International GAAP 2017 (eBook)

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Cover 1
Title Page 3
Copyright 4
About this book 5
Preface 7
Lists of chapters 11
Volume 1 11
Volume 2 12
Volume 3 13
Abbreviations 15
Authoritative literature 21
Chapter 1 International GAAP 25
1 WHY INTERNATIONAL FINANCIAL REPORTING STANDARDS MATTER 27
2 THE IFRS FOUNDATION AND THE IASB 28
2.1 The standard-setting structure 28
2.2 The IFRS Foundation 28
2.3 The Monitoring Board 30
2.4 The International Accounting Standards Board (IASB) 32
2.5 The IFRS Interpretations Committee (the Interpretations Committee) 33
2.6 The IASB’s and IFRS Interpretations Committee’s Due Process Handbook 34
2.7 The IFRS Advisory Council (the Advisory Council) 35
2.8 Accounting Standards Advisory Forum (ASAF) 36
2.9 Other advisory bodies 36
3 THE IASB’S TECHNICAL AGENDA AND CONVERGENCE WITH US GAAP 37
3.1 The IASB’s current priorities and future agenda 37
3.2 IFRS/US GAAP convergence 38
4 THE ADOPTION OF IFRS AROUND THE WORLD 39
4.1 Worldwide adoption 39
4.2 Europe 42
4.2.1 EU 42
4.2.2 Russia 45
4.3 Americas 46
4.3.1 US 46
4.3.2 Canada 46
4.3.3 Brazil 47
4.4 Asia 47
4.4.1 China 47
4.4.2 Japan 49
4.4.3 India 50
4.5 Australia 51
4.6 Africa – South Africa 52
5 CONSISTENCY IN APPLICATION OF IFRS 52
6 SUMMARY 53
References 54
Chapter 2 The IASB’s Conceptual Framework 57
1 INTRODUCTION 61
1.1 What is a conceptual framework? 62
1.2 Why is a conceptual framework necessary? 62
2 THE IASB’S CONCEPTUAL FRAMEWORK 64
2.1 Development of the IASB’s Conceptual Framework 64
2.2 Contents, purpose and scope of the IASB’s Conceptual Framework 65
2.2.1 Contents of the Conceptual Framework 65
2.2.2 Purpose and scope of the Conceptual Framework 65
2.2.2.A Purpose 65
2.2.2.B Scope 66
2.3 Chapter 1: The objective of general purpose financial reporting 66
2.3.1 Objective, usefulness and limitations of general purpose financial reporting 66
2.3.1.A Objective and usefulness 66
2.3.1.B Limitations 68
2.3.2 Information about economic resources, claims and changes in resources and claims 68
2.3.2.A Economic resources and claims 68
2.3.2.B Changes in economic resources and claims 69
2.4 Chapter 2: The reporting entity 70
2.5 Chapter 3: Qualitative characteristics of useful financial information 70
2.5.1 Fundamental qualitative characteristics 71
2.5.1.A Relevance (including materiality) 71
2.5.1.B Faithful representation 72
2.5.1.C Applying the fundamental qualitative characteristics 73
2.5.2 Enhancing qualitative characteristics 74
2.5.2.A Comparability 74
2.5.2.B Verifiability 74
2.5.2.C Timeliness 75
2.5.2.D Understandability 75
2.5.2.E Applying the enhancing qualitative characteristics 75
2.5.3 The cost constraint 75
2.6 Chapter 4: The Framework (1989): the remaining text 76
2.6.1 Underlying assumption (going concern) 76
2.6.2 The elements of financial statements 76
2.6.2.A Statement of financial position 77
2.6.2.B Assets 78
2.6.2.C Liabilities 79
2.6.2.D Equity 80
2.6.2.E Performance 81
2.6.2.F Income 81
2.6.2.G Expenses 82
2.6.2.H Realisation 82
2.6.2.I Transactions with owners acting in another capacity 83
2.6.2.J Capital maintenance adjustments 83
2.6.3 Recognition of the elements of financial statements 83
2.6.3.A Probability of future economic benefit or outflow 84
2.6.3.B Reliability of measurement 84
2.6.3.C Recognition of assets 84
2.6.3.D Recognition of liabilities 84
2.6.3.E Recognition of income 85
2.6.3.F Recognition of expenses 85
2.6.4 Measurement of the elements of financial statements 85
2.6.5 Concepts of capital and capital maintenance 87
2.6.5.A Financial capital maintenance 87
2.6.5.B Physical capital maintenance 88
2.7 Management commentary 88
3 FUTURE DEVELOPMENTS 89
3.1 Objective of GPFR and qualitative characteristics of useful financial information 90
3.2 Reporting entities 90
3.3 Elements of financial statements 90
3.4 Recognition and derecognition 91
3.4.1 Recognition 91
3.4.2 Existence uncertainty 91
3.4.3 Derecognition 91
3.5 Measurement 92
3.6 Presentation and disclosure 92
3.6.1 Reporting financial performance and other comprehensive income 92
3.7 Transition and effective date 93
3.8 Tentative decisions of the Board regarding the progression of the ED to a revised framework 93
References 94
Chapter 3 Presentation of financial statements and accounting policies 95
1 INTRODUCTION 99
1.1 Objective and scope of IAS 1 99
1.2 Objective and scope of IAS 8 100
2 THE PURPOSE AND COMPOSITION OF FINANCIAL STATEMENTS 101
2.1 The purpose of financial statements 101
2.2 Frequency of reporting and period covered 102
2.3 The components of a complete set of financial statements 102
2.4 Comparative information 104
2.5 Identification of the financial statements and accompanying information 106
2.5.1 Identification of financial statements 106
2.5.2 Statement of compliance with IFRS 106
3 THE STRUCTURE OF FINANCIAL STATEMENTS 107
3.1 The statement of financial position 108
3.1.1 The distinction between current/non-current assets and liabilities 108
3.1.2 Non-current assets and disposal groups held for sale or distribution 109
3.1.3 Current assets 110
3.1.4 Current liabilities 110
3.1.5 Information required on the face of the statement of financial position 113
3.1.6 Information required either on the face of the statement of financial position or in the notes 115
3.1.7 Illustrative statements of financial position 116
3.2 The statement of comprehensive income and the statement of profit or loss 118
3.2.1 Profit and loss and comprehensive income 118
3.2.2 Information required on the face of the statement of profit or loss 120
3.2.2.A Operating profit 120
3.2.3 Classification of expenses recognised in profit or loss by nature or function 121
3.2.3.A Analysis of expenses by nature 121
3.2.3.B Analysis of expenses by function 123
3.2.4 The statement of comprehensive income 124
3.2.4.A The face of the statement of comprehensive income 124
3.2.4.B Reclassification adjustments 126
3.2.4.C Tax on items of other comprehensive income 127
3.2.5 Discontinued operations 129
3.2.6 Material and extraordinary items 129
3.2.6.A Material items 129
3.2.6.B Ordinary activities and extraordinary items 130
3.3 The statement of changes in equity 130
3.4 The notes to the financial statements 133
4 ACCOUNTING POLICIES 134
4.1 General principles 134
4.1.1 Fair presentation 134
4.1.1.A Fair presentation and compliance with IFRS 134
4.1.1.B The fair presentation override 135
4.1.2 Going concern 137
4.1.3 The accrual basis of accounting 137
4.1.4 Consistency 138
4.1.5 Materiality, aggregation and offset 139
4.1.5.A Materiality and aggregation 139
4.1.5.B Offset 140
4.1.6 Profit or loss for the period 141
4.2 The distinction between accounting policies and accounting estimates 142
4.3 The selection and application of accounting policies 142
4.4 Changes in accounting policies 144
4.5 Changes in accounting estimates 146
4.6 Correction of errors 146
4.7 Impracticability of restatement 149
4.7.1 Impracticability of restatement for a change in accounting policy 151
4.7.2 Impracticability of restatement for a material error 152
5 DISCLOSURE REQUIREMENTS 153
5.1 Disclosures relating to accounting policies 153
5.1.1 Disclosure of accounting policies 153
5.1.1.A Summary of significant accounting policies 153
5.1.1.B Judgements made in applying accounting policies 154
5.1.2 Disclosure of changes in accounting policies 154
5.1.2.A Accounting policy changes pursuant to the initial application of anIFRS 154
5.1.2.B Voluntary changes in accounting policy 155
5.1.2.C Future impact of a new IFRS 156
5.2 Disclosure of estimation uncertainty and changes in estimates 156
5.2.1 Sources of estimation uncertainty 156
5.2.2 Changes in accounting estimates 158
5.3 Disclosure of prior period errors 158
5.4 Disclosures about capital 159
5.4.1 General capital disclosures 159
5.4.2 Puttable financial instruments classified as equity 161
5.5 Other disclosures 161
6 FUTURE DEVELOPMENTS 162
6.1 The IASB’s disclosure initiative 162
6.1.1 Standard-setting and related projects 162
6.1.1.A IAS 1 amendments 162
6.1.1.B Reconciliation of liabilities from financing activities 163
6.1.1.C Distinction between a change in an accounting policy and a change inan accounting estimate 163
6.1.1.D Materiality 163
6.1.2 Research projects 163
6.1.2.A Principles of disclosure 163
6.1.2.B Standards-level review of disclosure 164
6.2 The IASB’s Conceptual Framework 164
6.3 Proposed clarifications to the classification of liabilities 164
References 165
Chapter 4 Non-current assets held for sale and discontinued operations 167
1 OBJECTIVE AND SCOPE OF IFRS 5 169
2 NON-CURRENT ASSETS (AND DISPOSAL GROUPS) HELD FOR SALE OR HELD FOR DISTRIBUTION TO OWNERS 170
2.1 Classification of non-current assets (and disposal groups) held for sale or held for distribution to owners 170
2.1.1 The concept of a disposal group 170
2.1.2 Classification as held for sale or as held for distribution to owners 171
2.1.2.A Meaning of available for immediate sale 172
2.1.2.B Meaning of highly probable 173
2.1.2.C Abandonment 176
2.1.3 Partial disposals of operations 176
2.1.3.A Loss of control of a subsidiary 176
2.1.3.B Partial disposal of an associate or joint venture 178
2.2 Measurement of non-current assets (and disposal groups) held for sale 178
2.2.1 Scope of the measurement requirements 178
2.2.2 Measurement of non-current assets and disposal groups held for sale 178
2.2.2.A Measurement on initial classification as held for sale 178
2.2.2.B Subsequent remeasurement 180
2.2.3 Impairments and reversals of impairment 180
2.2.4 Presentation in the statement of financial position of non-current assets and disposal groups held for sale 183
2.2.5 Changes to a plan of sale or to a plan of distribution 185
2.2.5.A Assets (or disposal groups) to be retained by the entity 185
2.2.5.B Change in method of distribution 186
3 DISCONTINUED OPERATIONS 187
3.1 Definition of a discontinued operation 187
