s option...............................................................2089 3.2.1.B Instruments redeemable only at the issuer’s option or not redeemable .........................................................2089 3.2.1.C Instruments with a ‘dividend blocker’ clause ..............2090 3.2.1.D Perpetual instruments with a ‘step-up’ clause ............2092 3.2.1.E Relative subordination ..................................................2093 3.2.1.F Economic compulsion ...................................................2093 3.2.1.G ‘Linked’ instruments ....................................................2094 3.2.1.H ‘Change of control’, ‘taxation change’ and ‘regulatory change’ clauses ...........................................2095 3.2.1.I Hedging of instruments classified as equity ................2095


lxxx

Detailed contents – Volume 2 3.2.2 Puttable instruments and instruments repayable only on liquidation .....................................................................................2096 3.2.2.A The issue .......................................................................2096 3.2.2.B Puttable instruments ....................................................2098 3.2.2.C Instruments entitling the holder to a pro rata share of net assets only on liquidation ...................................2099 3.2.2.D Clarification of the exemptions ....................................2100 3.2.2.E Reclassification of puttable instruments and instruments imposing an obligation only on liquidation .....................................................................2104 3.2.2.F IFRIC 2..........................................................................2104 3.2.3 Perpetual debt ..............................................................................2106 3.3 Contracts settled by delivery of the entity’s own equity instruments ..............................................................................................2106 3.3.1 Contracts accounted for as equity instruments ..........................2107 3.3.1.A Fixed amount of cash (or other financial assets) denominated in a currency other than the entity’s functional currency .......................................................2108 3.3.1.B Instrument issued by foreign subsidiary convertible into equity of parent .....................................................2110 3.3.1.C Number of equity instruments issued adjusted for capital restructuring or other event .............................2111 3.3.1.D Exchange of fixed amounts of equity ...........................2113 3.3.2 Contracts accounted for as financial assets or financial liabilities........................................................................................2114 3.3.2.A Variable number of equity instruments .......................2114 3.3.2.B Contracts based on the price of the entity’s equity instruments ...................................................................2114 3.3.2.C Fixed number of equity instruments for variable consideration .................................................................2114 3.3.2.D Fixed number of equity instruments with variable value ...............................................................................2115 3.3.2.E Fixed amount of cash determined by reference to share price .....................................................................2115 3.3.2.F Net-settled contracts over own equity ........................2115 3.3.3 Gross-settled contracts for the purchase of the entity’s own equity instruments .......................................................................2115 3.3.3.A Contracts to purchase own equity during ‘close’ or ‘prohibited’ periods .......................................................2117 3.3.3.B Contracts to acquire non-controlling (minority) interests .........................................................................2117 3.3.4 Gross-settled contracts for the sale or issue of the entity’s own equity instruments ...............................................................2118 3.4 Contingent settlement provisions ..........................................................2119 3.4.1 Terms that are ‘not genuine’ .......................................................2120 3.4.2 Liabilities that arise only on liquidation .....................................2121 3.4.3 Liabilities that arise only on a change of control ........................2121


Detailed contents – Volume 2 lxxxi

3.5 3.6

3.7

3.8

3.4.4 Some typical contingent settlement provisions..........................2122 Derivative financial instruments with settlement options....................2124 Differences of classification between consolidated and single entity financial statements.................................................................................2124 3.6.1 Consolidated financial statements ..............................................2124 3.6.2 Single entity financial statements ...............................................2125 Settlement of financial liability with new equity instrument ...............2126 3.7.1 Scope of IFRIC 19 ........................................................................2126 3.7.2 Requirements of IFRIC 19 ..........................................................2127 3.7.3 Debt for equity swaps with shareholders ....................................2127 Reclassification of instruments ...............................................................2128 3.8.1 Change of terms ...........................................................................2128 3.8.1.A Equity instrument to financial liability........................2128 3.8.1.B Financial liability to equity instrument .......................2129 3.8.2 Change of circumstances..............................................................2129 3.8.2.A Arguments against reclassification ...............................2130 3.8.2.B Arguments for reclassification ......................................2130

4

COMPOUND FINANCIAL INSTRUMENTS ........................................................2131 4.1 Background...............................................................................................2131 4.1.1 Treatment by holder and issuer contrasted ................................2132 4.2 The components of a compound instrument .........................................2133 4.2.1 Determining the components of a financial instrument ............2133 4.2.2 Separated (i.e. not closely-related) embedded derivatives ........2135 4.3 Initial recognition ....................................................................................2136 4.3.A Temporary differences arising from split accounting .....................................................................2139 4.3.1 Accounting for the equity component .........................................2139 4.4 Conversion, early repurchase and modification......................................2140 4.4.1 Conversion at maturity .................................................................2140 4.4.1.A Embedded derivatives ..................................................2141 4.4.2 Conversion before maturity .........................................................2141 4.4.2.A ‘Fixed stated principal’ of a bond .................................2141 4.4.2.B Accounting treatment ...................................................2141 4.4.3 Early repurchase ...........................................................................2142 4.4.4 Modification..................................................................................2144 4.5 Issuer cash settlement options ...............................................................2146 4.6 Other issues .............................................................................................2147

5

INTEREST, DIVIDENDS, GAINS AND LOSSES ...................................................2147 5.1 Transaction costs of equity transactions ................................................2149

6

TREASURY SHARES ...........................................................................................2150 6.1 Entities ‘controlled’ by the entity...........................................................2151


lxxxii Detailed contents – Volume 2 6.2 Transactions in own shares not at fair value...........................................2151 7

CONTRACTS OVER OWN EQUITY INSTRUMENTS ...........................................2152 7.1 Forward contracts ....................................................................................2153 7.1.1 Forward purchase .........................................................................2153 7.1.2 Forward sale ..................................................................................2155 7.1.3 ‘Back-to-back’ forward contracts .................................................2157 7.2 Call options ..............................................................................................2158 7.2.1 Purchased call option ...................................................................2158 7.2.2 Written call option........................................................................2161 7.3 Put options ...............................................................................................2163 7.3.1 Purchased put option ...................................................................2163 7.3.2 Written put option .......................................................................2165 7.4 Dissenting opinion...................................................................................2168

8

TRANSITIONAL AND FIRST-TIME ADOPTION PROVISIONS ............................2169

9

POSSIBLE FUTURE DEVELOPMENTS ...............................................................2171

9.1 The IASB discussion paper .....................................................................2171 9.2 Development of an exposure draft .........................................................2173 CHAPTER 34

FINANCIAL INSTRUMENTS: CLASSIFICATION (IAS 39)

1

INTRODUCTION ..............................................................................................2177

2

ASSETS AND LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS ..........2178 2.1 Assets and liabilities held for trading ......................................................2178 2.2 Instruments designated at fair value through profit or loss...................2179 2.2.1 Designation eliminates or significantly reduces a measurement or recognition inconsistency (accounting mismatch) that would otherwise arise ........................................2180 2.2.2 A group of financial assets, financial liabilities or both is managed and its performance is evaluated on a fair value basis ...............................................................................................2183 2.2.3 Instruments containing embedded derivatives ..........................2185

3

HELD-TO-MATURITY INVESTMENTS .............................................................2186 3.1 Instruments that may be classified as held-to-maturity ........................2186 3.2 Positive intention and ability to hold to maturity..................................2188 3.3 The tainting provisions ...........................................................................2189

4

LOANS AND RECEIVABLES ...............................................................................2191

5

AVAILABLE-FOR-SALE ASSETS .........................................................................2192

6

RECLASSIFICATIONS .......................................................................................2193 6.1 Reclassifications to or from fair value through profit or loss..................2193


Detailed contents – Volume 2 lxxxiii 6.1.1 Reclassifications from held for trading ........................................2193 6.1.1.A Reclassifications to loans and receivables ....................2194 6.1.1.B Reclassifications in rare circumstances ........................2196 6.1.1.C Prohibited reclassifications ...........................................2196 6.1.2 Re-designation and de-designation of derivatives as hedging instruments ...................................................................................2196 6.1.3 Changes in accounting policy for insurance contracts ................2196 6.2 Reclassifications between available-for-sale financial assets and loans and receivables ...............................................................................2196 6.3 Reclassifications between held-to-maturity investments and available for sale financial assets .............................................................2197 7

CLASSIFICATION OF FINANCIAL INSTRUMENTS IN A BUSINESS COMBINATION .................................................................................................2197

8

EFFECTIVE DATES AND TRANSITIONAL PROVISIONS.....................................2198 8.1 Effective dates .........................................................................................2198 8.2 Transitional provisions ............................................................................2198

9

FUTURE DEVELOPMENTS ...............................................................................2198

CHAPTER 35

FINANCIAL INSTRUMENTS: CLASSIFICATION (IFRS 9)

1

INTRODUCTION ..............................................................................................2203

2

OVERVIEW OF THE APPROACH IN IFRS 9 FOR CLASSIFYING FINANCIAL ASSETS..............................................................................................................2203

3

THE ‘BUSINESS MODEL’ TEST ........................................................................2205 3.1 Applying the test to components of an entity ........................................2205 3.2 Impact of sales on the test ......................................................................2206 3.3 Applying the business model test in practice ........................................2207

4

THE ‘CONTRACTUAL CHARACTERISTICS’ TEST ............................................2210 4.1 Payments of principal and interest on the principal outstanding .........2210 4.2 Conventional subordination features ......................................................2215 4.3 Non-recourse loans ..................................................................................2215 4.4 Contractually linked instruments ...........................................................2217 4.4.1 Assessing the characteristics of the underlying pool ..................2218 4.4.2 Assessing the exposure to credit risk in the tranche held ..........2219 4.4.3 Date of assessment .......................................................................2219

5

DESIGNATION AS MEASURED AT FAIR VALUE THROUGH PROFIT OR LOSS ...2219

6

DESIGNATION AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME............................................................................................................2221

7

RECLASSIFICATION .........................................................................................2222


lxxxiv Detailed contents – Volume 2 8

EFFECTIVE DATE AND TRANSITION ...............................................................2223 8.1 Effective date ...........................................................................................2223 8.2 Transitional provisions ............................................................................2223 8.2.1 Date of initial application ............................................................2223 8.2.2 Applying the ‘business model’ test ..............................................2223 8.2.3 Applying the contractual characteristics test ..............................2224 8.2.4 Making and revoking designations ..............................................2225 8.2.5 Financial assets derecognised prior to the date of initial application.....................................................................................2225 8.2.6 Transition adjustments and measurement of financial assets ...2226 8.2.6.A Hybrid financial assets ..................................................2226 8.2.6.B Assets measured at amortised cost ...............................2226 8.2.6.C Unquoted equity investments .....................................2226 8.2.7 Restatement of comparatives ......................................................2227

9

FUTURE DEVELOPMENTS ...............................................................................2227

CHAPTER 36

FINANCIAL INSTRUMENTS: RECOGNITION AND INITIAL MEASUREMENT

1

INTRODUCTION ..............................................................................................2231

2

RECOGNITION .................................................................................................2231 2.1 General requirements ..............................................................................2231 2.1.1 Receivables and payables .............................................................2231 2.1.2 Firm commitments .......................................................................2231 2.1.3 Forward contracts .........................................................................2232 2.1.4 Option contracts ...........................................................................2233 2.1.5 Planned future transactions .........................................................2233 2.1.6 Treatment by transferee of transfers of financial assets not qualifying for derecognition by transferor ...................................2233 2.2 ‘Regular way’ transactions .......................................................................2234 2.2.1 Trade date accounting .................................................................2235 2.2.2 Settlement date accounting .........................................................2235 2.2.2.A Current market practice – ‘due date’ accounting........2236 2.2.3 Illustrative examples ....................................................................2236 2.2.3.A Exchanges of non-cash financial assets ........................2239

3

INITIAL MEASUREMENT..................................................................................2240 3.1 General requirements ..............................................................................2240 3.2 Initial fair value ........................................................................................2241 3.2.1 Interest-free and low-interest loans ............................................2241 3.2.2 Short-term receivables and payables ...........................................2243 3.2.3 Equity instruments reclassified as liabilities following modification of contractual terms ................................................2243


Detailed contents – Volume 2 lxxxv

3.3 3.4 3.5 3.6 3.7

3.2.4 Financial guarantee contracts and off-market loan commitments ................................................................................2244 3.2.5 ‘Day 1’ profits ...............................................................................2244 3.2.6 Loans and receivables acquired in a business combination........2244 Transaction costs .....................................................................................2244 Bid-ask spreads ........................................................................................2245 Embedded derivatives and financial instrument hosts..........................2246 Regular way transactions .........................................................................2246 Assets and liabilities arising from loan commitments ............................2247