3.2 Presentation of discontinued operations 188
3.3 Trading between continuing and discontinued operations 190
4 COMPARATIVE INFORMATION 191
4.1 Treatment of comparative information on initial classification as held for sale 191
4.1.1 The statement of comprehensive income 191
4.1.2 The statement of financial position 192
4.2 Treatment of comparative information on the cessation of classification as held for sale 192
5 DISCLOSURE REQUIREMENTS 193
5.1 Requirements of IFRS 5 193
5.2 Disclosures required by standards other than IFRS 5 194
6 FUTURE DEVELOPMENTS 195
References 196
Chapter 5 First-time adoption 197
1 INTRODUCTION 205
1.1 Objectives of first-time adoption 205
1.2 Authoritative literature 206
1.3 Defined terms 206
1.4 Future developments 207
2 WHO IS A FIRST-TIME ADOPTER? 207
2.1 The first IFRS financial statements in scope of IFRS 1 207
2.2 When should IFRS 1 be applied? 210
2.2.1 Repeat application of IFRS 1 210
2.2.2 Repeat application of the transition requirements of IFRS for SMEs now available 211
2.3 Determining the previous GAAP 211
2.3.1 Transition to IFRSs from a similar GAAP 213
3 OPENING IFRS STATEMENT OF FINANCIAL POSITION 214
3.1 First-time adoption timeline 214
3.2 Opening IFRS statement of financial position and accounting policies 215
3.3 Fair value and deemed cost 217
3.4 Transitional provisions in other standards 218
3.5 Departures from full retrospective application 218
4 EXCEPTIONS TO RETROSPECTIVE APPLICATION OF OTHER IFRSs 220
4.1 Introduction 220
4.2 Estimates 221
4.3 Derecognition of financial assets and financial liabilities 224
4.3.1 First-time adopters applying IAS 39 225
4.4 Hedge accounting: general 225
4.4.1 Applicability of IAS 39 hedge requirements 226
4.4.2 First-time adopters applying IAS 39 226
4.5 Hedge accounting in the opening IFRS statement of financial position 226
4.5.1 Measurement of derivatives and elimination of deferred gains and losses 226
4.5.2 Hedge relationships reflected in the opening IFRS statement of financial position 228
4.5.2.A Prohibition on retrospective designation 229
4.5.2.B Designation in anticipation of adoption of IFRS 229
4.5.3 Reflecting cash flow hedges in the opening IFRS statement of financial position 230
4.5.4 Reflecting fair value hedges in the opening IFRS statement of financial position 231
4.5.5 Reflecting foreign currency net investment hedges in the opening IFRS statement of financial position 231
4.5.6 First-time adopters applying IAS 39 231
4.6 Hedge accounting: subsequent treatment 231
4.6.1 First-time adopters applying IAS 39 232
4.7 Hedge accounting: examples 232
4.8 Non-controlling interests 235
4.9 Classification and measurement of financial instruments under IFRS 9 235
4.10 Impairment of financial instruments 236
4.11 Embedded derivatives 236
4.11.1 Entities applying IAS 39 236
4.11.2 Entities applying IFRS 9 237
4.12 Government loans 237
5 OPTIONAL EXEMPTIONS FROM THE REQUIREMENTS OF CERTAIN IFRSs 238
5.1 Introduction 238
5.2 Business combinations and acquisitions of associates and joint arrangements 238
5.2.1 Definition of a ‘business’ under IFRSs 239
5.2.1.A Asset acquisitions 239
5.2.2 Option to restate business combinations retrospectively 240
5.2.2.A Associates and joint arrangements 242
5.2.3 Classification of business combinations 242
5.2.4 Assets and liabilities to be recognised in the opening IFRS statement of financial position 243
5.2.4.A Assets and liabilities to be excluded 243
5.2.4.B Recognition of assets and liabilities 244
5.2.4.C Previous GAAP carrying amount as deemed cost 245
5.2.4.D In-process research and development 247
5.2.4.E Subsequent measurement under IFRSs not based on cost 247
5.2.4.F Example of recognition and measurement requirements 247
5.2.5 Restatement of goodwill 249
5.2.5.A Prohibition of other adjustments of goodwill 251
5.2.5.B Derecognition of negative goodwill 252
5.2.5.C Goodwill previously deducted from equity 253
5.2.6 Currency adjustments to goodwill 254
5.2.7 Previously unconsolidated subsidiaries 255
5.2.8 Previously consolidated entities that are not subsidiaries 257
5.2.9 Measurement of deferred taxes and non-controlling interests 257
5.2.10 Transition accounting for contingent consideration 258
5.3 Share-based payment transactions 258
5.3.1 Use of previously published fair values 261
5.3.2 Restatement of costs recognised under previous GAAP 261
5.4 Insurance contracts 262
5.5 Deemed cost 262
5.5.1 Fair value or revaluation as deemed cost 263
5.5.1.A Determining deemed cost 265
5.5.1.B Deemed cost determined before the date of transition to IFRSs 266
5.5.1.C Summary 267
5.5.2 Event-driven fair value measurement as deemed cost 268
5.5.2.A ‘Push down’ accounting 269
5.5.2.B ‘Fresh start’ accounting 269
5.5.2.C Exemption for event-driven revaluations after the date of transition 269
5.5.3 Deemed cost for oil and gas assets 270
5.5.4 Deemed cost for assets used in operations subject to rate regulation 272
5.6 Leases 274
5.6.1 IFRIC 4 (Prior to adoption of IFRS 16) 274
5.6.2 Arrangements assessed for lease accounting under previous GAAP (Prior to adoption of IFRS 16) 274
5.6.3 IFRS 16 275
5.7 Cumulative translation differences 276
5.7.1 Gains and losses arising on related hedges 277
5.8 Investments in subsidiaries, joint ventures and associates 278
5.8.1 Consolidated financial statements: subsidiaries and structured entities 278
5.8.2 Separate financial statements: Cost of an investment in a subsidiary, joint venture or associate 279
5.9 Assets and liabilities of subsidiaries, associates and joint ventures 279
5.9.1 Subsidiary becomes a first-time adopter later than its parent 280
5.9.2 Parent becomes a first-time adopter later than its subsidiary 282
5.9.3 Implementation guidance on accounting for assets and liabilities of subsidiaries, associates and joint ventures 283
5.9.4 Adoption of IFRSs on different dates in separate and consolidated financial statements 283
5.9.5 Application to investment entities under IFRS 10 284
5.9.5.A Subsidiary adopts IFRSs after investment entity parent 284
5.9.5.B Non-investment entity parent adopts IFRSs after investment entity subsidiary 285
5.10 Compound financial instruments 285
5.11 Designation of previously recognised financial instruments – Entities applying IAS 39 285
5.11.1 Available-for-sale financial assets 285
5.11.2 Financial asset or financial liability at fair value through profit or loss 286
5.11.3 Implementation guidance on other categories of financial instruments 286
5.11.3.A Held-to-maturity investments 286
5.11.3.B Financial assets or financial liabilities at fair value through profit or loss 286
5.11.3.C Loans and receivables 287
5.11.3.D Financial assets and financial liabilities measured at amortised cost 287
5.11.3.E Available-for-sale financial assets 287
5.11.3.F Derivatives 288
5.11.4 Loan impairments 288
5.12 Designation of previously recognised financial instruments – Entities adopting IFRS 9 288
5.12.1 Designation of financial asset as measured at fair value through profit or loss 288
5.12.2 Designation of financial liability at fair value through profit or loss 288
5.12.3 Designation of investment in equity instruments 289
5.12.4 Determination of an accounting mismatch for presenting a gain or loss on financial liability 289
5.12.5 Designation of contracts to buy or sell a non-financial item 289
5.13 Fair value measurement of financial assets or financial liabilities at initial recognition 289
5.14 Decommissioning liabilities included in the cost of property, plant and equipment 290
5.14.1 IFRIC 1 exemption 290
5.14.2 IFRIC 1 exemption for oil and gas assets at deemed cost 292
5.15 Financial assets or intangible assets accounted for in accordance with IFRIC 12 293
5.16 Borrowing costs 293
5.16.1 Borrowing cost exemption 293
5.16.2 Interaction with other exemptions 294
5.17 Transfers of assets from customers (prior to adoption of IFRS 15) 294
5.18 Extinguishing financial liabilities with equity instruments 295
5.19 Severe hyperinflation 295
5.20 Joint arrangements 296
5.21 Stripping costs in the production phase of a surface mine 296
5.22 Regulatory deferral accounts 296
5.22.1 Continuation of previous GAAP accounting policies 296
5.22.2 Recognition 297
5.22.3 Changes in accounting policies 298
5.22.4 Impairment considerations 298
5.22.5 Presentation and disclosures 299
5.22.5.A Presentation 299
I Presentation of deferred tax balances 299
II Presentation of earnings per share amo 300
III Presentation of discontinued operations and disposal groups 300
5.22.5.B Disclos 300
5.22.6 Interaction with other standards 302
5.22.6.A Application of IAS 10 – Events after the Reporting Period 302
5.22.6.B Application of IAS 12 – Income Taxes 302
5.22.6.C Application of IFRS 3 – Business Combinations 302
5.22.6.D Application of IFRS 10 – Consolidated Financial Statements – andIAS 28 – Investments in Associates and Joint Ventures 303
5.23 IFRS 15 303
– Revenue 303
from Contracts with Customers 303
5.24 Short-term exemptions 304
5.24.1 Short-term exemption from restatement of comparative information for IFRS 9 304
5.24.2 Short-term exemption from comparative IFRS 7 disclosures 305
5.24.3 Short-term exemption from investment entities requirements 305
6 PRESENTATION AND DISCLOSURE 305
6.1 Comparative information 305
6.2 Non-IFRS comparative information and historical summaries 306
6.3 Explanation of transition to IFRSs 306
6.3.1 Disclosure of reconciliations 308
6.3.1.A Reconciliation by a first-time adopter that continues to publishprevious GAAP financial statements 310
6.3.2 Line-by-line reconciliations and detailed explanations 310
6.3.3 Recognition and reversal of impairments 318
6.3.4 Inclusion of IFRS 1 reconciliations by cross reference 319
6.4 Designation of financial instruments 319
6.5 Disclosures regarding deemed cost 320
6.5.1 Use of fair value as deemed cost 320
6.5.2 Use of deemed cost for investments in subsidiaries, joint ventures and associates 320
6.5.3 Use of deemed cost for oil and gas assets 320
6.5.4 Use of deemed cost for assets used in operations subject to rate regulation 321
6.5.5 Use of deemed cost after severe hyperinflation 321
6.6 Interim financial reports 321
6.6.1 Reconciliations in the interim financial reports 321
6.6.2 Disclosures in the interim financial report 323
6.7 Disclosure of IFRS information before adoption of IFRSs 324
7 ACCOUNTING POLICIES AND PRACTICAL APPLICATION ISSUES 326
7.1 IAS 7 326
– Statement of Cash Flows 326
7.2 IAS 8 327
– Accounting Policies, Changes in Accounting Estimates and Errors 327
7.2.1 Changes in IFRS accounting policies during the first IFRS reporting period 327
7.2.2 Changes in estimates and correction of errors 328
7.3 IAS 11 328
– Construction Contracts 328
7.4 IAS 12 329
– Income Taxes 329
7.4.1 Previous revaluation of plant, property and equipment treated as deemed cost on transition 330
7.4.2 Share-based payment transactions subject to transitional provisions of IFRS 1 and IFRS 2 331
7.4.3 Retrospective restatements or applications 331
7.4.4 Defined benefit pension plans 332
7.5 IAS 16 333
– Property, Plant and Equipment 333
– and IAS 40 333
– Investment Property 333
(cost model) 333
7.5.1 Depreciation method and rate 333
7.5.2 Estimates of useful life and residual value 333
7.5.3 Revaluation model 334
7.5.4 Parts approach 334
7.6 IAS 17 335
– Leases 335
7.6.1 Assets held under finance leases 335
7.7 IAS 18 336
– Revenue 336
7.8 IAS 19 338
– Employee Benefits 7.8.1 Sensitivity analysis for each significant actuarial assumption 338
7.8.2 Full actuarial valuations 338
7.8.3 Actuarial assumptions 338
7.8.4 Unrecognised past service costs 339
7.9 IAS 21 339
– The Effects of Changes in Foreign Exchange Rates 7.9.1 Functional currency 339
7.10 IAS 28 340
– Investments in Associates and Joint Ventures 340
7.10.1 Transition impairment review 340
7.11 IAS 29 341
– Financial Reporting in Hyperinflationary Economies 341
7.12 IFRS 11 341
– Joint Arrangements 341
7.13 IAS 36 341
– Impairment of Assets 341
7.14 IAS 37 342
– Provisions, Contingent Liabilities and Contingent Assets 342
7.15 IAS 38 343
– Intangible Assets 343
8 REGULATORY ISSUES 344
8.1 First-time adoption by foreign private issuers that are SEC registrants 344
8.1.1 SEC guidance 344
8.1.2 IPTF guidance 346
8.2 Disclosure of IFRS information in financial statements for periods prior to an entity’s first IFRS reporting period 348
8.2.1 IFRS guidance 348
8.2.2 Disclosure of expected changes in accounting policies 349
References 350
Chapter 6 Consolidated financial statements 351
1 INTRODUCTION 357
1.1 Background 357
1.2 Development of IFRS 10 358
2 EFFECTIVE DATE, OBJECTIVE AND SCOPE OF IFRS 10 359
2.1 Effective date 359
2.2 Objective 360
2.3 Scope 360
2.3.1 Exemption from preparing consolidated financial statements by an intermediate parent 360
2.3.1.A Condition (a) – consent of non-controlling shareholders 361
2.3.1.B Condition (b) – securities not traded in a public market 362
2.3.1.C Condition (c) – not filing financial statements for listing securities 362
2.3.1.D Condition (d) – parent’s IFRS financial statements are publiclyavailable and includes subsidiaries that are consolidated or measuredat fair value through profit or loss in accordance with IFRS 10 363
2.3.2 Employee benefit plans and employee share trusts 364
2.3.3 Investment entity exception 365
2.3.4 Entity no longer a parent at the end of the reporting period 365
2.3.5 Interaction of IFRS 10 and EU law 366
2.3.6 Combined and carve-out financial statements 366
2.3.6.A Common control 367
2.3.6.B Purpose and users of combined financial statements 367
2.3.6.C Preparation of combined financial statements 368
2.3.6.D When combined financial statements are not general-purpose 369
2.3.6.E The reporting entity in combined financial statements and inconsolidated financial statements 370
3 CONTROL 371
3.1 Assessing control 371
3.2 Purpose and design of an investee 373
4 POWER OVER AN INVESTEE 374
4.1 Relevant activities 374
4.1.1 More than one relevant activity 375
4.1.2 No relevant activities 377
4.1.3 Single asset, single lessee vehicles 378
4.1.4 Management of assets in the event of default 379
4.2 Existing rights 379
4.2.1 Evaluating whether rights are substantive 380
4.2.2 Evaluating whether rights are protective 382
4.2.2.A Veto rights 383
4.2.2.B Franchises 383
4.2.2.C Budget approval rights 385
4.2.2.D Independent directors 385
4.2.3 Incentives to obtain power 386
4.3 Voting rights 386
4.3.1 Power with a majority of the voting rights 387
4.3.2 A majority of voting rights without power 387
4.3.2.A Evaluating voting rights during bankruptcy 387
4.3.3 Power without a majority of voting rights (de facto control) 388
4.3.4 Potential voting rights 393
4.3.4.A Exercise price or conversion price 395
4.3.4.B Financial ability 396
4.3.4.C Exercise period 397
4.3.5 Contractual arrangement with other vote holders 398
4.3.6 Additional rights from other contractual arrangements 398
4.4 Contractual arrangements 399
4.4.1 Structured entities 400
4.5 Other evidence of power 401
4.6 Determining whether sponsoring (designing) a structured entity gives power 403
5 EXPOSURE TO VARIABLE RETURNS 404
5.1 Exposure to variable returns can be an indicator of power 405
5.2 Returns that appear fixed can be variable 405
5.3 Evaluating whether derivatives provide an exposure to variable returns 405
5.3.1 Plain vanilla foreign exchange swaps and interest rate swaps 407
5.3.2 Total return swaps 409
5.4 Exposures to variable returns not directly received from an investee 409
5.5 Exposure to variable returns in bankruptcy filings 409
5.6 Interaction of IFRS 10 with the derecognition requirements in IAS 39 (or IFRS 9) 410
5.7 Reputational risk 410
6 LINK BETWEEN POWER AND RETURNS: PRINCIPAL-AGENCY SITUATIONS 411
6.1 Delegated power: principals and agents 412
6.2 Scope of decision-making 413
6.2.1 Involvement in design 413
6.2.2 Assessing whether the scope of powers is narrow or broad 414
6.3 Rights held by other parties 414
6.3.1 Evaluating whether a removal right is substantive 416
6.3.2 Liquidation rights and redemption rights 417
6.4 Remuneration 417
6.4.1 Evaluating remuneration in the asset management industry 418
6.4.2 Evaluating remuneration in other industries 418
6.5 Exposure to variability of returns from other interests 419
6.5.1 Evaluating returns received via an indirect investment in another entity 420
6.6 Application examples in IFRS 10 422
6.7 Other illustrative examples 426
7 RELATED PARTIES AND 427
AGENTS 427
7.1 Customer-supplier relationships 428
8 CONTROL OF SPECIFIED ASSETS 429
8.1 Identifying a silo 430
8.1.1 Identifying silos in the insurance industry 430
8.1.2 Identifying silos in the investment funds industry 431
8.2 Evaluating control of a silo 431
8.3 Consolidation of a silo 432
9 CONTINUOUS ASSESSMENT 432
9.1 Changes in market conditions 433
9.2 Bankruptcy filings and troubled debt restructurings 435
9.3 Control reassessment as a result of action by others 436
10 INVESTMENT ENTITIES 437
10.1 Definition of an investment entity 438
10.2 Determining whether an entity is an investment entity 438
10.2.1 Business purpose 439
10.2.1.A Entities that provide investment-related services 439
10.2.1.B Entities that are intermediate holding companies established for taxoptimisation purposes 441
10.2.2 Exit strategies 441
10.2.3 Earnings from investments 442
10.2.4 Fair value measurement 443
10.2.5 Holding more than one investment 444
10.2.6 Having more than one investor 444
10.2.7 Unrelated investors 445
10.2.8 Ownership interests 446
10.2.9 Investment entity illustrative examples 446
10.2.10 Multi-layered fund structures 449
10.3 Accounting by an investment entity 450
10.3.1 Accounting for a change in investment entity status 452
10.3.1.A Becoming an investment entity 452
10.3.1.B Ceasing to be an investment entity 453
10.4 Accounting by a parent of an investment entity 453
11 CONSOLIDATION PROCEDURES 454
11.1 Non-controlling interests when there is a 455
de facto 455
agent 455
12 DISCLOSURE REQUIREMENTS 455
13 TRANSITIONAL ARRANGEMENTS 456
13.1 Transitional arrangements on adoption of IFRS 10 456
13.2 Transitional arrangements in respect of the December 2014 amendments 456
14 FUTURE DEVELOPMENTS 456
References 458
Chapter 7 Consolidation procedures and non-controlling interests 459
1 INTRODUCTION 463
2 CONSOLIDATION PROCEDURES 464
2.1 Basic principles 464
2.2 Proportion consolidated 465
2.3 Consolidating foreign operations 466
2.4 Intragroup eliminations 467
2.5 Non-coterminous accounting periods 468
2.6 Consistent accounting policies 468
3 CHANGES IN OWNERSHIP INTERESTS 469
3.1 Commencement of consolidation 469
3.1.1 Acquisition of a subsidiary that is not a business 469
3.2 Accounting for a loss of control 470
3.2.1 Interest retained in the former subsidiary 471
3.2.1.A Interest retained in the former subsidiary – financial asset 471
3.2.1.B Interest retained in the former subsidiary – associate or joint venture 472
3.2.1.C Interest retained in the former subsidiary – joint operation 473
3.2.2 Loss of control in multiple arrangements 475
3.2.3 Other comprehensive income 477
3.2.4 Deemed disposal 480
3.2.5 Presentation of comparative information for a former subsidiary that becomes an equity-accounted investee 481
3.2.6 Subsidiary that is a single-asset entity 481
3.3 Changes in ownership interest without a loss of control 483
3.3.1 Reattribution of other comprehensive income 484
3.3.2 Goodwill attributable to non-controlling interests 485
3.3.3 Non-cash acquisition of non-controlling interests 487
3.3.4 Transaction costs 488
3.4 Demergers and distributions of non-cash assets to owners 488
3.4.1 Scope of IFRIC 17 489
3.4.2 Recognition and measurement in IFRIC 17 489
3.4.3 Presentation and disclosure 490
4 NON-CONTROLLING INTERESTS 491
4.1 The definition of non-controlling interest 491