CHAPTER 37

FINANCIAL INSTRUMENTS: SUBSEQUENT MEASUREMENT

1

OVERVIEW ........................................................................................................2253

2

SUBSEQUENT MEASUREMENT AND RECOGNITION OF GAINS AND LOSSES (IAS 39) ...........................................................................................................2253 2.1 Financial assets and financial liabilities at fair value through profit or loss ........................................................................................................2254 2.2 Held-to-maturity investments ................................................................2255 2.3 Loans and receivables ..............................................................................2255 2.4 Available-for-sale assets ...........................................................................2255 2.5 Other financial liabilities .........................................................................2257 2.6 Reclassifications .......................................................................................2258 2.6.1 Reclassifications from held-for-trading .......................................2258 2.6.2 Reclassifications from available-for-sale to loans and receivables.....................................................................................2258 2.6.3 Reclassifications between held-to-maturity investments and available for sale financial assets ..................................................2259 2.7 Financial guarantees and commitments to provide a loan at a below-market interest rate ......................................................................2259 2.8 Other exceptions .....................................................................................2260 2.8.1 Hedging relationships ..................................................................2260 2.8.2 Regular way transactions ..............................................................2260 2.8.3 Liabilities arising from ‘failed derecognition’ transactions ........2260

3

SUBSEQUENT MEASUREMENT AND RECOGNITION OF GAINS AND LOSSES (IFRS 9) ..........................................................................................................2261 3.1 Financial assets measured at fair value through profit or loss ...............2261 3.2 Investments in equity investments designated at fair value through other comprehensive income ..................................................................2261 3.3 Financial assets measured at amortised cost ..........................................2262 3.4 Reclassifications .......................................................................................2262 3.5 Hedging relationships..............................................................................2262


lxxxvi Detailed contents – Volume 2 3.6 Regular way transactions .........................................................................2262 4

FAIR VALUE MEASUREMENT CONSIDERATIONS .............................................2263 4.1 Quoted prices in an active market ..........................................................2264 4.1.1 General ..........................................................................................2264 4.1.2 Identifying whether prices are quoted in an active market .......2264 4.1.3 Transaction costs and bid, mid and asking (or offer) prices ......2265 4.1.4 Which market? ..............................................................................2266 4.1.5 Large holdings ..............................................................................2266 4.1.6 Restrictions on sale.......................................................................2267 4.1.7 Using market prices to estimate fair values ................................2268 4.1.8 Forced or distressed transactions ................................................2269 4.2 Valuation techniques where there is no active market ..........................2269 4.3 Inputs to valuation techniques ...............................................................2271 4.4 The impact of the financial crisis on the use of valuation techniques ................................................................................................2273 4.4.1 Understanding the instrument ....................................................2274 4.4.2 Evaluating available market information .....................................2275 4.4.2.A Transaction prices .........................................................2275 4.4.2.B Indices ...........................................................................2276 4.4.2.C Information from brokers and pricing services ............2277 4.4.2.D Changes in own credit ..................................................2277 4.4.3 Using models ................................................................................2277 4.5 Unquoted equity instruments and related derivatives ..........................2278 4.5.1 Financial assets and liabilities within the scope of IAS 39.........2278 4.5.2 Financial assets and liabilities within the scope of IFRS 9 ........2279 4.6 Demand deposits and similar liabilities..................................................2280 4.7 Negative assets and liabilities .................................................................2281 4.8 ‘Day 1’ profits ...........................................................................................2281 4.9 Own credit risk ........................................................................................2282

5

AMORTISED COST AND THE EFFECTIVE INTEREST METHOD.......................2285 5.1 Fixed interest, fixed term instruments ..................................................2286 5.2 Prepayment, call and similar options ......................................................2287 5.2.1 Revisions to estimated cash flows ...............................................2288 5.2.2 Special requirements for financial assets reclassified in accordance with IAS 39 ................................................................2289 5.2.3 Interaction with the requirements for embedded derivatives ...2289 5.3 Floating rate instruments ........................................................................2291 5.4 Perpetual debt instruments ....................................................................2293 5.5 Acquisition of impaired debt instruments..............................................2294 5.6 Inflation-linked debt ...............................................................................2295 5.7 Other, more complex, instruments .........................................................2297


Detailed contents – Volume 2lxxxvii 6

IMPAIRMENT ...................................................................................................2298 6.1 Impairment reviews .................................................................................2299 6.1.1 Examples of loss events................................................................2300 6.1.2 Loss events related to investments in equity instruments ........2300 6.1.3 Significant or prolonged declines in fair value ............................2301 6.2 Financial assets carried at amortised cost...............................................2303 6.2.1 Individual and collective assessments .........................................2303 6.2.2 Measurement – general requirements ........................................2304 6.2.3 Measurement – detailed requirements .......................................2307 6.2.4 Impairment of assets subject to hedges ......................................2309 6.2.5 Reversal of impairment losses ......................................................2310 6.3 Available-for-sale assets measured at fair value ......................................2310 6.3.1 Recognition of impairment ..........................................................2310 6.3.2 Reversals of impairment ...............................................................2311 6.3.3 Further declines in the fair value of impaired equity instruments ...................................................................................2312 6.3.4 Timing of impairment tests and interaction with interim reporting........................................................................................2313 6.4 Financial assets carried at cost in accordance with IAS 39 ....................2314 6.5 Interest income after impairment recognition .......................................2314

7

FOREIGN CURRENCIES ....................................................................................2314 7.1 Foreign currency instruments .................................................................2314 7.2 Foreign entities ........................................................................................2317

8

EFFECTIVE DATES AND TRANSITIONAL PROVISIONS.....................................2317 8.1 Effective dates .........................................................................................2317 8.2 Transitional provisions ............................................................................2317 8.2.1 Date of initial application ............................................................2318 8.2.2 Financial assets derecognised prior to the date of initial application.....................................................................................2318 8.2.3 Hybrid financial assets measured at fair value through profit or loss.............................................................................................2318 8.2.4 Financial assets measured at amortised cost...............................2319 8.2.5 Unquoted equity investments .....................................................2319 8.2.6 Restatement of comparatives ......................................................2319

9

FUTURE DEVELOPMENTS ...............................................................................2319 9.1 Fair value measurement ..........................................................................2319 9.2 Replacement of IAS 39 ............................................................................2320

CHAPTER 38 1

FINANCIAL INSTRUMENTS: DERECOGNITION

INTRODUCTION ..............................................................................................2327


lxxxviii

Detailed contents – Volume 2 1.1 Off-balance sheet finance........................................................................2327

2

DEVELOPMENT OF IFRS ................................................................................2328 2.1 Definitions ...............................................................................................2329

3

DERECOGNITION – FINANCIAL ASSETS..........................................................2330 3.1 Background...............................................................................................2330 3.2 Decision tree ............................................................................................2331 3.2.1 Importance of applying tests in sequence...................................2333 3.3 Derecognition principles, parts of assets and groups of assets ..............2334 3.3.1 Credit enhancement through transferor’s waiver of right to future cash flows ...........................................................................2335 3.3.2 Derecognition of groups of financial assets .................................2336 3.3.2.A The IASB’s view and The Interpretations Committee’s tentative conclusions..............................2337 3.3.2.B What are ‘similar assets’? ..............................................2338 3.3.3 Transfer of asset (or part of asset) for only part of its life ..........2339 3.3.4 ‘Financial asset’ includes whole or part of a financial asset........2339 3.4 Have the contractual rights to cash flows from the asset expired? .......2340 3.5 Has the entity ‘transferred’ the asset?....................................................2340 3.5.1 Transfers of contractual rights to receive cash flows ..................2341 3.5.1.A Meaning of ‘transfers the contractual rights to receive the cash flows’ ..................................................2341 3.5.1.B Transfers subject to conditions ....................................2343 3.5.2 Retention of rights to receive cash flows subject to obligation to pay over to others (pass-through arrangement)......................2345 3.6 Securitisations ..........................................................................................2346 3.6.1 Recourse to originator ..................................................................2347 3.6.2 Short-term loan facilities..............................................................2347 3.6.3 Insurance protection ....................................................................2348 3.6.4 Treatment of collection proceeds ...............................................2348 3.6.5 Transfer of a group of assets not all of which are derecognised .................................................................................2349 3.6.6 ‘Empty’ SPEs ................................................................................2350 3.7 Client money ...........................................................................................2350 3.8 Has the entity transferred or retained substantially all the risksand rewards of ownership?..............................................................................2351 3.8.1 Transfers resulting in transfer of substantially all risks and rewards ..........................................................................................2352 3.8.2 Transfers resulting in retention of substantially all risks and rewards ..........................................................................................2352 3.8.3 Transfers resulting in neither transfer nor retention of substantially all risks and rewards................................................2353 3.9 Has the entity retained control of the asset? .........................................2353 3.9.1 Transferee’s ‘practical ability’ to sell the asset ...........................2354


Detailed contents – Volume 2 lxxxix 4

PRACTICAL APPLICATION OF THE DERECOGNITION CRITERIA ....................2354 4.1 Repurchase agreements (‘repos’) and securities lending ......................2355 4.1.1 Agreements to return the same asset ..........................................2355 4.1.1.A Transferee’s right to pledge .........................................2355 4.1.2 Agreements with right to return the same or substantially the same asset ...............................................................................2355 4.1.3 Agreements with right of substitution ........................................2356 4.1.4 Net cash-settled forward repurchase...........................................2356 4.1.5 Agreement to repurchase at fair value .........................................2356 4.1.6 Right of first refusal to repurchase at fair value ..........................2356 4.1.7 Wash sale .......................................................................................2357 4.2 Transfers subject to put and call options ...............................................2357 4.2.1 Deeply in the money put and call options ..................................2357 4.2.2 Deeply out of the money put and call options ............................2358 4.2.3 Options that are neither deeply out of the money nor deeply in the money .................................................................................2358 4.2.3.A Assets readily obtainable in the market .......................2358 4.2.3.B Assets not readily obtainable in the market ................2358 4.2.4 Option to put or call at fair value .................................................2359 4.2.5 Net cash-settled options ..............................................................2359 4.2.6 Removal of accounts provision .....................................................2359 4.2.7 Clean-up call options....................................................................2360 4.2.8 Same (or nearly the same) price put and call options ................2360 4.2.9 Changes in probability of exercise of options after initial transfer of asset .............................................................................2360 4.3 Subordinated retained interests and credit guarantees .........................2362 4.4 Transfers by way of swaps .......................................................................2362 4.4.1 Total return swaps........................................................................2362 4.4.2 Interest rate swaps .......................................................................2363 4.5 Factoring of trade receivables .................................................................2363

5

ACCOUNTING TREATMENT ............................................................................2364 5.1 Transfers that qualify for derecognition .................................................2364 5.1.1 Transferred asset part of larger asset...........................................2365 5.1.2 Servicing assets and liabilities......................................................2367 5.2 Transfers that do not qualify for derecognition through retention of risks and rewards ......................................................................................2369 5.3 Transfers with continuing involvement – summary ..............................2374 5.3.1 Guarantees ....................................................................................2374 5.3.2 Options .........................................................................................2374 5.3.3 Associated liability ........................................................................2375 5.3.4 Subsequent measurement of assets and liabilities .....................2375 5.3.5 Continuing involvement in part only of a larger asset ................2375 5.4 Transfers with continuing involvement – accounting examples ...........2376


xc

Detailed contents – Volume 2 5.4.1 Transfers with guarantees ............................................................2376 5.4.2 Transfers of assets measured at amortised cost ..........................2378 5.4.3 Transfers of assets measured at fair value ...................................2379 5.4.3.A Transferor’s call option .................................................2380 5.4.3.B Transferee’s put option ................................................2382 5.4.3.C ‘Collar’ put and call options ..........................................2383 5.4.4 Continuing involvement in part only of a financial asset ...........2385 5.5 Miscellaneous provisions .........................................................................2388 5.5.1 Offset ............................................................................................2388 5.5.2 Collateral .......................................................................................2388 5.5.3 Rights or obligations over transferred assets that continue to be recognised ................................................................................2389 5.6 Reassessing derecognition .......................................................................2389 5.6.1 Reassessment of consolidation of SPEs.......................................2389 6

DERECOGNITION – FINANCIAL LIABILITIES ..................................................2390 6.1 Extinguishment of debt ..........................................................................2390 6.1.1 What constitutes ‘part’ of a liability? ...........................................2391 6.1.2 Legal release by creditor ..............................................................2391 6.1.3 ‘In-substance defeasance’ arrangements .....................................2392 6.1.4 Extinguishment in exchange for transfer of assets not meeting the derecognition criteria ..............................................2392 6.2 Exchange or modification of debt by original lender .............................2393 6.2.1 Costs and fees ...............................................................................2394 6.2.2 Illustrative examples ....................................................................2394 6.2.3 Settlement of financial liability with issue of new equity instrument ....................................................................................2397 6.3 Gains and losses on extinguishment of debt ..........................................2398 6.4 Derivatives that can be financial assets or financial liabilities ..............2398

7

FUTURE DEVELOPMENTS: NEW MODELS FOR DERECOGNITION..................2399 7.1 The preferred approach ...........................................................................2400 7.1.1 Groups of assets ............................................................................2401 7.1.2 Transfer of cash flows ...................................................................2401 7.1.3 Continuing involvement in the asset ..........................................2401 7.1.4 Practical ability to transfer ...........................................................2402 7.2 Alternative approach to derecognition of financial assets......................2402 7.3 Derecognition of financial liabilities .......................................................2403 7.4 Consequences of the proposals ...............................................................2403

CHAPTER 39 1

FINANCIAL INSTRUMENTS: HEDGE ACCOUNTING

INTRODUCTION ..............................................................................................2411 1.1 Background...............................................................................................2411


Detailed contents – Volume 2 1.2 What is hedge accounting? ......................................................................2411 1.3 Development of hedge accounting standards ........................................2413 2

HEDGING INSTRUMENTS AND HEDGED ITEMS .............................................2415 2.1 Hedging instruments ...............................................................................2415 2.1.1 Derivative financial instruments .................................................2415 2.1.1.A Options and collars........................................................2416 2.1.1.B Credit break clauses ......................................................2418 2.1.2 Cash instruments..........................................................................2418 2.1.3 Combinations of instruments ......................................................2419 2.1.4 Portions and proportions of hedging instruments ......................2420 2.1.4.A Time value of options ...................................................2421 2.1.4.B Interest elements of forwards.......................................2421 2.1.4.C Proportions of instruments ...........................................2421 2.1.4.D Cash instruments ..........................................................2421 2.1.4.E Notional decomposition................................................2422 2.1.4.F Restructuring of derivatives .........................................2422 2.1.5 Reduction of risk ..........................................................................2422 2.1.6 Hedging different risks with one instrument .............................2423 2.1.7 Own equity instruments ..............................................................2425 2.1.8 Pension scheme assets .................................................................2425 2.2 Hedged items...........................................................................................2425 2.2.1 Financial items: portions and proportions...................................2426 2.2.1.A Portions of interest rate risk .........................................2426 2.2.1.B Foreign currency risk associated with publicly quoted shares ................................................................2428 2.2.1.C Inflation risk ..................................................................2429 2.2.1.D Other portions ...............................................................2429 2.2.2 Non-financial items: portions ......................................................2431 2.2.3 Groups of items as hedged items.................................................2434 2.2.4 Hedges of general business risk ...................................................2435 2.2.5 Held-to-maturity investments .....................................................2435 2.2.6 Derivatives and other financial instruments at fair value through profit or loss ....................................................................2436 2.2.7 Forecast acquisition or issuance of foreign currency monetary items..............................................................................................2436 2.2.8 Own equity instruments ..............................................................2437 2.2.9 Recognised core deposit intangibles ...........................................2437 2.2.10 Equity investments designated at fair value through other comprehensive income in accordance with IFRS 9 ....................2437 2.3 Internal hedges and other group accounting issues ...............................2438 2.3.1 Internal hedging instruments ......................................................2438 2.3.2 Offsetting internal hedging instruments ....................................2440 2.3.2.A Interest rate risk............................................................2440 2.3.2.B Foreign exchange risk ...................................................2442

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xcii

Detailed contents – Volume 2 2.3.3 Offsetting external hedging instruments ....................................2449 2.3.4 Internal hedged items ..................................................................2451 2.3.4.A Intragroup monetary items ...........................................2451 2.3.4.B Forecast intragroup transactions ..................................2452 2.3.5 Hedged item and hedging instrument held by different group entities ................................................................................2453 3

TYPES OF HEDGING RELATIONSHIPS .............................................................2453 3.1 Fair value hedges .....................................................................................2454 3.1.1 Hedges of firm commitments ......................................................2454 3.1.2 Hedges of foreign currency monetary items ...............................2455 3.2 Cash flow hedges .....................................................................................2455 3.2.1 All-in-one hedges ..........................................................................2456 3.2.2 Hedges of firm commitments ......................................................2457 3.2.3 Hedges of foreign currency monetary items ...............................2457 3.3 Hedges of net investments in foreign operations ..................................2457 3.3.1 Overview of IFRIC 16 ..................................................................2458 3.3.2 Nature of the hedged risk ............................................................2459 3.3.3 Amount of the hedged item for which a hedging relationship may be designated ........................................................................2460 3.3.4 Where the hedging instrument can be held................................2462 3.3.5 Disposal of a hedged foreign operation .......................................2462

4

ACCOUNTING FOR EFFECTIVE HEDGES .........................................................2463 4.1 Fair value hedges .....................................................................................2463 4.1.1 Ongoing fair value hedge accounting ..........................................2463 4.1.2 Dealing with adjustments to the hedged item ...........................2465 4.1.3 Discontinuing fair value hedge accounting .................................2467 4.2 Cash flow hedges .....................................................................................2468 4.2.1 Ongoing cash flow hedge accounting ..........................................2468 4.2.2 Reclassification of gains and losses recognised in other comprehensive income from equity to profit or loss ..................2470 4.2.3 Discontinuing cash flow hedge accounting .................................2474 4.2.4 Acquisitions and disposals ............................................................2475 4.3 Accounting for hedges of a net investment in a foreign operation........2476

5

QUALIFYING CONDITIONS FOR HEDGE ACCOUNTING ..................................2476 5.1 Documentation and designation .............................................................2477 5.1.1 Business combinations .................................................................2478 5.1.2 Dynamic hedging strategies .........................................................2478 5.2 Forecast transactions ...............................................................................2479 5.3 Assessing hedge effectiveness .................................................................2481 5.3.1 Basic requirements .......................................................................2481 5.3.2 The ‘dollar-offset’ method ...........................................................2484 5.3.2.A Law of small numbers ...................................................2490


Detailed contents – Volume 2 5.3.3 Dollar-offset: comparison of spot rate and forward rate methods ........................................................................................2491 5.3.4 The impact of the hedging instrument’s credit quality .............2495 5.3.5 Hedging using instruments with a non-zero fair value ...............2497 5.3.6 Regression analysis and other statistical methods ......................2497 5.3.6.A Basic concepts of regression .........................................2497 5.3.6.B Summary ........................................................................2501 5.3.7 ‘Almost fully offset’ and under-hedging ......................................2501 5.3.8 ‘Short-cut method’ .......................................................................2502 5.3.9 ’Critical terms match’ approach ...................................................2502 5.3.10 Interest accruals and ‘clean’ vs. ‘dirty’ values .............................2505 5.3.11 Effectiveness of options ...............................................................2505 5.3.12 Net investment hedges: identifying the effective portion ........2507 5.3.13 Net investment hedges: other practical issues ...........................2508 5.3.13.A Non-derivative liabilities used as the hedging instrument .....................................................................2508 5.3.13.B Derivatives used as the hedging instrument ...............2509 5.3.13.C Combinations of derivative and non-derivative instruments used as the hedging instrument ..............2511 5.3.13.D Individual or separate financial statements .................2512 6

PORTFOLIO (OR MACRO) HEDGING ...............................................................2512

7

FUTURE DEVELOPMENTS ...............................................................................2513 7.1 Hedge accounting: to eliminate, replace or maintain and simplify? .....2513 7.2 Progress towards the removal of the EU ‘carve-out’ ..............................2516

CHAPTER 40

FINANCIAL INSTRUMENTS: PRESENTATION AND DISCLOSURE

1

INTRODUCTION ..............................................................................................2525 1.1 IAS 32 .......................................................................................................2525 1.2 IFRS 7 ......................................................................................................2526 1.3 The financial crisis and related changes to IFRS 7 ................................2526

2

SCOPE OF IFRS 7 ............................................................................................2528 2.1 Entities required to comply with IFRS 7 ...............................................2528 2.2 Financial instruments within the scope of IFRS 7 ................................2528 2.3 Interim reports .........................................................................................2528

3

STRUCTURING THE DISCLOSURES .................................................................2529 3.1 Level of detail ..........................................................................................2529 3.2 Materiality ................................................................................................2529 3.3 Classes of financial instrument ...............................................................2530

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xciv

Detailed contents – Volume 2 4

SIGNIFICANCE OF FINANCIAL INSTRUMENTS FOR AN ENTITY’S FINANCIAL POSITION AND PERFORMANCE ....................................................2531 4.1 Accounting policies ..................................................................................2531 4.2 Income, expenses, gains and losses.........................................................2532 4.2.1 Gains and losses by measurement category ................................2532 4.2.2 Interest income and expense .......................................................2534 4.2.3 Fee income and expense ..............................................................2534 4.2.4 Impairment losses ........................................................................2534 4.3 Hedge accounting ....................................................................................2534 4.4 Balance sheet ...........................................................................................2538 4.4.1 Categories of financial assets and financial liabilities .................2538 4.4.2 Financial liabilities designated at fair value through profit or loss .................................................................................................2539 4.4.3 Financial assets designated as measured at fair value through profit or loss ..................................................................................2541 4.4.4 Financial assets measured at fair value through other comprehensive income (IFRS 9) .................................................2541 4.4.5 Reclassification .............................................................................2542 4.4.5.A Reclassifications in accordance with the October 2008 ‘reclassification’ amendments to IAS 39 .............2542 4.4.5.B Other reclassifications under IAS 39............................2543 4.4.5.C Reclassifications of financial assets in accordance with IFRS 9 ...................................................................2543 4.4.6 Transfers of financial assets .........................................................2544 4.4.7 Collateral .......................................................................................2545 4.4.8 Allowance account for credit losses .............................................2545 4.4.9 Compound financial instruments with multiple embedded derivatives .....................................................................................2547 4.4.10 Defaults and breaches of loans payable .......................................2547 4.4.11 Interests in associates and jointly controlled entities designated at fair value through profit or loss .............................2548 4.5 Fair values ................................................................................................2548 4.5.1 General disclosure requirements .................................................2548 4.5.2 Fair value hierarchy ......................................................................2549 4.5.3 Day 1 profits .................................................................................2554 4.5.4 Situations for which fair values need not be disclosed ...............2556 4.6 Business combinations.............................................................................2556 4.6.1 Acquired receivables.....................................................................2557 4.6.2 Contingent consideration and indemnification assets ...............2557

5

NATURE AND EXTENT OF RISKS ARISING FROM FINANCIAL INSTRUMENTS .................................................................................................2557 5.1 Qualitative disclosures.............................................................................2560 5.2 Quantitative disclosures ..........................................................................2562 5.2.1 General matters ............................................................................2562


Detailed contents – Volume 2 5.2.2 Credit risk .....................................................................................2563 5.2.2.A Maximum exposure to credit risk ................................2563 5.2.2.B Credit quality of financial assets ..................................2566 5.2.2.C Financial assets that are either past due or impaired ..2572 5.2.2.D Collateral and other credit enhancements obtained ...2574 5.2.3 Liquidity risk ................................................................................2574 5.2.3.A Information provided to key management ..................2574 5.2.3.B Maturity analyses ..........................................................2574 5.2.3.C Management of associated liquidity risk .....................2582 5.2.3.D Puttable financial instruments classifiedas equity ......2583 5.2.4 Market risk ....................................................................................2583 5.2.4.A ‘Basic’ sensitivity analysis .............................................2584 5.2.4.B Value-at-risk and similar analyses .................................2589 5.2.4.C Other market risk disclosures .......................................2592 5.2.5 Concentrations of risk ..................................................................2593 5.2.6 Operational risk ............................................................................2594 5.2.7 Capital disclosures ........................................................................2594 6