4.2 Initial measurement of non-controlling interests in a business combination 491
4.3 Presentation of non-controlling interests 494
4.4 Non-controlling interests classified as financial liabilities 495
4.5 Subsequent measurement of non-controlling interests 495
4.5.1 Loss-making subsidiaries 496
5 CALL AND PUT OPTIONS OVER NON-CONTROLLING INTERESTS 497
5.1 Call options only 497
5.1.1 Options giving the acquirer present access to returns associated with that ownership interest 497
5.1.2 Options not giving the acquirer present access to returns associated with that ownership interest 498
5.2 Put options only 499
5.2.1 The financial liability for the NCI put 500
5.2.2 The NCI put provides a present ownership interest 501
5.2.3 The NCI put does not provide a present ownership interest 502
5.2.3.A Non-controlling interest is not recognised – financial liability recognised 502
5.2.3.B Full recognition of non-controlling interest 503
5.2.3.C Partial recognition of non-controlling interest 504
5.2.3.D Non-controlling interest is subsequently derecognised 504
5.2.4 Assessing whether multiple transactions should be accounted for as a single arrangement 505
5.2.4.A Identifying a linked transaction 506
5.2.4.B Accounting for the linked transaction 506
5.3 Combination of call and put options 508
5.4 Call and put options entered into in relation to existing non-controlling interests 508
5.5 Put options over non-controlling interests – Interpretations Committee and IASB developments 508
6 FUTURE DEVELOPMENTS 510
6.1 Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (Amendments to IFRS 10 and IAS 28) 510
6.2 Fair value measurement: unit of account 512
6.3 Put options written on non-controlling interests 512
6.4 Mandatory purchase of non-controlling interests 513
References 513
Chapter 8 Separate and individual financial statements 515
1 SEPARATE AND INDIVIDUAL FINANCIAL STATEMENTS 519
1.1 Consolidated financial statements and separate financial statements 520
1.1.1 Separate financial statements and interests in associates and joint ventures 522
1.1.2 Separate financial statements and interests in joint operation 523
1.1.3 Publishing separate financial statements without consolidated financial statements or financial statements in which invest 524
1.2 Entities incorporated in the EU and consolidated and separate financial statements 525
2 REQUIREMENTS OF SEPARATE FINANCIAL STATEMENTS 526
2.1 Cost method 527
2.1.1 Cost of investment 527
2.1.1.A Investments acquired for own shares or other equity instruments 529
2.1.1.B Investments acquired in common control transactions 529
2.1.1.C Cost of investment in subsidiary, associate or joint venture acquired instages 531
2.1.1.D Formation of a new parent 533
2.1.2 Deemed cost on transition to IFRS 536
2.2 IAS 39 method 537
2.3 Equity method 538
2.3.1 First-time adoption of IFRS 539
2.4 Dividends and other distributions 539
2.4.1 Dividends from subsidiaries, joint ventures or associates 539
2.4.1.A The dividend exceeds the total comprehensive income 540
2.4.1.B The carrying amount exceeds the consolidated net assets 541
2.4.1.C Returns of capital 541
2.4.2 Distributions of non-cash assets to owners (IFRIC 17) 542
2.4.2.A Scope 542
2.4.2.B Recognition, measurement and presentation 543
3 DISCLOSURE 545
3.1 Separate financial statements prepared by parent electing not to prepare consolidated financial statements 545
3.2 Separate financial statements prepared by an investment entity 547
3.3 Separate financial statements prepared by an entity other than a parentelecting not to prepare consolidated financial statements 547
3.3.1 Entities with no subsidiaries but exempt from applying IAS 28 548
4 COMMON CONTROL OR GROUP TRANSACTIONS IN INDIVIDUAL FINANCIAL STATEMENTS 548
4.1 Introduction 548
4.2 Recognition 551
4.3 Measurement 552
4.3.1 Fair value in intra-group transactions 552
4.4 Application of the principles in practice 553
4.4.1 Transactions involving non-monetary assets 553
4.4.1.A Sale of PP& E from the parent to the subsidiary for an amount of cashnot representative of the fair value of the asset.
4.4.1.B The parent exchanges PP& E for a non-monetary asset of thesubsidiary.
4.4.1.C Acquisition and sale of assets for shares 557
4.4.1.D Contribution and distribution of assets 559
4.4.1.E Transfers between subsidiaries 559
4.4.2 Acquiring and selling businesses – transfers between subsidiaries 560
4.4.2.A Has a business been acquired? 561
4.4.2.B If a business has been acquired, how should it be accounted for? 561
4.4.2.C Purchase and sale of a business for equity or cash not representativeof the fair value of the business 561
4.4.2.D If the net assets are not a business, how should the transactions beaccounted for? 562
4.4.3 Transfers of businesses between parent and subsidiary 562
4.4.3.A Distributions of businesses without consideration – subsidiarytransferring business to the parent. 563
4.4.3.B Legal merger of parent and subsid 565
4.4.4 Incurring expenses and settling liabilities without recharges 569
4.4.5 Financial instruments within the scope of IAS 39 569
4.4.5.A Interest-free or non-market interest rate loans 570
4.4.5.B Financial guarantee contracts: parent guarantee issued on behalf ofsubsidiary 572
4.5 Disclosures 573
References 573
Chapter 9 Business combinations 575
1 INTRODUCTION 581
1.1 IFRS 3 (as revised in 2008) and subsequent amendments 582
1.1.1 Post-implementation review 583
1.1.2 Proposed amendments to IFRS 3 585
2 SCOPE OF IFRS 3 585
2.1 Mutual entities 585
2.2 Arrangements out of scope of IFRS 3 586
2.2.1 Formation of a joint arrangement 586
2.2.2 Acquisition of an asset or a group of assets that does not constitute a business 586
2.2.3 Business combinations under common control 587
2.3 Acquisition by an investment entity 587
3 IDENTIFYING A BUSINESS COMBINATION 588
3.1 Identifying a business combination 588
3.2 Definition of a business 588
3.2.1 Inputs, processes and outputs 589
3.2.2 ‘Capable of’ from the viewpoint of a market participant 589
3.2.3 Identifying business combinations 590
3.2.4 Development stage entities 592
3.2.5 Presence of goodwill 593
3.2.6 Proposed clarifications to the definition of a business 593
4 ACQUISITION METHOD OF ACCOUNTING 595
4.1 Identifying the acquirer 595
4.1.1 New entity formed to effect a business combination 596
4.1.2 Stapling arrangements 599
4.2 Determining the acquisition date 599
5 RECOGNITION AND MEASUREMENT OF ASSETS ACQUIRED, LIABILITIES ASSUMED AND NON-CONTROLLING INTERESTS 600
5.1 General principles 600
5.2 Recognising identifiable assets acquired and liabilities assumed 600
5.3 Acquisition-date fair values of identifiable assets acquired and liabilities assumed 601
5.4 Classifying or designating identifiable assets acquired and liabilities assumed 602
5.5 Recognising and measuring particular assets acquired and liabilities assumed 604
5.5.1 Operating leases 604
5.5.2 Intangible assets 605
5.5.2.A Examples of identifiable intangible assets 607
5.5.2.B Customer relationship intangible assets 609
5.5.2.C Combining an intangible asset with a related contract, identifiableasset or liability 611
5.5.2.D In-process research or development project expenditure 612
5.5.2.E Emission rights 613
5.5.2.F Determining the fair values of intangible assets 614
5.5.3 Reacquired rights 617
5.5.4 Assembled workforce and other items that are not identifiable 617
5.5.4.A Assembled workforce 617
5.5.4.B Items not qualifying as assets 618
5.5.5 Assets with uncertain cash flows (valuation allowances) 618
5.5.6 Assets that the acquirer does not intend to use or intends to use in a way that is different from other market participant 619
5.5.7 Investments in equity-accounted entities 619
5.5.8 Deferred revenue 620
5.6 Exceptions to the recognition and/or measurement principles 621
5.6.1 Contingent liabilities 621
5.6.1.A Initial recognition and measurement 621
5.6.1.B Subsequent measurement and accounting 622
5.6.2 Income taxes 622
5.6.3 Employee benefits 623
5.6.4 Indemnification assets 623
5.6.5 Reacquired rights 624
5.6.6 Assets held for sale 624
5.6.7 Share-based payment transactions 625
5.6.8 Leases in which the acquiree is the lessee (IFRS 16) 625
6 RECOGNISING AND MEASURING GOODWILL OR A GAIN IN A BARGAIN PURCHASE 626
6.1 Subsequent accounting for goodwill 627
7 CONSIDERATION TRANSFERRED 627
7.1 Contingent consideration 628
7.1.1 Initial recognition and measurement 629
7.1.1.A Estimating an appropriate discount rate 631
7.1.2 Classification of a contingent consideration obligation 633
7.1.3 Subsequent measurement and accounting 635
7.2 Replacement share-based payment awards 635
7.3 Acquisition-related costs 636
7.4 Business combinations achieved without the transfer of consideration 636
7.4.1 Business combinations by contract alone 637
7.5 Combinations involving mutual entities 638
8 RECOGNISING AND MEASURING NON-CONTROLLING INTERESTS 638
8.1 Measuring qualifying non-controlling interests at acquisition-date fair value 640
8.2 Measuring qualifying non-controlling interests at the proportionate share of the value of net identifiable assets acquired 640
8.3 Implications of method chosen for measuring non-controlling interests 640
8.4 Measuring share-based payment and other components of noncontrolling interests 643
8.5 Call and put options over non-controlling interests 644
9 BUSINESS COMBINATIONS ACHIEVED IN STAGES (‘STEP ACQUISITIONS’) 645
9.1 Proposed clarifications to accounting for previously held interests in a joint operation 651
10 BARGAIN PURCHASE TRANSACTIONS 652
11 ASSESSING WHAT IS PART OF THE EXCHANGE FOR THE ACQUIREE 654
11.1 Effective settlement of pre-existing relationships 656
11.2 Remuneration for future services of employees or former owners of the acquiree 659
11.2.1 Arrangements for contingent payments to employees or selling shareholders 659
11.2.2 Share-based payment awards exchanged for awards held by the acquiree’s employees 662
11.3 Reimbursement for paying the acquirer’s acquisition-related costs 663
11.4 Restructuring plans 663
12 MEASUREMENT PERIOD 664
12.1 Adjustments made during measurement period to provisional amounts 665
12.2 Adjustments made after end of measurement period 667
13 SUBSEQUENT MEASUREMENT AND ACCOUNTING 668
14 REVERSE ACQUISITIONS 668
14.1 Measuring the consideration transferred 669
14.2 Measuring goodwill 671
14.3 Preparation and presentation of consolidated financial statements 671
14.4 Non-controlling interest 674
14.5 Earnings per share 676
14.6 Cash consideration 677
14.7 Share-based payments 678
14.8 Reverse acquisitions involving a non-trading shell company 679
14.9 Reverse acquisitions and acquirers that are not legal entities 681
15 PUSH DOWN ACCOUNTING 681
16 DISCLOSURES 682
16.1 Nature and financial effect of business combinations 682
16.1.1 Business combinations during the current reporting period 683
16.1.2 Business combinations effected after the end of the reporting period 685
16.2 Financial effects of adjustments recognised in the current reporting period 685
16.3 Other necessary information 687
16.4 Illustrative disclosures 687
References 690
Chapter 10 Common control business combinations 691
1 INTRODUCTION 693
1.1 Background 693
1.2 Development of the IFRS 3 exemption for business combinations involving entities or businesses under common control 694
1.3 Possible future developments: IASB project on business combinations under common control 694
1.4 Scope of this chapter 697
2 THE IFRS 3 EXEMPTION 698
2.1 Common control exemption 698
2.1.1 Common control by an individual or group of individuals 698
2.1.2 Transitory control 701
3 ACCOUNTING FOR BUSINESS COMBINATIONS INVOLVING ENTITIES OR BUSINESSES UNDER COMMON CONTROL 703
3.1 Pooling of interests method or acquisition method 703
3.2 Application of the acquisition method under IFRS 3 707
3.3 Application of the pooling of interests method 709
3.3.1 General requirements 709
3.3.2 Carrying amounts of assets and liabilities 710
3.3.3 Restatement of financial information for periods prior to the date of the combination 712
3.3.4 Acquisition of a non-controlling interest as part of a common control business combination 716
4 GROUP REORGANISATIONS 718
4.1 Introduction 718
4.2 Setting up a new top holding company 720
4.2.1 Setting up a new top holding company in exchange for equity 720
4.2.2 Setting up a new top holding company: transactions including cash consideration 722
4.3 Inserting a new intermediate parent within an existing group 723
4.4 Transferring businesses outside an existing group using a Newco 724
4.5 Transferring associates/joint ventures within an existing group 726
References 729
Chapter 11 Investments in associates and joint ventures 731
1 INTRODUCTION 735
2 OBJECTIVE AND SCOPE OF IAS 28 735
2.1 Objective 735
2.2 Scope 736
3 DEFINITIONS 736
4 SIGNIFICANT INFLUENCE 736
4.1 Lack of significant influence 737
4.2 Holdings of less than 20% of the voting power 738
4.3 Potential voting rights 738
4.4 Voting rights held in a fiduciary capacity 739
5 EXEMPTIONS FROM APPLYING THE EQUITY METHOD 739
5.1 Parents exempt from preparing consolidated financial statements 739
5.2 Subsidiaries meeting certain criteria 740
5.3 Investments held in associates or joint ventures held by venture capital organisations and similar organisations 741
5.3.1 Investment entities exception 741
5.3.2 Application of IFRS 9 (or IAS 39) to exempt investments in associates or joint ventures 742
5.3.2.A Entities with a mix of activities 742
5.3.2.B Designation of investments as ‘at fair value through profit or loss’ 743
5.4 Partial use of fair value measurement of associates 743
6 CLASSIFICATION AS HELD FOR SALE (IFRS 5) 745
7 APPLICATION OF THE EQUITY METHOD 746
7.1 Overview 746
7.2 Comparison between equity accounting and consolidation 748
7.3 Date of commencement of equity accounting 749
7.4 Initial carrying amount of an associate or joint venture 749
7.4.1 Initial carrying amount of an associate or joint venture following loss of control of an entity 750
7.4.2 Piecemeal acquisition of an associate or joint venture 752
7.4.2.A Financial instrument becoming an associate or joint venture 752
7.4.2.B Step increase in an existing associate or joint venture without a changein status of the investee 757
7.4.2.C Existing associate that becomes a joint venture, or vice versa 759
7.5 Share of the investee 760
7.5.1 Accounting for potential voting rights 760
7.5.2 Cumulative preference shares held by parties other than the investor 760
7.5.3 Several classes of equity 761
7.5.4 Where the reporting entity is a group 761
7.5.5 Where the investee is a group: non-controlling interests in an associate or joint venture’s consolidated financial stateme 762
7.6 Transactions between the reporting entity and its associates or joint ventures 763
7.6.1 Elimination of ‘upstream’ and ‘downstream’ transactions 763
7.6.1.A Elimination of ‘downstream’ unrealised profits in excess of theinvestment 767
7.6.1.B Transactions between associates and/or joint ventures 769
7.6.2 Reciprocal interests 769
7.6.2.A Reciprocal interests in reporting entity accounted for under the equitymethod by the associate 769
7.6.2.B Reciprocal interests in reporting entity not accounted for under theequity method by the associate 771
7.6.3 Loans and borrowings between the reporting entity and its associates or joint ventures 772
7.6.4 Statement of cash flows 773
7.6.5 Contributions of non-monetary assets to an associate or a joint venture 773
7.6.5.A ‘Commercial substance’ 774
7.6.5.B Contributions of non-monetary assets – practical application 775
I ‘Artificial’ transactions 777
II Accounting for the acquisition of a business on formation of a joint venture 778
7.6.5.C Conflict between IAS 28 and IFRS 10 779
7.7 Non-coterminous accounting periods 781
7.8 Consistent accounting policies 782
7.9 Loss-making associates or joint ventures 782
7.10 Distributions received in excess of the carrying amount 783
7.11 Equity transactions in an associate’s or joint venture’s financial statements 784
7.11.1 Dividends or other forms of distributions 784
7.11.2 Issues of equity instruments 784
7.11.3 Equity-settled share-based payment transactions 785
7.11.4 Effects of changes in parent/non-controlling interests in subsidiaries 788
7.12 Discontinuing the use of the equity method 791
7.12.1 Investment in associate or joint venture becoming a subsidiary 791
7.12.2 Retained investment in the former associate or joint venture is a financial asset 792
7.12.3 Investment in associate becomes a joint venture (or vice versa) 793
7.12.4 Partial disposals of interests in associate or joint venture where the equity method continues to be applied 793
7.12.5 Deemed disposals 794
8 IMPAIRMENT LOSSES 796
8.1 General 796
8.2 Goodwill 798
8.3 Allocation and reversal of impairment 800
9 SEPARATE FINANCIAL STATEMENTS 800
9.1 Impairment of investments in associates or joint ventures in separate financial statements 801
10 PRESENTATION AND DISCLOSURES 801
10.1 Presentation 801
10.1.1 Statement of financial position 801
10.1.2 Profit or loss 802
10.1.3 Other items of comprehensive income 803
10.1.4 Statement of cash flows 804
10.2 Disclosures 804
11 FUTURE DEVELOPMENTS 804
References 805
Chapter 12 Joint arrangements 807
1 INTRODUCTION 811
1.1 The nature of joint arrangements 811
1.2 Development of IFRS 11 812
1.3 Future developments 813
1.3.1 Research programme on equity method of accounting 813
1.3.2 Fair value measurement: unit of account 813
1.3.3 Remeasurement of previously held interests 813
1.3.4 2015 agenda consultation 814
2 EFFECTIVE DATE, OBJECTIVE AND SCOPE OF IFRS 11 814
2.1 Effective date 814
2.2 Objective 815
2.3 Scope 815
2.3.1 Application by venture capital organisations and similar entities 815
2.3.2 Application to joint arrangements held for sale 815
3 JOINT ARRANGEMENT 816
3.1 Unit of account 816
4 JOINT CONTROL 818
4.1 Assessing control 819
4.1.1 Sequential activities 819
4.2 Rights to control collectively 820
4.2.1 Protective rights, including some veto rights 820
4.2.2 Potential voting rights and joint control 821
4.2.3 Other evidence of joint control 822
4.2.4 Delegated decision-making 822
4.2.5 Related parties and de facto agents 823
4.2.6 Role of a government 823
4.3 Unanimous consent 823
4.3.1 Arrangements involving parties that participate in a joint arrangement but who do not have joint control 824
4.3.2 Ultimate voting authority 825
4.3.3 Arbitration 825
4.3.4 Statutory mechanisms 825
4.4 Other practical issues with assessing joint control 826
4.4.1 Undivided share, lease or a joint arrangement 826
4.4.2 Evaluate multiple agreements together 826
5 CLASSIFICATION OF A JOINT ARRANGEMENT: JOINT OPERATIONS AND JOINT VENTURES 827
5.1 Separate vehicle or not 829
5.2 Legal form of the separate vehicle 830
5.3 Contractual terms 831
5.3.1 Guarantees 832
5.3.2 Contractual terms upon liquidation or dissolution of joint arrangement 833
5.4 Other facts and circumstances 834
5.4.1 Facts and circumstances indicating rights to assets 834
5.4.1.A Output not taken in proportion to ownership 835
5.4.1.B Consideration of derecognition requirements for financial instruments 835
5.4.2 Facts and circumstances indicating obligations for liabilities 836
5.4.2.A Assessing the obligation related to cash calls or capital contributions 836
5.4.3 Interpretations Committee agenda decisions 837
5.4.3.A How and why particular facts and circumstances create rights andobligations 838
5.4.3.B Implication of ‘economic substance’ 839
5.4.3.C Application of ‘other facts and circumstances’ to specific fact patterns 840
5.4.4 Comprehensive example illustrating evaluation of facts and circumstances 840
5.5 Illustrative examples accompanying IFRS 11 841
6 ACCOUNTING FOR JOINT OPERATIONS 847
6.1 Joint arrangements not structured through a separate vehicle 847