PRESENTATION ON THE FACE OF THE FINANCIAL STATEMENTS AND RELATED DISCLOSURES ..................................................................................2594 6.1 Gains and losses recognised in profit or loss ..........................................2595 6.1.1 Presentation on the face of the statement of comprehensive income (or income statement) ....................................................2595 6.1.2 Further analysis of gains and losses recognised in profit or loss .................................................................................................2595 6.1.3 Offsetting and hedges ..................................................................2597 6.1.4 Embedded derivatives ..................................................................2598 6.1.5 Entities whose share capital is not equity ...................................2598 6.2 Gains and losses recognised in other comprehensive income ...............2599 6.3 Statement of changes in equity ..............................................................2600 6.4 Balance sheet ...........................................................................................2601 6.4.1 Offsetting financial assets and financial liabilities .....................2601 6.4.1.A Legal framework............................................................2601 6.4.1.B Right and intention to settle net .................................2602 6.4.1.C Simultaneous settlement..............................................2602 6.4.1.D Situations where offset is not normally appropriate....2602 6.4.1.E Master netting agreements ..........................................2603 6.4.2 Assets and liabilities .....................................................................2603 6.4.3 The distinction between current and non-current assets and liabilities........................................................................................2605 6.4.3.A Derivatives.....................................................................2605 6.4.3.B Convertible loans ..........................................................2605 6.4.4 Equity............................................................................................2606 6.4.5 Entities whose share capital is not equity ...................................2607 6.5 Statement of cash flows...........................................................................2609

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xcvi

Detailed contents – Volume 2 7

EFFECTIVE DATES AND TRANSITIONAL PROVISIONS.....................................2609 7.1 Effective date ...........................................................................................2609 7.2 Transitional provisions ............................................................................2610

8

FUTURE DEVELOPMENTS ...............................................................................2610

CHAPTER 41

OPERATING SEGMENTS

1

INTRODUCTION ..............................................................................................2615 1.1 Background...............................................................................................2615 1.2 The main features of IFRS 8...................................................................2616 1.3 Terms used in IFRS 8 .............................................................................2618

2

OBJECTIVE AND SCOPE OF IFRS 8..................................................................2619 2.1 Objective ..................................................................................................2619 2.2 Scope of IFRS 8 .......................................................................................2619 2.2.1 The meaning of ‘traded in a public market’................................2620 2.2.2 Consolidated financial statements presented with those of the parent......................................................................................2620 2.2.3 Extending the scope of IFRS 8 to ‘publicly accountable entities’ .........................................................................................2620 2.2.4 Entities providing segment information on a voluntary basis ....2621

3

IDENTIFYING A SINGLE SET OF OPERATING SEGMENTS ...............................2621 3.1 Definition of an operating segment ........................................................2621 3.1.1 Revenue earning business activities ............................................2621 3.1.2 ‘Chief operating decision maker’ and ‘segment manager’ ..........2622 3.1.3 Availability of discrete financial information ..............................2623 3.1.4 When a single set of components is not immediately apparent ........................................................................................2623 3.2 Identifying externally reportable segments ...........................................2624 3.2.1 Aggregation criteria – combining internally reported operating segments ......................................................................2626 3.2.2 Quantitative thresholds – operating segments which are reportable because of their size ...................................................2627 3.2.3 Combining small operating segments into a larger reportable segment .........................................................................................2628 3.2.4 ‘All other segments’ ......................................................................2628 3.2.5 A ‘practical limit’ for the number of reported operating segments .......................................................................................2629 3.2.6 Restatement of segments reported in comparative periods.......2629

4

MEASUREMENT ...............................................................................................2629

5

INFORMATION TO BE DISCLOSED ABOUT REPORTABLE SEGMENTS .............2631 5.1 General information about reportable segments....................................2631


Detailed contents – Volume 2 xcvii 5.2 5.3 5.4 5.5 5.6 5.7 5.8

A measure of segment profit or loss, total assets and total liabilities....2632 Disclosure of other elements of revenue, income and expense ............2632 Additional disclosures relating to segment assets ..................................2635 Explanation of the measurements used in segment reporting ..............2635 Reconciliations .........................................................................................2637 Restatement of previously reported information ...................................2638 Entity-wide disclosures ...........................................................................2639 5.8.1 Information about products and services ....................................2639 5.8.2 Information about geographical areas ..........................................2640 5.9 Information about major customers ........................................................2641 5.9.1 Customers known to be under common control .........................2642 5.10 Disclosure of commercially sensitive information .................................2644

6

TRANSITIONAL PROVISIONS ...........................................................................2644

CHAPTER 42

EARNINGS PER SHARE

1

INTRODUCTION ..............................................................................................2651

2

OBJECTIVE AND SCOPE OF IAS 33 ..................................................................2651 2.1 Objective ..................................................................................................2651 2.2 Scope ........................................................................................................2652

3

THE BASIC EPS................................................................................................2652 3.1 Earnings ....................................................................................................2653 3.2 Number of shares .....................................................................................2653

4

CHANGES IN OUTSTANDING ORDINARY SHARES ...........................................2656 4.1 Weighted average number of shares .......................................................2656 4.2 Purchase and redemption of own shares ................................................2657 4.3 Changes in ordinary shares without corresponding changes in resources ...................................................................................................2658 4.3.1 Capitalisation, bonus issue, share split and share consolidation .................................................................................2658 4.3.1.A Capitalisation, bonus issues and share splits ...............2658 4.3.1.B Stock dividends .............................................................2659 4.3.1.C Share consolidations......................................................2660 4.3.2 Share consolidation with a special dividend ...............................2660 4.3.3 Rights issue ...................................................................................2661 4.3.4 B share schemes............................................................................2663 4.3.5 Put warrants priced above market value .....................................2664 4.4 Options exercised during the year ..........................................................2665 4.5 Post balance sheet changes in capital .....................................................2666 4.6 Issue to acquire another business ...........................................................2666


xcviii Detailed contents – Volume 2 4.6.1 Acquisitions ..................................................................................2666 4.6.2 Reverse acquisitions .....................................................................2666 4.6.3 Establishment of a new parent undertaking ...............................2667 4.7 Adjustments to EPS in historical summaries .........................................2668 5

MATTERS AFFECTING THE NUMERATOR .......................................................2668 5.1 Earnings ....................................................................................................2668 5.2 Preference dividends ...............................................................................2668 5.3 Retrospective adjustments ......................................................................2670 5.4 Participating equity instruments and two class shares ..........................2670 5.5 Other bases ..............................................................................................2672

6

DILUTED EARNINGS PER SHARE .....................................................................2672 6.1 The need for diluted EPS .......................................................................2672 6.2 Calculation of diluted EPS ......................................................................2673 6.2.1 Diluted earnings ...........................................................................2674 6.2.2 Diluted number of shares ............................................................2676 6.3 Dilutive potential ordinary shares...........................................................2677 6.3.1 Dilution judged by effect on profits from continuing operations......................................................................................2677 6.3.2 Dilution judged by the cumulative impact of potential shares ..2678 6.4 Particular types of dilutive instruments .................................................2679 6.4.1 Convertible instruments ..............................................................2679 6.4.1.A Convertible debt ...........................................................2680 6.4.1.B Convertible preference shares ......................................2682 6.4.1.C Participating equity instruments and two class shares with conversion rights ........................................2682 6.4.2 Options, warrants and their equivalents .....................................2683 6.4.2.A The numerator ..............................................................2683 6.4.2.B Written call options.......................................................2686 6.4.2.C Written put options and forward purchase agreements ....................................................................2688 6.4.2.D Options over convertible instruments .........................2689 6.4.2.E Settlement of option exercise price with debt or other instruments of the entity ....................................2689 6.4.2.F Specified application of option proceeds .....................2689 6.4.3 Purchased options and warrants ..................................................2690 6.4.4 Partly paid shares ..........................................................................2690 6.4.5 Share based payments ..................................................................2692 6.4.6 Contingently issuable shares .......................................................2693 6.4.6.A Earnings-based contingencies ......................................2694 6.4.6.B Share-price-based contingencies ..................................2697 6.4.6.C Other contingencies ......................................................2697 6.4.7 Potential ordinary shares of investees .........................................2697 6.4.8 Contingently issuable potential ordinary shares .........................2700


Detailed contents – Volume 2 7

PRESENTATION, RESTATEMENT AND DISCLOSURE ......................................2700 7.1 Presentation .............................................................................................2700 7.2 Restatement .............................................................................................2701 7.3 Disclosure .................................................................................................2702

8

FUTURE DEVELOPMENTS................................................................................2703

9

APPENDIX ........................................................................................................2704

CHAPTER 43

EVENTS AFTER THE REPORTING PERIOD

1

INTRODUCTION ..............................................................................................2713

2

REQUIREMENTS OF IAS 10 .............................................................................2714 2.1 Objective, scope and definitions .............................................................2714 2.1.1 Date when financial statements are authorised for issue ...........2714 2.1.2 Adjusting events ...........................................................................2716 2.1.3 Non-adjusting events ...................................................................2717 2.2 The treatment of adjusting events .........................................................2719 2.2.1 Events requiring adjustment to the amounts recognised, or disclosures, in the financial statements ......................................2719 2.2.2 Events indicating that the going concern basis is not appropriate ....................................................................................2719 2.3 The treatment of non-adjusting events..................................................2720 2.4 Other disclosure requirements ...............................................................2722

3

PRACTICAL ISSUES ..........................................................................................2723 3.1 Valuation of inventory..............................................................................2723 3.2 Percentage of completion estimates .......................................................2724 3.3 Insolvency of a debtor..............................................................................2724 3.4 Valuation of investment property at fair value and tenant insolvency ..2724 3.5 Valuation of investments and fraud ........................................................2725

CHAPTER 44 1

2

RELATED PARTY DISCLOSURES

INTRODUCTION ..............................................................................................2731 1.1 The related party issue ............................................................................2731 1.2 Possible solutions .....................................................................................2732 1.2.1 Remeasurement of transactions at fair values .............................2732 1.2.2 Disclosure of transactions ............................................................2732 1.3 Reasons for issuing IAS 24 (2011) ..........................................................2732 REQUIREMENTS OF THE ORIGINAL VERSION OF IAS

24, ‘IAS 24 (2010)’ .....2733 2.1 Effective date, objective and scope ........................................................2733

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c

Detailed contents – Volume 2

2.2

2.3 2.4

2.5

3

2.1.1 Effective date ...............................................................................2733 2.1.2 Objective .......................................................................................2733 2.1.3 Scope .............................................................................................2733 Identification of related parties ..............................................................2734 2.2.1 Parties that control, are controlled by, or are under common control with, the entity ................................................................2734 2.2.2 Parties that have significant influence over the entity...............2735 2.2.3 Parties that have joint control over the entity ............................2736 2.2.4 Associates ......................................................................................2737 2.2.5 Joint ventures ...............................................................................2737 2.2.6 Key management personnel .........................................................2738 2.2.7 Close family members ..................................................................2740 2.2.8 Entities controlled, jointly controlled or significantly influenced by certain individuals.................................................2741 2.2.9 Post-employment benefit plans...................................................2744 2.2.10 Parties presumed not to be related parties .................................2744 Disclosure of controlling relationships ...................................................2745 Disclosable transactions ..........................................................................2747 2.4.1 Key management personnel compensation .................................2747 2.4.2 Other transactions ........................................................................2748 2.4.2.A Entities owned or influenced by government .............2749 2.4.3 Materiality ....................................................................................2749 2.4.4 Aggregation of items of a similar nature ......................................2749 Disclosures required for related party transactions ...............................2750 2.5.1 Disclosures required for key management personnel compensation ................................................................................2750 2.5.1.A Short-term employee benefits......................................2751 2.5.1.B Post-employment benefits ...........................................2751 2.5.1.C Other long-term benefits ..............................................2752 2.5.1.D Termination benefits ....................................................2752 2.5.1.E Share-based payment transactions ...............................2752 2.5.1.F Reporting entity part of a group ...................................2752 2.5.1.G Key management personnel compensated by other entities ...........................................................................2753 2.5.2 Other disclosures required for related party transactions ..........2753

REQUIREMENTS OF THE NEW VERSION OF IAS 24 ‘IAS 24 (2011)’ ...............2757 3.1 Effective date and transition, objective, scope and main changes introduced compared to IAS 24 (2010) ..................................................2757 3.1.1 Effective date and transition .......................................................2757 3.1.2 Objective .......................................................................................2758 3.1.3 Scope .............................................................................................2758 3.1.4 Main changes introduced compared to IAS 24 (2010) ...............2759 3.1.4.A Disclosure exemption for government-controlled entities ...........................................................................2759