6.2 Difference from proportionate consolidation 848
6.3 Determining the relevant IFRS 849
6.4 Parties that participate in a joint arrangement but do not have joint control 850
6.5 Joint operations with a party that participates in a joint arrangement but does not have joint control 850
6.6 Transactions between a joint operator and a joint operation 851
6.7 Accounting for a joint operation in separate financial statements 851
7 ACCOUNTING FOR JOINT VENTURES 852
7.1 Interest in a joint venture without joint control 853
7.2 Contributions of non-monetary assets to a joint venture 853
7.3 Accounting for a joint venture in separate financial statements 853
8 CONTINUOUS ASSESSMENT 854
8.1 When to reassess under IFRS 11 854
8.1.1 Changes in ownership 855
8.2 Changes in ownership of a joint venture that constitute a business 857
8.2.1 Acquisition of an interest in a joint venture 857
8.2.2 Gaining control over a former joint venture 857
8.2.3 Former subsidiary becomes a joint venture 857
8.2.3.A Conflict between IAS 28 and IFRS 10 857
8.2.4 Joint venture becomes an associate (or vice versa) 858
8.2.5 Joint venture becomes a financial asset (or vice versa) 858
8.2.6 Disposal of an interest in a joint venture 859
8.2.7 Interest in a joint venture held for sale 859
8.3 Changes in ownership of a joint operation that is a business 860
8.3.1 Acquisition of an interest in a joint operation 860
8.3.1.A Scope of IFRS 3 860
8.3.1.B Amendment to IFRS 11 860
8.3.2 Control over a former joint operation 861
8.3.3 Former subsidiary becomes a joint operation 861
8.3.4 Other changes in ownership of a joint operation 862
8.3.5 Disposal of interest in a joint operation 863
8.4 Changes in ownership of a joint arrangement that does not constitute a business 863
8.4.1 Joint operator obtains control or parties that participate in a jointarrangement but do not have joint control obtain joint control 863
8.4.2 Single-asset subsidiary becomes joint venture or joint operation 864
9 DISCLOSURES 864
References 864
Chapter 13 Disclosure of interests in other entities 865
1 INTRODUCTION 869
1.1 The development of IFRS 12 869
2 OBJECTIVE, SCOPE AND EFFECTIVE DATE OF IFRS 12 870
2.1 Objective 870
2.2 Scope 871
2.2.1 Definitions 871
2.2.1.A Interests in other entities 871
2.2.1.B Structured entities 873
2.2.1.C Interaction of IFRS 12 and IFRS 5 875
2.2.2 Interests disclosed under IFRS 12 876
2.2.2.A Subsidiaries 877
2.2.2.B Joint arrangements 877
2.2.2.C Associates 877
2.2.2.D Unconsolidated structured entities 877
2.2.3 Interests not within the scope of IFRS 12 878
2.2.3.A Employee benefit plans 878
2.2.3.B Separate financial statements 878
2.2.3.C Interests in joint arrangements that result in neither joint control norsignificant influence and are not interests in structured entities 879
2.2.3.D Interests in other entities accounted for in accordance with IAS 39 orIFRS 9 879
2.3 Effective date 879
3 DISCLOSURE OF SIGNIFICANT ESTIMATES AND JUDGEMENTS 880
4 DISCLOSURE OF INTERESTS IN SUBSIDIARIES 883
4.1 Disclosure about the composition of the group 883
4.2 Disclosure of interests of non-controlling interests 885
4.3 Disclosure of the nature and extent of significant restrictions 888
4.4 Disclosure of risks associated with interests in consolidated structured entities 889
4.4.1 Terms of contractual arrangements to provide financial support to consolidated structured entities 890
4.4.2 Financial or other support to consolidated structured entities with no contractual obligation 890
4.4.3 Financial or other support to unconsolidated structured entities which resulted in consolidation of those entities 892
4.4.4 Current intentions to provide financial or other support 892
4.5 Disclosure of changes in ownership interests in subsidiaries 892
4.5.1 Changes that do not result in loss of control 892
4.5.2 Changes that do result in loss of control 893
4.6 Disclosures required by investment entities 893
4.6.1 Disclosures about the composition of the group 893
4.6.2 Disclosures required when investment entity status changes 894
4.6.3 Disclosures required in respect of significant restrictions, commitments and financial and other support 894
4.6.4 Valuation methodologies and nature of investing activities 895
5 DISCLOSURE OF INTERESTS IN JOINT ARRANGEMENTS AND ASSOCIATES 895
5.1 Disclosure of the nature, extent and financial effects of interests in joint arrangements and associates 896
5.1.1 Summarised financial information of individually material joint ventures and associates 898
5.1.2 Financial information of individually immaterial joint ventures and associates 901
5.2 Risks associated with interests in joint ventures and associates 902
5.2.1 Disclosure of commitments relating to joint ventures 902
5.2.2 Disclosure of contingent liabilities relating to joint ventures and associates 903
6 DISCLOSURE OF INTERESTS IN UNCONSOLIDATED STRUCTURED ENTITIES 903
6.1 Disclosure of the nature of interests in unconsolidated structured entities 905
6.1.1 Disclosure of the nature, purpose, size, activities and financing of structured entities 905
6.1.1.A Nature and purpose 906
6.1.1.B Size 907
6.1.1.C Activities 907
6.1.1.D Financing 907
6.1.2 Disclosures of sponsored structured entities for which no interest is held at the reporting date 908
6.2 Disclosure of the nature of risks of unconsolidated structured entities 911
6.2.1 Disclosures of interests in structured entities and of the maximum exposure to loss from those interests 911
6.2.2 Disclosures of actual and intended financial and other support to structured entities 914
6.3 Additional disclosures regarding the nature of risks from interests in unconsolidated structured entities 914
6.3.1 Disclosure of support 915
6.3.2 Disclosure of losses 915
6.3.3 Disclosure of types of income received 916
6.3.4 Disclosure of ranking and amounts of potential losses 916
6.3.5 Disclosure of liquidity arrangements 917
6.3.6 Disclosure of funding difficulties 917
6.3.7 Disclosure of the forms of funding of an unconsolidated structured entity 918
References 918
Chapter 14 Fair value measurement 919
1 INTRODUCTION AND BACKGROUND 927
1.1 Introduction 927
1.2 Overview of IFRS 13 928
1.3 Objective of IFRS 13 930
2 SCOPE 931
2.1 Items in the scope of IFRS 13 931
2.1.1 Fair value disclosures 932
2.1.2 Measurements based on fair value 932
2.1.3 Short-term receivables and payables 933
2.2 Scope exclusions 933
2.2.1 Share-based payments 933
2.2.2 Lease transactions 933
2.2.3 Measurements similar to fair value 934
2.2.4 Exemptions from the disclosure requirements of IFRS 13 934
2.3 Present value techniques 935
2.4 Fair value measurement exceptions and practical expedients in other standards 935
2.4.1 Fair value measurement exceptions 935
2.4.2 Practical expedient for impaired financial assets carried at amortised cost 935
2.5 Measurement exceptions and practical expedients within IFRS 13 936
2.5.1 Practical expedients in IFRS 13 936
2.5.2 Measurement exception to the fair value principles for financial instruments 937
3 DEFINITIONS 938
4 THE FAIR VALUE FRAMEWORK 940
4.1 Definition of fair value 940
4.2 The fair value measurement framework 941
5 THE ASSET OR LIABILITY 943
5.1 The unit of account 943
5.1.1 Unit of account and P×Q 944
5.1.2 Unit of account and the portfolio exception 946
5.1.3 Unit of account versus the valuation premise 947
5.1.4 Does IFRS 13 allow fair value to be measured by reference to an asset’s (or liability’s) components? 948
5.2 Characteristics of the asset or liability 949
5.2.1 Condition and location 949
5.2.2 Restrictions on assets or liabilities 950
5.2.2.A In determining the fair value of a restricted security, is it appropriate toapply a constant discount percentage over the entire life of therestriction? 951
6 THE PRINCIPAL (OR MOST ADVANTAGEOUS) MARKET 952
6.1 The principal market 953
6.1.1 Can an entity have more than one principal market for the same asset or liability? 954
6.1.2 In situations where an entity has access to multiple markets, should the determination of the principal market be based on 955
6.2 The most advantageous market 956
7 MARKET PARTICIPANTS 957
7.1 Characteristics of market participants 957
7.2 Market participant assumptions 958
8 THE TRANSACTION 961
8.1 Evaluating whether there has been a significant decrease in the volume and level of activity for an asset or liability 963
8.1.1 Can a market exhibit a significant decrease in volume or level of activity and still be considered active? 964
8.2 Identifying transactions that are not orderly 965
8.2.1 Are all transactions entered into to meet regulatory requirements or transactions initiated during bankruptcy assumed to b 967
8.2.2 Is it possible for orderly transactions to take place in a ‘distressed’ market? 967
8.3 Estimating fair value when there has been a significant decrease in the volume and level of activity 968
8.3.1 Assessing the relevance of observable data 968
8.3.2 Selection and use of valuation techniques when there has been a significant decrease in volume or level of activity 969
9 THE PRICE 972
9.1 Transaction costs 973
9.1.1 Are transaction costs in IFRS 13 the same as ‘costs to sell’ in other IFRSs? 973
9.1.2 Transaction costs in IFRS 13 versus acquisition-related transaction costs in other IFRSs 974
9.2 Transportation costs 974
10 APPLICATION TO NON-FINANCIAL ASSETS 975
10.1 Highest and best use 976
10.1.1 Highest and best use: determining what is legally permissible 977
10.1.2 Highest and best use versus current use 978
10.1.3 Highest and best use versus intended use (including defensive value) 979
10.2 Valuation premise for non-financial assets 981
10.2.1 Valuation premise – stand-alone basis 981
10.2.2 Valuation premise – in combination with other assets and/or liabilities 982
10.2.3 How should associated liabilities be considered when measuring the fair value of a non-financial asset? 984
10.2.4 Unit of account versus the valuation premise 984
11 APPLICATION TO LIABILITIES AND AN ENTITY’S OWN EQUITY 985
11.1 General principles 986
11.1.1 Fair value of a liability 986
11.1.2 Fair value of an entity’s own equity 987
11.1.3 Settlement value versus transfer value 987
11.2 Measuring the fair value of a liability or an entity’s own equity when quoted prices for the liability or equity instrument 988
11.2.1 Liabilities or an entity’s own equity that are held by other parties as assets 988
11.2.2 Liabilities or an entity’s own equity not held by other parties as assets 992
11.2.2.A Use of present value techniques to measure fair value for liabilities andan entity’s own equity instruments not held by other parties as assets 992
11.2.2.B Consideration of an entry price in measuring a liability or entity’s ownequity not held as an asset 995
11.3 Non-performance risk 996
11.3.1 Liabilities issued with third-party credit enhancements 999
11.3.1.A Do the requirements of IFRS 13 regarding third-party creditenhancements in a fair value measurement apply to liabilities other thandebt? 1000
11.3.2 Does IFRS 13 require an entity to consider the effects of both counterparty credit risk and its own credit risk when valu 1001
11.3.3 How should an entity incorporate credit risk into the valuation of its derivative contracts? 1002
11.3.3.A How do credit adjustments work? 1002
11.3.3.B Valuation methods 1004
11.3.3.C Data challenges 1005
11.3.4 Does the existence of master netting agreements and/or CSAs eliminate the need to consider an entity’s own credit risk wh 1007
11.3.4.A Portfolio approaches and credit mitigation arrangements 1007
11.3.4.B Portfolio-level credit adjustments 1009
11.4 Restrictions preventing the transfer of a liability or an entity’s own equity 1009
11.5 Financial liability with a demand feature 1010
12 FINANCIAL ASSETS AND LIABILITIES WITH OFFSETTING POSITIONS 1010
12.1 Criteria for using the portfolio approach for offsetting positions 1011
12.1.1 Accounting policy considerations 1012
12.1.2 Presentation considerations 1012
12.1.3 Is there a minimum level of offset required to use the portfolio approach? 1013
12.1.4 Can Level 1 instruments be included in a portfolio of financial instruments with offsetting risks when calculating the ne 1013
12.2 Measuring fair value for offsetting positions 1014
12.2.1 Exposure to market risks 1017
12.2.2 Exposure to the credit risk of a particular counterparty 1018
13 FAIR VALUE AT INITIAL RECOGNITION 1018
13.1 Exit price versus entry price 1018
13.1.1 Assessing whether the transaction price equals fair value at initial recognition 1018
13.2 Day one gains and losses 1019
13.2.1 Day one losses for over-the-counter derivative transactions 1020
13.2.2 Day one gains and losses when entry and exit markets for the transaction are deemed to be the same 1021
13.3 Related party transactions 1022
14 VALUATION TECHNIQUES 1022
14.1 Selecting appropriate valuation techniques 1022
14.1.1 Single versus multiple valuation techniques 1023
14.1.2 Using multiple valuation techniques to measure fair value 1024
14.1.3 Valuation adjustments 1027
14.1.3.A Adjustments to valuation techniques that use unobservable inputs 1028
14.1.4 Making changes to valuation techniques 1028
14.2 Market approach 1029
14.3 Cost approach 1029
14.3.1 Use of depreciated replacement cost to measure fair value 1030
14.4 Income approach 1031
15 INPUTS TO VALUATION TECHNIQUES 1031
15.1 General principles 1031
15.2 Premiums and discounts 1034
15.2.1 Blockage factors (or block discounts) 1036
15.3 Pricing within the bid-ask spread 1037
15.3.1 Mid-market pricing 1037
15.3.2 What does the bid-ask spread include? 1038
15.4 Risk premiums 1038
15.5 Broker quotes and pricing services 1039
15.5.1 How should values provided by central clearing organisations for margin purposes be evaluated when determining the fair v 1040
16 THE FAIR VALUE HIERARCHY 1041
16.1 The fair value hierarchy 1041
16.2 Categorisation within the fair value hierarchy 1042
16.2.1 Assessing the significance of inputs 1043
16.2.2 Transfers between levels within the fair value hierarchy 1044
16.2.3 Information provided by third-party pricing services or brokers 1045
16.2.4 Categorisation of over-the-counter derivative instruments 1047
17 LEVEL 1 INPUTS 1047
17.1 Use of Level 1 inputs 1047
17.1.1 Level 1 liabilities and instruments classified in an entity’s own equity 1048
17.2 Alternative pricing methods 1049
17.3 Quoted prices in active markets that are not representative of fair value 1049
17.4 Unit of account 1049
18 LEVEL 2 INPUTS 1050
18.1 Level 2 inputs 1050
18.2 Examples of Level 2 inputs 1050
18.3 Market corroborated inputs 1051
18.4 Making adjustments to a Level 2 input 1052
18.5 Recently observed prices in an inactive market 1053
19 LEVEL 3 INPUTS 1054
19.1 Use of Level 3 inputs 1054
19.2 Examples of Level 3 inputs 1055
20 DISCLOSURES 1055
20.1 Disclosure objectives 1056
20.1.1 Format of disclosures 1057
20.1.2 Level of disaggregation 1057
20.1.2.A Determining appropriate classes of assets and liabilities for disclosure 1058
20.1.3 Differentiating between ‘recurring’ and ‘non-recurring’ 1058
20.2 Accounting policy disclosures 1059
20.3 Disclosures for recognised fair value measurements 1061
20.3.1 Disclosures for recognised recurring fair value measurements 1062
20.3.2 Disclosures for recognised non-recurring fair value measurements 1063
20.3.3 Fair value hierarchy categorisation 1064
20.3.4 Transfers between hierarchy levels for recurring fair value measurements 1067
20.3.5 Disclosure of valuation techniques and inputs 1069
20.3.5.A Significant unobservable inputs for Level 3 fair value measurements 1069
20.3.6 Level 3 reconciliation 1072
20.3.7 Disclosure of valuation processes for Level 3 measurements 1074
20.3.8 Sensitivity of Level 3 measurements to changes in significant unobservable inputs 1075
20.3.8.A Quantitative sensitivity of Level 3 measurements of financialinstruments to changes in significant unobservable inputs 1076
20.3.9 Highest and best use 1077
20.4 Disclosures for unrecognised fair value measurements 1078
20.5 Disclosures regarding liabilities issued with an inseparable third-party credit enhancement 1078
21 APPLICATION GUIDANCE – PRESENT VALUE TECHNIQUES 1078
21.1 General principles for use of present value techniques 1078
21.2 The components of a present value measurement 1080
21.2.1 Time value of money 1081
21.2.2 Risk and uncertainty in a present value technique 1081
21.3 Discount rate adjustment technique 1082
21.3.1 Illustrative example of the discount rate adjustment technique 1084
21.4 Expected present value technique 1085
21.4.1 Expected present value technique – method 1 and method 2 1086
22 EFFECTIVE DATE AND TRANSITION 1090
23 CONVERGENCE WITH US GAAP 1090
23.1 The development of IFRS 13 1090
23.2 US GAAP differences 1091
23.2.1 Practical expedient for alternative investments 1091
23.2.2 Fair value of liabilities with a demand feature 1092
23.2.3 Recognition of day-one gains and losses 1092
23.2.4 Disclosures 1093
References 1094
Chapter 15 Foreign exchange 1095
1 INTRODUCTION 1099
1.1 Background 1099
1.2 Relevant pronouncements 1100
2 IAS 21: OBJECTIVE, SCOPE AND DEFINITIONS 1100
2.1 Objective of the standard 1100
2.2 Scope 1100
2.3 Definitions of terms 1101
3 SUMMARY OF THE APPROACH REQUIRED BY IAS 21 1102
4 DETERMINATION OF AN ENTITY’S FUNCTIONAL CURRENCY 1102
4.1 General 1102
4.2 Intermediate holding companies or finance subsidiaries 1104
4.3 Investment holding companies 1106
4.4 Branches and divisions 1106
4.5 Documentation of judgements made 1107
5 REPORTING FOREIGN CURRENCY TRANSACTIONS IN THE FUNCTIONAL CURRENCY OF AN ENTITY 1107
5.1 Initial recognition 1107
5.1.1 Identifying the date of transaction 1108
5.1.2 Using average rates 1109
5.1.3 Dual rates or suspension of rates 1110
5.1.4 Longer term lack of exchangeability 1111
5.2 Reporting at the ends of subsequent reporting periods 1111
5.3 Treatment of exchange differences 1112
5.3.1 Monetary items 1112
5.3.2 Non-monetary items 1114
5.4 Determining whether an item is monetary or non-monetary 1115
5.4.1 Deposits or progress payments 1115
5.4.2 Investments in preference shares 1116
5.4.3 Foreign currency share capital 1117
5.4.4 Deferred tax 1117
5.4.5 Post-employment benefit plans – foreign currency assets 1118
5.4.6 Post-employment benefit plans – foreign currency plans 1118
5.5 Change in functional currency 1119
5.6 Books and records not kept in functional currency 1121
6 USE OF A PRESENTATION CURRENCY OTHER THAN THE FUNCTIONAL CURRENCY 1122
6.1 Translation to the presentation currency 1122
6.1.1 Functional currency is not that of a hyperinflationary economy 1123
6.1.2 Functional currency is that of a hyperinflationary economy 1127
6.1.3 Dual rates, suspension of rates and longer-term restrictions on exchangeability 1129
6.1.4 Calculation of average rate 1130
6.1.5 Accounting for foreign operations where sub-groups exist 1132
6.2 Translation of equity items 1132
6.2.1 Share capital 1133
6.2.2 Other equity balances resulting from transactions with equity holders 1133
6.2.3 Other equity balances resulting from income and expenses being recognised in other comprehensive income 1134
6.3 Exchange differences on intragroup balances 1134
6.3.1 Monetary items included as part of the net investment in a foreign operation – general 1135
6.3.2 Monetary items included as part of the net investment in a foreign operation – currency of the monetary item 1136
6.3.3 Monetary items included as part of the net investment in a foreign operation – treatment in the individual financial state 1138
6.3.4 Monetary items transacted by other members of the group 1138
6.3.5 Monetary items becoming part of the net investment in a foreign operation 1138
6.3.6 Monetary items ceasing to be part of the net investment in a foreign operation 1140
6.3.7 Dividends 1141
6.3.8 Unrealised profits on intragroup transactions 1141