Detailed contents – Volume 2

3.2

3.3 3.4 3.5

3.6

4

3.1.4.B Changes to the definition of a related party ................2759 3.1.4.C Disclosures of commitments ........................................2760 Identification of a related party and related party transactions ............2760 3.2.1 Persons or close family members that are related parties ..........2760 3.2.1.A Key management personnel .........................................2762 3.2.2 Entities that are members of the same group .............................2763 3.2.3 Entities that are associates or joint ventures ..............................2764 3.2.4 Entities that are joint ventures of the same third party .............2765 3.2.5 Entities that are joint ventures and associates of the same third entity ....................................................................................2766 3.2.6 Post-employment benefit plans...................................................2766 3.2.7 Controlled or jointly controlled entities......................................2767 3.2.8 Entities under significant influence ............................................2767 3.2.9 Government-related entities .......................................................2768 Parties that are not related parties .........................................................2768 Disclosure of controlling relationships ...................................................2769 Disclosable transactions ..........................................................................2771 3.5.1 Key management personnel compensation .................................2771 3.5.2 Other transactions, including commitments ..............................2772 3.5.3 Materiality ....................................................................................2773 3.5.4 Aggregation of items of a similar nature ......................................2774 Disclosures required for related party transactions ...............................2774 3.6.1 Disclosures required for key management personnel compensation ................................................................................2774 3.6.1.A Short-term employee benefits......................................2775 3.6.1.B Post-employment benefits ...........................................2775 3.6.1.C Other long-term benefits ..............................................2776 3.6.1.D Termination benefits ....................................................2776 3.6.1.E Share-based payment transactions ...............................2776 3.6.1.F Reporting entity part of a group ...................................2776 3.6.1.G Key management personnel compensated by other entities ...........................................................................2777 3.6.2 Other disclosures required for related party transactions, including commitments ...............................................................2777 3.6.3 Disclosures with government-related entities ............................2778

FUTURE DEVELOPMENTS................................................................................2781

CHAPTER 45

STATEMENT OF CASH FLOWS

1

INTRODUCTION ..............................................................................................2787

2

THE REQUIREMENTS OF IAS 7 .......................................................................2787 2.1 Objective and scope.................................................................................2787 2.1.1 Objective .......................................................................................2787

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cii

Detailed contents – Volume 2 2.1.2 Scope .............................................................................................2788 2.2 Cash and cash equivalents.......................................................................2788 2.2.1 Definitions ....................................................................................2788 2.2.2 Components of cash and cash equivalents ..................................2788 2.2.2.A Cash and cash equivalents in the statement of cash flows ...............................................................................2788 2.2.2.B Money market funds .....................................................2789 2.2.2.C Investments with maturities greater than three months ...........................................................................2789 2.2.2.D Bank overdrafts..............................................................2790 2.2.2.E Policy for determining the components of cash and cash equivalents ............................................................2790 2.2.2.F Reconciliation with items reported in the balance sheet ..............................................................................2791 2.2.3 Restrictions on the use of cash and cash equivalents .................2792 2.3 Presentation of the statement of cash flows ..........................................2793 2.3.1 Reporting cash flows from operating activities ...........................2795 2.3.1.A The direct method ........................................................2796 2.3.1.B The indirect method.....................................................2797 2.3.2 Cash flows from investing activities ............................................2798 2.3.2.A Property, plant and equipment held for rental............2799 2.3.2.B Cash flows relating to expenses intended to generate future income .................................................2799 2.3.3 Cash flows from financing activities ............................................2800 2.3.4 Allocating items to operating, investing and financing activities ........................................................................................2800 2.3.4.A Interest and dividends ..................................................2800 2.3.4.B Taxes on income ...........................................................2802 2.3.4.C VAT and other non-income tax cash flows ..................2802 2.3.4.D Cash flows from factoring of trade receivables ............2803 2.3.4.E Treasury shares .............................................................2803 2.3.4.F Cash flows on derivative contracts ...............................2804 2.3.5 Exceptional and other material cash flows ..................................2805 2.4 Groups ......................................................................................................2806 2.4.1 Preparation of the group statement of cash flows ......................2806 2.4.2 Acquisitions and disposals ............................................................2807 2.4.2.A Acquisition-related costs ..............................................2808 2.4.2.B Deferred and other non-cash consideration.................2808 2.4.2.C Contingent consideration .............................................2809 2.4.2.D Settlement of amounts owed by the acquired entity ..2810 2.4.2.E Settlement of intra-group balances on a demerger .....2810 2.4.3 Cash flows in subsidiaries, associates and joint ventures ...........2810 2.4.3.A Investments in subsidiaries, associates and joint ventures .........................................................................2810 2.4.3.B Transactions with non-controlling interests ................2811


Detailed contents – Volume 2 2.5 Measurement of movements presented in the statement of cash flows..........................................................................................................2811 2.5.1 Gross or net presentation of cash flows .......................................2811 2.5.2 Foreign currency cash flows .........................................................2812 2.5.2.A Entities applying the direct method ............................2812 2.5.2.B Entities applying the indirect method.........................2813 2.5.3 Non-cash transactions and transactions on deferred terms........2814 2.5.3.A Asset purchases on deferred terms...............................2815 2.5.3.B Asset disposals on deferred terms ................................2815 2.6 Voluntary disclosures ...............................................................................2816 2.6.1 Cash flows to increase and maintain operating capacity ............2816 2.6.2 Segment cash flow disclosures .....................................................2816 3

REQUIREMENTS OF OTHER STANDARDS........................................................2817 3.1 Cash flows of discontinued operations ...................................................2817 3.2 Cash flows arising from insurance contracts ...........................................2818 3.3 Cash flows arising from the exploration of mineral resources ...............2818

4

FINANCIAL INSTITUTIONS .............................................................................2819 4.1 Presentation of the statement of cash flows ..........................................2819 4.1.1 Operating cash flows for financial institutions............................2819 4.1.2 Reporting cash flows on a net basis .............................................2820 4.1.3 Reporting operating cash flows using the indirect method........2820

5

FUTURE DEVELOPMENTS ...............................................................................2822 5.1 Project on financial statement presentation ..........................................2822

CHAPTER 46

INTERIM FINANCIAL REPORTING

1

INTRODUCTION ..............................................................................................2829

2

OBJECTIVE AND SCOPE OF IAS 34 ..................................................................2830 2.1 Objective ..................................................................................................2830 2.2 Scope ........................................................................................................2831

3

CONTENT OF AN INTERIM FINANCIAL REPORT PREPARED UNDER IAS 34 ..2832 3.1 Definitions ...............................................................................................2832 3.2 Components, form and content of an interim financial report .............2832 3.2.1 Complete set of interim financial statements ............................2832 3.2.2 Condensed interim financial statements ....................................2832 3.2.3 Requirements for both complete and condensed interim financial information ....................................................................2837

4

DISCLOSURES IN CONDENSED FINANCIAL STATEMENTS .............................2837 4.1 Significant events and transactions ........................................................2837 4.2 Other disclosures .....................................................................................2838

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civ

Detailed contents – Volume 2 4.3 Illustrative examples ...............................................................................2840 4.3.1 Inventory write-down and reversals.............................................2840 4.3.2 Impairment ...................................................................................2840 4.3.3 Reversal of restructuring provisions ............................................2840 4.3.4 Acquisition and disposal of property, plant and equipment ......2841 4.3.5 Capital commitments ...................................................................2842 4.3.6 Litigation settlements..................................................................2842 4.3.7 Correction of prior period errors ..................................................2843 4.3.8 Changes in circumstances affecting fair values...........................2844 4.3.9 Default or breach of loan covenants not remedied before the end of interim period ...................................................................2845 4.3.10 Related party transactions............................................................2846 4.3.11 Transfers between different levels of fair value hierarchy .........2848 4.3.12 Changes in classification of financial assets arising from changes in use ...............................................................................2849 4.3.13 Contingent liabilities ...................................................................2849 4.3.14 Accounting policies and methods of computation ......................2850 4.3.15 Seasonality or cyclicality of operations ........................................2852 4.3.16 Amounts that are unusual because of their nature,size or incidence .......................................................................................2852 4.3.17 Changes in estimates ...................................................................2853 4.3.18 Issues, repurchases and repayments of debt and equity securities .......................................................................................2854 4.3.19 Dividends paid for each class of share .........................................2854 4.3.20 Events after the interim reporting date ......................................2854 4.3.21 Changes in the composition of the entity ...................................2855 4.4 Segment information in condensed interim financial statements ........2855 4.5 Disclosure of compliance with IFRS ......................................................2857 5

PERIODS FOR WHICH INTERIM FINANCIAL STATEMENTS ARE REQUIRED TO BE PRESENTED ...........................................................................................2859 5.1 Other comparative information ...............................................................2862 5.2 Length of interim reporting period ........................................................2863 5.3 Change in financial year-end ...................................................................2864

6

MATERIALITY ..................................................................................................2865

7

DISCLOSURE IN ANNUAL FINANCIAL STATEMENTS ......................................2865

8

RECOGNITION AND MEASUREMENT ..............................................................2865 8.1 Same accounting policies as in annual financial statements .................2866 8.1.1 Measurement on a year-to-date basis ..........................................2866 8.1.2 New accounting standards and other changes in accounting policies ..........................................................................................2867 8.1.2.A New standards becoming mandatory during the current year ...................................................................2868 8.1.2.B Voluntary changes of accounting policy .......................2869


Detailed contents – Volume 2 8.1.3 Change in going concern assumption ..........................................2870 8.1.4 Voluntary changes in presentation ..............................................2871 8.2 Seasonal businesses .................................................................................2871 8.2.1 Revenues received seasonally, cyclically, or occasionally ...........2871 8.2.2 Costs incurred unevenly during the year ....................................2872 9

EXAMPLES OF THE RECOGNITION AND MEASUREMENT PRINCIPLES 2873 9.1 Property, plant and equipment and intangible assets ...........................2873 9.1.1 Depreciation and amortisation ....................................................2873 9.1.2 Impairment of assets ....................................................................2873 9.1.3 Recognition of intangible assets ..................................................2874 9.1.4 Capitalisation of borrowing costs .................................................2874 9.2 Reversal of impairment losses recognised in a previous interim period (IFRIC 10) ...................................................................................2874 9.3 Employee benefits ...................................................................................2875 9.3.1 Employer payroll taxes and insurance contributions ..................2875 9.3.2 Year-end bonuses ..........................................................................2876 9.3.3 Pensions ........................................................................................2877 9.3.4 Vacations, holidays, and other short-term compensated absences ........................................................................................2877 9.4 Inventories and cost of sales ...................................................................2878 9.4.1 Inventories ....................................................................................2878 9.4.2 Contractual or anticipated purchase price changes ....................2878 9.4.3 Interim period manufacturing cost variances..............................2878 9.5 Taxation ...................................................................................................2878 9.5.1 Measuring interim income tax expense ......................................2879 9.5.2 Changes in the effective tax rate during the year.......................2881 9.5.2.A Enacted changes for the current year that apply after the interim reporting date ...................................2881 9.5.2.B Changes to previously reported estimated income tax rates for the current year ........................................2881 9.5.2.C Enacted changes applying only to subsequent years...2882 9.5.3 Difference in financial year and tax year .....................................2883 9.5.4 Tax loss and tax credit carrybacks and carryforwards .................2884 9.5.5 Tax credits ....................................................................................2887 9.6 Foreign currency translation ...................................................................2887 9.6.1 Foreign currency translation gains and losses .............................2887 9.6.2 Interim financial reporting in hyperinflationary economies .......2888 9.7 Provisions, contingencies and accruals for other costs ...........................2889 9.7.1 Provisions ......................................................................................2889 9.7.2 Other planned but irregularly occurring costs ............................2889 9.7.3 Major planned periodic maintenance or overhaul .......................2890 9.7.4 Contingent lease payments .........................................................2890

10 USE OF ESTIMATES..........................................................................................2891

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cvi

Detailed contents – Volume 2 11 RESTATEMENT OF PREVIOUSLY REPORTED INTERIM PERIODS ....................2892 12 EFFECTIVE DATES AND TRANSITIONAL RULES..............................................2893 12.1 First-time presentation of interim reports complying with IAS 34 ......2893 12.1.1 Condensed financial statements in the year of incorporation or when an entity converts from its local GAAP to IFRS ...........2893 12.2 Amendments to IAS 34 from the May 2010 Annual Improvements standard ....................................................................................................2895 12.3 Consequential amendments to IFRIC 10 when first adopting IFRS 9 ......................................................................................................2895 13 FUTURE DEVELOPMENTS ...............................................................................2895 CHAPTER 47

AGRICULTURE

1

INTRODUCTION ..............................................................................................2899 1.1 Background and need for a standard .......................................................2899 1.2 Arguments for and against the fair value model .....................................2900

2

OBJECTIVE, DEFINITIONS AND SCOPE ...........................................................2902 2.1 Objective ..................................................................................................2902 2.2 Definitions ...............................................................................................2903 2.2.1 Agriculture-related definitions ....................................................2903 2.2.2 General definitions .......................................................................2904 2.3 Scope ........................................................................................................2904 2.3.1 Biological assets outside the scope of IAS 41 ..............................2905 2.3.2 Agricultural produce before and after harvest .............................2905 2.3.3 Products that are the result of processing after harvest .............2905 2.3.4 Leased assets ................................................................................2905

3

RECOGNITION AND MEASUREMENT PRINCIPLES ..........................................2906

3.1 Recognition ..............................................................................................2906 3.1.1 Control ..........................................................................................2906 3.2 Measurement ...........................................................................................2907 3.2.1 Biological assets ............................................................................2907 3.2.1.A Initial and subsequent measurement ..........................2907 3.2.1.B Subsequent expenditure ..............................................2907 3.2.2 Agricultural produce .....................................................................2907 3.2.3 Gains and losses ............................................................................2908 3.2.4 Inability to measure fair value reliably ........................................2908 3.2.4.A Rebutting the presumption ..........................................2908 3.2.4.B The cost model .............................................................2909 3.3 Government grants ..................................................................................2910 4

DETERMINING FAIR VALUE LESS COSTS TO SELL..........................................2910


Detailed contents – Volume 2 4.1 Establishing ‘what’ to measure ...............................................................2910 4.1.1 Current condition and location ....................................................2910 4.1.1.A Biological assets attached to land .................................2911 4.1.1.B Obligation to replant a biological asset after harvest ..2912 4.1.2 Grouping of assets ........................................................................2912 4.2 Determining costs to sell ........................................................................2912 4.3 Determining fair value.............................................................................2913 4.3.1 The fair value hierarchy ...............................................................2913 4.3.1.A Exposure Draft – Fair Value Measurement – and IAS 41 ............................................................................2913 4.3.2 Determining fair value in an active market.................................2914 4.3.3 Determining fair value where there is no active market ............2914 4.3.3.A Market-determined prices or values ............................2914 4.3.3.B Discounted cash flows ..................................................2914 4.3.3.C Cost as an approximation of fair value .........................2915 4.3.4 Use of external independent valuers ...........................................2915 4.3.5 Forward sales contracts ................................................................2916 4.3.6 Onerous contracts .........................................................................2916 4.4 The problem of measuring part-grown biological assets........................2917 5

DISCLOSURE ....................................................................................................2919 5.1 General .....................................................................................................2919 5.1.1 Balance sheet ................................................................................2919 5.1.2 Income statement ........................................................................2922 5.1.3 Groups of biological assets ...........................................................2924 5.1.4 Other disclosures ..........................................................................2925 5.2 Additional disclosures if fair value cannot be measured reliably ...........2928 5.3 Government grants ..................................................................................2929

CHAPTER 48 1

EXTRACTIVE INDUSTRIES

INTRODUCTION ..............................................................................................2939 1.1 Nature of the extractive industries .........................................................2939 1.2 Phases in extractive activities .................................................................2942 1.2.1 Upstream and downstream activities ..........................................2942 1.2.2 Phases in upstream activities .......................................................2942 1.3 Definition of terms ..................................................................................2944 1.4 Development of IFRS guidance..............................................................2944 1.4.1 Development of IFRS 6 – Exploration for and Evaluation of Mineral Resources ........................................................................2945 1.4.2 Discussion Paper: Extractive activities .......................................2946 1.4.2.A Scope and approach.......................................................2946 1.4.2.B Definitions of reserves and resources ..........................2947

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Detailed contents – Volume 2 1.4.2.C Asset recognition ...........................................................2948 1.4.2.D Asset measurement .......................................................2949 1.4.2.E Disclosure ......................................................................2950 1.4.2.F Publish What You Pay proposals ...................................2951 1.4.3 Accounting for stripping costs in the production phase .............2952 1.4.3.A Scope..............................................................................2952 1.4.3.B The stripping campaign ................................................2953 1.4.3.C Asset recognition ...........................................................2953 1.4.3.D Asset measurement .......................................................2953 2

MINERAL RESERVES AND RESOURCES ............................................................2954 2.1 Significance of reserves estimation to financial reporting under IFRS .........................................................................................................2954 2.2 Reserve estimation and reporting ...........................................................2955 2.2.1 Petroleum reserve estimation and reporting...............................2955 2.2.1.A Standard-setting organisations .....................................2955 2.2.1.B Petroleum Resources Management System (SPEPRMS) ...........................................................................2956 2.2.2 Mining resource and reserve reporting ........................................2960 2.2.2.A Standard-setting organisations .....................................2960 2.2.2.B CRIRSCO International Reporting Template ............2961 2.2.3 International harmonisation of reserve reporting .......................2963 2.2.3.A IASB Discussion Paper – Extractive Activities ............2963 2.2.3.B SEC final rule – Modernization of Oil and Gas Reporting .......................................................................2965 2.2.3.C Mining resource and reserve reporting ........................2966 2.3 Disclosure of mineral reserves and resources .........................................2967 2.3.1 Disclosure of proven, probable and possible reserves.................2967 2.3.1.A Oil and gas industry ......................................................2969 2.3.1.B Mining industry .............................................................2974 2.3.2 Disclosure of the value of reserves ..............................................2978 2.3.2.A Discussion Paper – Extractive activities ......................2978 2.3.2.B ASC 932-235-50 (pre-codification FAS 69) – disclosure of standardised measure of oil and gas .......2980

3

IFRS 6 – EXPLORATION FOR AND EVALUATION OF MINERAL RESOURCES ..2983 3.1 Objective and scope.................................................................................2983 3.1.1 Scope exclusions in other standards relating to the extractive industries ......................................................................................2984 3.2 Recognition of exploration and evaluation assets ..................................2985 3.2.1 Temporary exemption from IAS 8 ...............................................2985 3.2.2 Changes in accounting policies ....................................................2988 3.3 Measurement of exploration and evaluation assets ...............................2988 3.3.1 Measurement at recognition ........................................................2988 3.3.2 Elements of cost of exploration and evaluation assets ...............2988


Detailed contents – Volume 2

3.4

3.5

3.6 3.7 4

3.3.3 Measurement after recognition ...................................................2990 3.3.4 Capitalisation of borrowing costs .................................................2990 Presentation .............................................................................................2990 3.4.1 Classification of E&E assets ........................................................2990 3.4.2 Reclassification of E&E assets .....................................................2991 Impairment ..............................................................................................2991 3.5.1 Recognition and measurement of impairment ...........................2991 3.5.1.A Impairment testing ‘triggers’........................................2991 3.5.1.B Specifying the level at which E&E assets are assessed for impairment................................................2992 3.5.1.C Cash-generating units comprising successful and unsuccessful E&E projects ...........................................2992 3.5.1.D Order of impairment testing ........................................2993 3.5.2 Reversal of impairment losses ......................................................2993 Disclosure .................................................................................................2994 3.6.1 Statement of cash flows ...............................................................2995 Effective date and transitional provisions ..............................................2996

PRACTICAL ISSUES IN THE EXTRACTIVE INDUSTRIES ...................................2996 4.1 Guidance under national accounting standards .....................................2996 4.1.1 Other standard-setting bodies .....................................................2996 4.2 Unit of account ........................................................................................2997 4.2.1 What is the unit of account? ........................................................2997 4.2.2 Unit of account in the extractive industries ...............................3001 4.3 Investments in the extractive industries................................................3002 4.3.1 Investments in subsidiaries .........................................................3002 4.3.2 Investments in joint ventures ......................................................3003 4.3.2.A Jointly controlled operations ........................................3004 4.3.2.B Jointly controlled assets and undivided interests........3004 4.3.2.C Jointly controlled entities .............................................3006 4.3.2.D Future developments ....................................................3007 4.3.3 Investments in associates.............................................................3011 4.3.4 Investments in financial assets ....................................................3011 4.3.5 Investments in undivided interests.............................................3011 4.3.6 Operators of joint ventures ..........................................................3012 4.3.6.A Reimbursements of costs ..............................................3012 4.3.6.B Direct legal liability ......................................................3012 4.4 Acquisitions ..............................................................................................3013 4.4.1 Business combinations versus asset acquisitions ........................3013 4.4.1.A Definition of a ‘business’ ..............................................3013 4.4.1.B Asset purchase transactions ..........................................3014 4.4.1.C Differences between asset purchase transactions and business combinations ...........................................3015

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Detailed contents – Volume 2

4.5

4.6

4.7

4.8

4.4.1.D Acquisition of an interest in a jointly controlled entity that constitutes a business ................................3015 4.4.2 Business combinations .................................................................3016 4.4.2.A Goodwill in business combinations ..............................3016 4.4.2.B Impairment of assets and goodwill recognised on acquisition .....................................................................3017 4.4.2.C Value beyond proven and probable reserves (VBPP) ..3017 4.4.3 Asset acquisitions .........................................................................3019 4.4.3.A Conditional purchase consideration .............................3019 Depreciation, depletion and amortisation (DD&A)..............................3020 4.5.1 Requirements under IFRS ...........................................................3020 4.5.1.A Property, plant and equipment ....................................3020 4.5.1.B Intangible assets............................................................3020 4.5.1.C Mineral reserves ............................................................3021 4.5.1.D Unit of account..............................................................3021 4.5.1.E Practical issues ..............................................................3022 4.5.2 Straight-line method ....................................................................3022 4.5.3 Unit-of-production method .........................................................3023 4.5.3.A Unit-of-production formula ..........................................3025 4.5.3.B Reserves base ................................................................3027 4.5.3.C Unit of measure .............................................................3031 4.5.3.D Joint and by-products....................................................3032 Impairment of assets ...............................................................................3033 4.6.1 Impairment indicators ..................................................................3033 4.6.2 Future capital expenditure ..........................................................3035 4.6.3 Identifying cash-generating units ................................................3035 4.6.3.A Markets for intermediate products ..............................3035 4.6.3.B External users of processing assets ..............................3036 4.6.3.C Shared infrastructure ....................................................3036 4.6.3.D Fields or mines operated on a portfolio basis ..............3036 4.6.4 Projections of cash flows ..............................................................3037 4.6.5 Mineral reserves and resources ....................................................3038 4.6.6 Risk-adjusted discount rates ........................................................3038 4.6.7 Foreign currency cash flows .........................................................3039 4.6.8 Commodity price assumptions ....................................................3039 Events after the reporting period ...........................................................3041 4.7.1 Reserves proven after the reporting period.................................3041 4.7.2 Application of the acquisition method ........................................3041 4.7.3 Completion of E&E activity after the reporting date ................3042 Decommissioning ....................................................................................3043 4.8.1 Recognition and measurement issues .........................................3043 4.8.1.A Initial recognition..........................................................3043 4.8.1.B Measurement of the liability ........................................3043 4.8.1.C Discount rate .................................................................3044


Detailed contents – Volume 2 4.8.1.D Decommissioning costs incurred in the production phase ..............................................................................3044 4.8.2 Accounting for changes in decommissioning and restoration costs ...............................................................................................3045 4.8.3 Treatment of exchange differences.............................................3047 4.8.4 Deferred tax on decommissioning obligations ............................3047 4.8.5 Indefinite life assets .....................................................................3048 4.9 Revenue recognition ................................................................................3049 4.9.1 Revenue in the development phase: Incidental revenue ...........3049 4.9.2 Revenue in the development phase: Integral to development ..3050 4.9.3 Exchanges of inventories..............................................................3050 4.10 Long-term contracts and leases ..............................................................3051 4.10.1 Embedded leases ..........................................................................3051 4.10.2 Take-or-pay contracts ..................................................................3052 4.10.2.A Makeup product and undertake ...................................3055 4.11 Taxation ...................................................................................................3055 4.11.1 Determining the nature of the taxation ......................................3055 4.11.2 Excise duties, production taxes and severance taxes .................3056 4.11.2.A Production-based taxation ............................................3056 4.11.2.B Petroleum revenue tax (or resource rent tax) .............3057 4.11.3 Grossing up of notional quantities withheld ...............................3059 4.12 Financial instruments ..............................................................................3060 4.12.1 Normal purchase and sales exemption ........................................3060 4.12.1.A Requirements of IAS 32 and IAS 39 ............................3060 4.12.1.B Application of the normal purchase or sale exemption in the extractive industries ........................3061 4.12.2 Embedded derivatives ..................................................................3062 4.12.2.A Separating embedded derivatives ................................3062 4.12.2.B Foreign currency embedded derivatives ......................3063 4.12.2.C Provisionally priced contracts .......................................3063 4.12.2.D Long-term supply contracts .........................................3063 4.12.2.E Development of gas markets ........................................3064 4.12.3 Volume flexibility in supply contracts .........................................3065 5

PRACTICAL ISSUES IN THE OIL AND GAS INDUSTRY ......................................3066 5.1 Legal rights to explore for, develop and produce mineral properties ...3066 5.1.1 Mineral leases and concession agreements .................................3068 5.1.1.A Concessionary agreements (concessions) ....................3069 5.1.2 Production sharing contracts .......................................................3069 5.1.3 Pure-service contracts ..................................................................3072 5.1.4 Risk service contracts ...................................................................3073 5.1.5 Joint operating agreements ..........................................................3074 5.2 Different types of royalty interests .........................................................3074 5.2.1 Working interest and basic royalties ............................................3074 5.2.2 Overriding royalties ......................................................................3074

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Detailed contents – Volume 2

5.3

5.4

5.5

5.6

6

5.2.3 Production payment royalties ......................................................3075 5.2.4 Net profits interests .....................................................................3075 Risk-sharing arrangements ......................................................................3075 5.3.1 Carried interests ...........................................................................3075 5.3.1.A Types of carried interest arrangements .......................3076 5.3.1.B Carried interest arrangements in the E&E phase .......3077 5.3.1.C Financing-type carried interest arrangements in the development phase .......................................................3078 5.3.1.D Purchase/sale-type carried interest arrangements in the development phase.................................................3079 5.3.1.E Government as the carried party ..................................3081 5.3.2 Farm-ins and farm-outs ................................................................3081 5.3.2.A Farm-in arrangements in the E&E phase ....................3081 5.3.2.B Farm-in arrangements outside the E&E phase ...........3082 5.3.3 Asset swaps ...................................................................................3085 5.3.3.A E&E assets ....................................................................3085 5.3.3.B PP&E, intangible assets and investment property .....3086 5.3.3.C Exchanges of E&E assets for other types of assets .....3087 5.3.4 Unitisations and redeterminations ..............................................3087 5.3.4.A Unitisations ...................................................................3087 5.3.4.B Redeterminations ..........................................................3090 Exploration and evaluation costs.............................................................3094 5.4.1 Successful efforts method ............................................................3094 5.4.2 Full cost method...........................................................................3096 5.4.3 Area-of-interest method ...............................................................3098 Capitalisation of costs ..............................................................................3100 5.5.1 Major maintenance and turnarounds ...........................................3100 5.5.2 Well workovers and recompletions ..............................................3101 Revenue recognition ................................................................................3102 5.6.1 Royalties ........................................................................................3102 5.6.2 Overlift and underlift ...................................................................3103 5.6.2.A Sales method .................................................................3103 5.6.2.B Entitlements method ...................................................3104 5.6.2.C Overlift and underlift in practice .................................3105 5.6.2.D Facility imbalances ........................................................3106 5.6.3 Trading activities..........................................................................3106 5.6.4 Inventories ....................................................................................3107 5.6.4.A Pipeline fill and cushion gas .........................................3107 5.6.4.B Carried at fair value .......................................................3109 5.6.4.C Recognition ...................................................................3109

PRACTICAL ISSUES IN THE MINING INDUSTRY ..............................................3110 6.1 Functional currency of mining companies..............................................3110 6.1.1 Determining the functional currency ..........................................3110 6.1.2 Changes in functional currency ...................................................3112


Detailed contents – Volume 2 6.2 Stripping costs and overburden ..............................................................3113 6.2.1 Expensing of production stripping costs as incurred ..................3114 6.2.2 Capitalising production stripping costs as cost of inventory: EITF 04-6 .....................................................................................3115 6.2.3 Deferral of production stripping costs to match future production .....................................................................................3116 6.2.3.A Specific identification approach ...................................3116 6.2.3.B Average strip ratio approach .........................................3116 6.2.4 Presentation of deferred stripping costs .....................................3118 6.3 Revenue recognition ................................................................................3118 6.3.1 Provisionally priced contracts ......................................................3118 6.3.2 The recognition of revenue at the completion of production ....3121 6.4 Impairment of assets ...............................................................................3122 6.4.1 Low mine profitability near end of life .......................................3122 6.4.2 Impairment testing assumptions .................................................3122 6.5 Inventories ...............................................................................................3123 6.5.1 Recognition ...................................................................................3123 6.5.2 Stockpiles of low grade ore ..........................................................3124 6.5.3 Sale of by-products and joint products ........................................3126 6.5.3.A By-products ...................................................................3126 6.5.3.B Joint products ................................................................3127 6.5.4 Heap leaching ...............................................................................3128 6.6 Tolling arrangements...............................................................................3129 6.7 Hedging sales of metal concentrate ........................................................3130 7

GLOSSARY ........................................................................................................3131

CHAPTER 49 1

INSURANCE CONTRACTS

INTRODUCTION ..............................................................................................3145 1.1  The history of the IASB’s insurance project ..........................................3145 1.2 The development of IFRS 4 ...................................................................3146 1.3 Existing accounting practices for insurance contracts ...........................3147 1.3.1  Non-life insurance ........................................................................3147 1.3.2 Life insurance ...............................................................................3148 1.3.3 Embedded value ...........................................................................3148

2  THE OBJECTIVES AND SCOPE OF IFRS 4 ..........................................................3149 2.1  The objectives of IFRS 4.........................................................................3149 2.2 The scope of IFRS 4 ................................................................................3149 2.2.1  Definitions ....................................................................................3149 2.2.2 Transactions within the scope of IFRS 4 ....................................3150 2.2.3 Transactions not within the scope of IFRS 4 .............................3152 2.2.3.A  Product warranties ........................................................3152

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Detailed contents – Volume 2 2.2.3.B Assets and liabilities arising from employment benefit plans ..................................................................3153 2.2.3.C Contingent rights and obligations related to nonfinancial items ...............................................................3153 2.2.3.D Financial guarantee contracts .......................................3153 2.2.3.E Contingent consideration payable or receivable in a business combination ....................................................3154 2.2.3.F Direct insurance contracts in which the entity is the policyholder ............................................................3154 2.2.4  The product classification process ..............................................3155 3  THE DEFINITION OF AN INSURANCE CONTRACT ..........................................3155 3.1  The definition ..........................................................................................3155 3.2 Significant insurance risk ........................................................................3156 3.2.1  The meaning of ‘significant’ ........................................................3157 3.2.2 The level at which significant insurance risk is assessed ...........3158 3.2.2.A  Self insurance ................................................................3159 3.2.2.B Insurance mutuals .........................................................3159 3.2.2.C Intragroup insurance contracts .....................................3159 3.2.3  Significant additional benefits .....................................................3159 3.3  Changes in the level of insurance risk ....................................................3161 3.4 Uncertain future events ..........................................................................3161 3.5 Payments in kind .....................................................................................3162 3.5.1  Service contracts ...........................................................................3162 3.6  The distinction between insurance risk and financial risk ....................3163 3.7 Adverse effect on the policyholder .........................................................3164 3.7.1  Lapse, persistency and expense risk ...........................................3165 3.7.2 Insurance of non-insurance risks .................................................3165 3.8  Accounting differences between insurance and non insurance contracts ...................................................................................................3166 3.9 Examples of insurance and non-insurance contracts .............................3166 3.9.1  Examples of insurance contracts .................................................3166 3.9.2 Examples of transactions that are not insurance contracts ........3169 4  EMBEDDED DERIVATIVES................................................................................3171 4.1  Unit-linked features ................................................................................3175 5  UNBUNDLING OF DEPOSIT COMPONENTS ....................................................3175 5.1  The unbundling requirements ................................................................3176 5.2 Unbundling illustration ...........................................................................3177 5.3 Practical difficulties .................................................................................3179 6  DISCRETIONARY PARTICIPATION FEATURES .................................................3180 6.1  Discretionary participation features in insurance contracts ..................3184 6.2 Discretionary participation features in financial instruments ...............3186


Detailed contents – Volume 2 6.3 Practical issues .........................................................................................3187 6.3.1  Negative DPF ...............................................................................3187 6.3.2 Contracts with switching features ...............................................3188 7  SELECTION OF ACCOUNTING POLICIES .........................................................3188 7.1  The hierarchy exemption ........................................................................3190 7.2 Limits on the hierarchy exemption ........................................................3190 7.2.1 Catastrophe and equalisation provisions .....................................3191 7.2.2 Liability adequacy testing ............................................................3192 7.2.2.A Using a liability adequacy test under existing accounting policies ........................................................3193 7.2.2.B Using the liability adequacy test specified in IFRS 4 ............................................................................3194 7.2.2.C Investment contracts with a discretionary participation feature .....................................................3195 7.2.2.D Interaction between the liability adequacy test and shadow accounting ........................................................3195 7.2.3 Insurance liability derecognition .................................................3196 7.2.4 Offsetting of insurance and related reinsurance contracts.........3197 7.2.5 Impairment of reinsurance assets ................................................3197 7.2.6 Accounting policy matters not addressed by IFRS 4 ..................3199 7.2.6.A Derecognition of insurance and reinsurance assets.....3199 7.2.6.B Impairment of insurance assets ....................................3199 7.2.6.C Gains and losses on buying reinsurance .......................3199 7.2.6.D Acquisition costs ...........................................................3200 7.2.6.E Salvage and subrogation ................................................3201 7.2.6.F Policy loans ....................................................................3202 7.2.6.G Investments held in a fiduciary capacity .....................3202 8

CHANGES IN ACCOUNTING POLICIES ............................................................3202 8.1 Criteria for accounting policy changes ....................................................3203 8.2 Specific issues ..........................................................................................3204 8.2.1 Continuation of existing practices ...............................................3204 8.2.1.A Measuring insurance liabilities on an undiscounted basis ...............................................................................3204 8.2.1.B Measuring contractual rights to future investment management fees in excess of their fair value .............3204 8.2.1.C Introducing non-uniform accounting policies for the insurance contracts of subsidiaries ........................3205 8.2.2 Current market interest rates ......................................................3206 8.2.3 Prudence .......................................................................................3207 8.2.4 Future investment margins..........................................................3208 8.3 Shadow accounting ..................................................................................3210 8.4 Redesignation of financial assets ............................................................3212 8.5 Practical issues .........................................................................................3213 8.5.1 Changes to local GAAP.................................................................3213

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INSURANCE CONTRACTS ACQUIRED IN BUSINESS COMBINATIONS AND PORTFOLIO TRANSFERS ..................................................................................3214 9.1 Expanded presentation of insurance contracts ......................................3214 9.1.1 Practical issues ..............................................................................3216 9.1.1.A The difference between a business combination and a portfolio transfer ..................................................3216 9.1.1.B Fair value of an insurer’s liabilities ...............................3217 9.1.1.C Deferred taxation ..........................................................3217 9.1.1.D Negative intangible assets ............................................3217 9.2 Customer lists and relationships not connected to contractual insurance rights and obligations ..............................................................3217

10 DISCLOSURE ....................................................................................................3218 10.1 Explanation of recognised amounts ........................................................3219 10.1.1 Disclosure of accounting policies ................................................3220 10.1.2 Recognised assets, liabilities, income and expense ....................3223 10.1.2.A Assets and liabilities ......................................................3223 10.1.2.B Income and expense .....................................................3228 10.1.2.C Cash flows ......................................................................3230 10.1.3 Gains or losses on buying reinsurance .........................................3230 10.1.4 Process used to determine significant assumptions ...................3231 10.1.5 The effects of changes in assumptions .......................................3236 10.1.6 Reconciliations of changes in insurance assets and liabilities ....3237 10.2 Nature and extent of risks arising from insurance contracts .................3240 10.2.1 Objectives, policies and processes for managing insurance contract risks .................................................................................3242 10.2.2 Insurance risk – general matters ..................................................3245 10.2.3 Insurance risk – sensitivity information ......................................3249 10.2.4 Insurance risk – concentrations of risk ........................................3252 10.2.5 Insurance risk – claims development information ......................3255 10.2.6 Credit risk, liquidity risk and market risk disclosures ................3259 10.2.6.A Credit risk disclosures...................................................3259 10.2.6.B Liquidity risk disclosures ..............................................3261 10.2.6.C Market risk disclosures .................................................3264 10.2.7 Exposures to market risk from embedded derivatives ...............3265 10.2.8 Other disclosure matters ..............................................................3267 10.2.8.A IAS 1 capital disclosures ...............................................3267 10.2.8.B Financial guarantee contracts .......................................3268 10.2.8.C Fair value disclosures ....................................................3269 10.2.8.D Key performance indicators ..........................................3269 11 FUTURE DEVELOPMENTS IN INSURANCE CONTRACT ACCOUNTING ...........3270 11.1 The Phase II discussion paper ................................................................3270 11.2 The Phase II exposure draft ...................................................................3270 11.3 The future ................................................................................................3273


Abbreviations

 

The following abbreviations are used in this book:

Professional and regulatory bodies: AASB

Australian Accounting Standards Board

AICPA

American Institute of Certified Public Accountants

AOSSG

Asian-Oceanian Standard-Setters Group

APB

Accounting Principles Board (of the AICPA, predecessor of the FASB)

ARC

Accounting Regulatory Committee of representatives of EU Member States

ASB

Accounting Standards Board in the UK

ASBJ

Accounting Standards Board of Japan

CESR

Committee of European Securities Regulators, an independent committee whose members comprise senior representatives from EU securities regulators

CICA

Canadian Institute of Chartered Accountants

EC

European Commission

ECB

European Central Bank

EFRAG

European Financial Reporting Advisory Group

EITF

Emerging Issues Task Force in the US

EU

European Union

FAF

Financial Accounting Foundation

FASB

Financial Accounting Standards Board in the US

FCAG

Financial Crisis Advisory Group

FEE

Federation of European Accountants

G4+1

The (now disbanded) group of four plus 1, actually with six members, that comprised an informal ‘think tank’ of staff from the standard setters from Australia, Canada, New Zealand, UK, and USA, plus the IASC

G20

The Group of Twenty Finance Ministers and Central Bank Governors

HKICPA Hong Kong Institute of Certified Public Accountants ICAI

Institute of Chartered Accountants of India

IASB

International Accounting Standards Board

cxvii


cxviii Abbreviations IASC

International Accounting Standards Committee. The former Board of the IASC was the predecessor of the IASB

IASCF

International Accounting Standards Committee Foundation (predecessor of the IFRS Foundation)

ICAEW

Institute of Chartered Accountants in England and Wales

ICAS

Institute of Chartered Accountants of Scotland

IFRIC

International Financial Reporting Interpretations Committee of the IASB (now simply termed the IFRS Interpretations Committee).

IGC

Implementation Guidance Committee on IAS 39 (now disbanded)

IOSCO

International Organisation of Securities Commissions

JWG

Joint Working Group of Standard-setters that from the IASC, the FASB, and eight other purpose of the (now disbanded) group was to harmonised standard on financial instruments to complete

SAC

Standards Advisory Council, predecessor of the IFRS Advisory Council which provides advice to the IASB on a wide range of issues

SEC

Securities and Exchange Commission (the US securities regulator)

SIC

Standing Interpretations Committee of the IASC (replaced by IFRIC)

TEG

Technical Expert Group, an advisor to the European Commission

comprised representatives international bodies. The develop an integrated and – a task they were unable

Accounting related terms: ADS

American Depositary Shares

AFS

Available-for-sale investment

ARB

Accounting Research Bulletins (issued by the AICPA)

ARS

Accounting Research Studies (issued by the APB)

ASC

Accounting Standards Codification. US GAAP accounting standards are now organised by a comprehensive Accounting Standards Codification scheme, which is now the single source of authoritative US GAAP

CGU

Cash Generating Unit

CIS

Comprehensive Income Statement, as developed by the G4+1 group of accounting standard-setters, and published in June 1999 in the ASB Discussion Paper Reporting Financial Performance: Proposals for Change

CU

Currency Unit

CULS

Convertible Unsecured Loan Stock

DPF

Discretionary Participation Feature

EBIT

Earnings Before Interest and Taxes

EBITDA Earnings Before Interest, Taxes, Depreciation and Amortisation EPS

Earnings per Share


Abbreviations FAS

Financial Accounting Standards (issued by the FASB)

FC

Foreign currency

FIFO

First-In, First-Out basis of valuation

FRS

Financial Reporting Standard (issued by the ASB)

FTA

First-time Adoption

FVLCS

Fair value less costs to sell

GAAP

Generally accepted accounting practice (as it applies under IFRS), or generally accepted accounting principles (as it applies to the US)

HTM

Held-to-maturity investment

IAS

International Accounting Standard (issued by the former board of the IASC)

IBNR

Incurred but not reported claims

IFAC

International Federation of Accountants

IFRS

International Financial Reporting Standard (issued by the IASB)

IPO

Initial Public Offering

IPR&D

In-process Research and Development

IRR

Internal Rate of Return

JV

Joint Venture

LAT

Liability Adequacy Test

LC

Local Currency

LIBOR

London Inter Bank Offered Rate

LIFO

Last-In, First-Out basis of valuation

NBV

Net Book Value

NRV

Net Realisable Value

PP&E

Property, Plant and Equipment

R&D

Research and development

SFAC

Statement of Financial Accounting Concepts (issued by the FASB as part of its conceptual framework project)

SFAS

Statement of Financial Accounting Standards (issued by the FASB)

SPE

Special Purpose Entity

TSR

Total Shareholder Return

VIU

Value In Use

WACC

Weighted Average Cost of Capital

References to IFRSs, IASs, Interpretations and supporting documentation: AG

Application Guidance

cxix


cxx

Abbreviations AV

Alternative View

B, BCZ

Basis for Conclusions on IASs

BC

Basis for Conclusions on IFRSs and IASs

DO

Dissenting Opinion

DP

Discussion Paper

ED

Exposure Draft

IE

Illustrative Examples on IFRSs and IASs

IG

Implementation Guidance

IN

Introduction to IFRSs and IASs


Authoritative literature

 

The content of this book takes into account all accounting standards and other relevant rules issued up to September 2010. Consequently, it covers the IASB’s Framework for the Preparation and Presentation of Financial Statements and authoritative literature listed below. Unless otherwise indicated therein, all references in the main text of each chapter to the extant pronouncements below are to the versions of those pronouncements as approved and included in the Blue Book edition of the Bound Volume 2011 International Financial Reporting Standards IFRS – Consolidated without early application, Official pronouncements applicable on 1 January 2011 published by the IASB (ISBN 978-1-907026-85-0). References to those extant pronouncements below which have an effective date after 1 January 2011 (such as IFRS 9: Financial Instruments) are to the versions of those pronouncements as approved and included in the Red Book edition of the Bound Volume 2010 International Financial Reporting Standards IFRS – Official pronouncements issued as at 1 January 2010 published by the IASB (ISBN 978-1-907026-61-4). Effective 1 July 2009 US GAAP accounting standards that are issued by various standard setters are now organised by a comprehensive Accounting Standards Codification scheme, which is now the single source of authoritative US GAAP. The new codification has been applied in this publication. † The standards and interpretations marked with a dagger have been withdrawn or superseded. IASB Framework Framework for the Preparation and Presentation of Financial Statements International Financial Reporting Standards IFRS 1 IFRS 2 IFRS 3 IFRS 4 IFRS 5 IFRS 6 IFRS 7 IFRS 8 IFRS 9

First-time Adoption of International Financial Reporting Standards Share-based Payment Business Combinations Insurance Contracts Non-current Assets Held for Sale and Discontinued Operations Exploration for and Evaluation of Mineral Resources Financial Instruments: Disclosures Operating Segments Financial Instruments

cxxi


cxxii Authoritative literature International Accounting Standards IAS 1 IAS 2 IAS 7 IAS 8 IAS 10 IAS 11 IAS 12 IAS 16 IAS 17 IAS 18 IAS 19 IAS 20 IAS 21 IAS 23 IAS 24 IAS 26 IAS 27 IAS 28 IAS 29 IAS 31 IAS 32 IAS 33 IAS 34 IAS 36 IAS 37 IAS 38 IAS 39 IAS 40 IAS 41

Presentation of Financial Statements Inventories Statement of Cash Flows Accounting Policies, Changes in Accounting Estimates and Errors Events after the Reporting Period Construction Contracts Income Taxes Property, Plant and Equipment Leases Revenue Employee Benefits Accounting for Government Grants and Disclosure of Government Assistance The Effects of Changes in Foreign Exchange Rates Borrowing Costs Related Party Disclosures Accounting and Reporting by Retirement Benefit Plans Consolidated and Separate Financial Statements Investments in Associates Financial Reporting in Hyperinflationary Economies Interests in Joint Ventures Financial Instruments: Presentation Earnings per Share Interim Financial Reporting Impairment of Assets Provisions, Contingent Liabilities and Contingent Assets Intangible Assets Financial Instruments: Recognition and Measurement Investment Property Agriculture IFRS Interpretations Committee Interpretations

IFRIC 1 IFRIC 2 † IFRIC 3 IFRIC 4 IFRIC 5 IFRIC 6 IFRIC 7 † IFRIC 8

Changes in Existing Decommissioning, Restoration and Similar Liabilities Members’ Shares in Co-operative Entities and Similar Instruments Emission Rights Determining whether an Arrangement contains a Lease Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds Liabilities arising from Participation in a Specific Market – Waste Electrical and Electronic Equipment Applying the Restatement Approach under IAS 29 – Financial Reporting in

Hyperinflationary Economies Scope of IFRS 2


Authoritative literature cxxiii IFRIC 9 IFRIC 10 † IFRIC 11 IFRIC 12 IFRIC 13 IFRIC 14 IFRIC 15 IFRIC 16 IFRIC 17 IFRIC 18 IFRIC 19 SIC-7 SIC-10 SIC-12 SIC-13 SIC-15 SIC-21 SIC-25 SIC-27 SIC-29 SIC-31 SIC-32

Reassessment of Embedded Derivatives Interim Financial Reporting and Impairment IFRS 2 – Group and Treasury Share Transactions Service Concession Arrangements Customer Loyalty Programmes IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction Agreements for the Construction of Real Estate Hedges of a Net Investment in a Foreign Operation Distributions of Non-cash Assets to Owners Transfer of Assets from Customers Extinguishing Financial Liabilities with Equity Instruments Standing Interpretations Committee Interpretations Introduction of the Euro Government Assistance – No Specific Relation to Operating Activities Consolidation – Special Purpose Entities Jointly Controlled Entities – Non-Monetary Contributions by Venturers Operating Leases – Incentives Income Taxes – Recovery of Revalued Non-Depreciable Assets Income Taxes – Changes in the Tax Status of an Entity or its Shareholders Evaluating the Substance of Transactions Involving the Legal Form of a Lease Service Concession Arrangements: Disclosures Revenue – Barter Transactions Involving Advertising Services Intangible Assets – Web Site Costs Other IASB publications Limited Exemption from Comparative IFRS 7 Disclosures for First-time Adopters (Amendments to IFRS 1) Improvements to IFRSs (issued 6 May 2010) The Conceptual Framework for Financial Reporting 2010 International Financial Reporting Standard (IFRS) for Small and Medium-sized Entities (SMEs) IASB Exposure Drafts

ED 9

ED 10 ED/2009/2 ED/2009/3 ED/2009/5 ED/2009/6 ED/2009/8

Joint Arrangements Amendments to IAS 37 Provisions, Contingent Liabilities and Contingent Assets and IAS 19 Employee Benefits Consolidated Financial Statements Income Tax Derecognition (Proposed amendments to IAS 39 and IFRS 7) Fair Value Measurement Management Commentary Rate-regulated Activities


cxxiv Authoritative literature ED/2009/12 ED/2010/1 ED/2010/3 ED/2010/4 ED/2010/5 ED/2010/6 ED/2010/7 ED/2010/8 ED/2010/9 ED/2010/10 ED/2010/11 ED/2010/12

Financial Instruments: Amortised Cost and Impairment Measurement of Liabilities in IAS 37 (proposed amendments to IAS 37) Defined Benefit Plans (Proposed amendment to IAS 19) Fair Value Option for Financial Liabilities Presentation of Other Comprehensive Income (Proposed amendments to IAS 1) Revenue from Contracts with Customers Measurement Uncertainty Analysis Disclosure of Fair Value Measurements (Limited re-exposure of proposed disclosure) Insurance Contracts Leases Removal of Fixed Dates for First-time Adopters (Proposed amendments to IFRS 1) Deferred Tax: Recovery of Underlying Assets (Proposed amendments to IAS 12) Severe Hyperinflation (Proposed amendments to IFRS 1) IFRIC Exposure Drafts

DI/2010/1

Stripping Costs in the Production Phase of a Surface Mine




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International GAAP 2011 Table of Contents