6.4 Non-coterminous period ends 1142
6.5 Goodwill and fair value adjustments 1143
6.6 Disposal or partial disposal of a foreign operation 1144
6.6.1 Disposals and transactions treated as disposals 1144
6.6.1.A Disposals of a foreign operation 1144
6.6.1.B Transactions treated as disposals 1146
6.6.2 Partial disposals 1147
6.6.2.A What constitutes a partial disposal? 1147
6.6.2.B Partial disposal of a proportionate interest in a subsidiary 1148
6.6.2.C Repayment of a permanent as equity loan by a subsidiary 1148
6.6.2.D Partial disposal of interest in an associate or joint arrangement 1148
6.6.3 Comparison of the effect of step-by-step and direct methods of consolidation on accounting for disposals 1149
7 CHANGE OF PRESENTATION CURRENCY 1152
8 INTRODUCTION OF THE EURO 1158
9 TAX EFFECTS OF ALL EXCHANGE DIFFERENCES 1159
10 DISCLOSURE REQUIREMENTS 1159
10.1 Exchange differences 1159
10.2 Presentation and functional currency 1160
10.3 Convenience translations of financial statements or other financial information 1160
10.4 Judgements made in applying IAS 21 and related disclosures 1160
11 FUTURE DEVELOPMENTS 1161
References 1162
Chapter 16 Hyperinflation 1163
1 INTRODUCTION 1165
1.1 Background 1165
1.2 Hyperinflationary economies 1166
1.3 Restatement approach 1166
2 THE REQUIREMENTS OF IAS 29 1167
2.1 The context of IAS 29 1167
2.2 Scope 1168
2.3 Definition of hyperinflation 1168
2.4 The IAS 29 restatement process 1169
3 SELECTION OF A GENERAL PRICE INDEX 1169
3.1 Selecting a general price index 1170
3.2 General price index not available for all periods 1170
4 ANALYSIS AND RESTATEMENT OF THE STATEMENT OF FINANCIAL POSITION 1171
4.1 Monetary and non-monetary items 1172
4.1.1 Monetary or non-monetary distinction 1172
4.1.2 Monetary items 1173
4.1.3 Non-monetary items carried at current cost 1174
4.1.4 Non-monetary items carried at historical cost 1174
4.2 Inventories 1177
4.3 Restatement of associates, joint ventures and subsidiaries 1177
4.4 Calculation of deferred taxation 1178
5 RESTATEMENT OF THE STATEMENT OF CHANGES IN EQUITY 1180
6 RESTATEMENT OF THE STATEMENT OF COMPREHENSIVE INCOME AND INCOME STATEMENT 1181
6.1 Restatement of interest and exchange differences 1183
6.2 Calculation of the gain or loss on the net monetary position 1183
6.3 Measurement of reclassification adjustments within equity 1184
7 RESTATEMENT OF THE STATEMENT OF CASH FLOWS 1185
8 RESTATEMENT OF COMPARATIVE FIGURES 1186
9 INTERIM REPORTING 1186
10 TRANSITION 1187
10.1 Economies becoming hyperinflationary 1187
10.2 Economies ceasing to be hyperinflationary 1188
10.3 Economies exiting severe hyperinflation 1190
11 TRANSLATION TO A DIFFERENT PRESENTATION CURRENCY 1190
12 DISCLOSURES 1191
References 1193
Chapter 17 Intangible assets 1195
1 INTRODUCTION 1199
1.1 Background 1199
1.2 Terms used in IAS 38 1200
2 OBJECTIVE AND SCOPE OF IAS 38 1202
2.1 What is an intangible asset? 1203
2.1.1 Identifiability 1203
2.1.2 Control 1204
2.1.3 Future economic benefits 1206
2.2 Is IAS 38 the appropriate IFRS? 1206
2.2.1 Whether to record a tangible or intangible asset 1206
2.2.2 Classification of programme and other broadcast rights as inventory or intangible assets 1207
3 RECOGNITION AND MEASUREMENT 1209
3.1 Recognition 1209
3.1.1 When to recognise programme and other broadcast rights 1210
3.2 Measurement 1212
3.3 Subsequent expenditure 1212
4 SEPARATE ACQUISITION 1213
4.1 Recognition 1213
4.2 Components of cost 1213
4.3 Costs to be expensed 1214
4.4 Income from incidental operations while an asset is being developed 1214
4.5 Measurement of intangible assets acquired for contingent consideration 1215
4.6 Acquisition by way of government grant 1217
4.7 Exchanges of assets 1217
4.7.1 Measurement of assets exchanged 1217
4.7.2 Commercial substance 1218
5 ACQUISITION AS PART OF A BUSINESS COMBINATION 1219
5.1 Recognition of intangible assets acquired in a business combination 1219
5.1.1 Probable inflow of benefits 1219
5.1.2 Reliability of measurement 1219
5.1.3 Identifiability in relation to an intangible asset acquired in a business combination 1220
5.1.3.A Contractual-legal rights 1221
5.1.3.B Separability 1221
5.2 Examples of intangible assets acquired in a business combination 1222
5.3 Measuring the fair value of intangible assets acquired in a business combination 1223
5.4 Customer relationship intangible assets acquired in a business combination 1223
5.5 In-process research and development 1225
6 INTERNALLY GENERATED INTANGIBLE ASSETS 1226
6.1 Internally generated goodwill 1226
6.2 Internally generated intangible assets 1226
6.2.1 Research phase 1227
6.2.2 Development phase 1228
6.2.3 Research and development in the pharmaceutical industry 1232
6.2.4 Internally generated brands, mastheads, publishing titles and customer lists 1233
6.2.5 Website costs (SIC-32) 1233
6.3 Cost of an internally generated intangible asset 1236
6.3.1 Establishing the time from which costs can be capitalised 1236
6.3.2 Determining the costs eligible for capitalisation 1236
7 RECOGNITION OF AN EXPENSE 1237
7.1 Catalogues and other advertising costs 1238
8 MEASUREMENT AFTER INITIAL RECOGNITION 1238
8.1 Cost model for measurement of intangible assets 1239
8.2 Revaluation model for measurement of intangible assets 1239
8.2.1 Revaluation is only allowed if there is an active market 1240
8.2.2 Frequency of revaluations 1241
8.2.3 Accounting for revaluations 1241
9 AMORTISATION OF INTANGIBLE ASSETS 1244
9.1 Assessing the useful life of an intangible asset as finite or indefinite 1244
9.1.1 Factors affecting the useful life 1244
9.1.2 Useful life of contractual or other legal rights 1246
9.2 Intangible assets with a finite useful life 1247
9.2.1 Amortisation period and method 1247
9.2.1.A Amortising customer relationships and similar intangible assets 1249
9.2.1.B Amortisation of programme and other broadcast rights 1250
9.2.2 Revenue-based amortisation 1251
9.2.3 Review of amortisation period and amortisation method 1252
9.2.4 Residual value 1253
9.3 Intangible assets with an indefinite useful life 1254
9.4 Impairment losses 1255
9.5 Retirements and disposals 1255
9.5.1 Derecognition of parts of intangible assets 1256
10 DISCLOSURE 1257
10.1 General disclosures 1257
10.2 Statement of financial position presentation 1260
10.3 Profit or loss presentation 1261
10.4 Additional disclosures when the revaluation model is applied 1262
10.5 Disclosure of research and development expenditure 1262
11 SPECIFIC ISSUES REGARDING INTANGIBLE ASSETS 1262
11.1 Rate-regulated activities 1262
11.2 Emissions trading schemes 1263
11.2.1 Emissions trading schemes – IFRIC 3 1264
11.2.2 Emissions trading schemes – Net liability approaches 1266
11.2.3 Emissions trading schemes – Government grant approach 1268
11.2.4 Amortisation and impairment testing of emission rights 1269
11.2.5 Emission rights acquired in a business combination 1269
11.2.6 Sale of emission rights 1270
11.2.7 Accounting for emission rights by brokers and traders 1270
11.3 Accounting for green certificates or renewable energy certificates 1271
11.3.1 Accounting by producers using renewable energy sources 1271
11.3.2 Accounting by distributors of renewable energy 1271
11.3.3 Accounting by brokers and traders 1272
11.4 Accounting for REACH costs 1272
11.4.1 Costs of registering a new substance performed by the entity itself 1274
11.4.2 Costs of acquiring test data from an existing registrant 1274
11.4.3 Costs of registering an existing substance performed by the entity itself 1274
References 1275
Chapter 18 Property, plant and equipment 1277
1 INTRODUCTION 1281
2 THE REQUIREMENTS OF IAS 16 1282
2.1 Scope 1282
2.2 Definitions used in IAS 16 1283
3 RECOGNITION 1284
3.1 Aspects of recognition 1285
3.1.1 Spare parts and minor items 1285
3.1.2 Environmental and safety equipment 1285
3.1.3 Property economic benefits and property developments 1286
3.1.4 Classification as PP& E or intangible asset
3.1.5 Classification of items as inventory or PP& E when minimum levels are maintained
3.1.6 Production stripping costs of surface mines 1288
3.1.7 Bearer plants 1288
3.2 Accounting for parts (‘components’) of assets 1289
3.3 Initial and subsequent expenditure 1290
3.3.1 Types of parts 1291
3.3.2 Major inspections 1292
4 MEASUREMENT AT RECOGNITION 1292
4.1 Elements of cost and cost measurement 1293
4.1.1 ‘Directly attributable’ costs 1294
4.1.2 Borrowing costs 1295
4.1.3 Administration and other general overheads 1295
4.1.4 Cessation of capitalisation 1295
4.1.5 Self-built assets 1296
4.1.6 Deferred payment 1296
4.1.7 Land and buildings to be redeveloped 1296
4.1.8 Transfers of assets from customers (IFRIC 18) 1297
4.1.9 Variable pricing 1299
4.2 Incidental and non-incidental income 1299
4.2.1 Income earned while bringing the asset to the intended location and condition 1300
4.2.2 Income received during the construction of property 1301
4.2.3 Liquidated damages during construction 1301
4.3 Accounting for changes in decommissioning and restoration costs 1301
4.4 Exchanges of assets 1302
4.4.1 Commercial substance 1303
4.4.2 Reliably measurable 1304
4.5 Assets held under finance leases 1304
4.6 Assets acquired with the assistance of government grants 1304
5 MEASUREMENT AFTER RECOGNITION: COST MODEL 1304
5.1 Significant parts of assets 1305
5.2 Depreciable amount and residual values 1306
5.3 Depreciation charge 1306
5.4 Useful lives 1307
5.4.1 Repairs and maintenance 1308
5.4.2 Land 1308
5.4.3 Technological change 1309
5.5 When depreciation starts 1310
5.6 Depreciation methods 1310
5.6.1 Diminishing balance methods 1311
5.6.2 Unit-of-production method 1312
5.7 Impairment 1312
6 MEASUREMENT AFTER RECOGNITION: REVALUATION MODEL 1312
6.1 The meaning of fair value 1314
6.1.1 Revaluing assets under IFRS 13 1314
6.1.1.A Highest and best use 1314
6.1.1.B Valuation approaches 1315
6.1.1.C The cost approach: current replacement cost and depreciatedreplacement cost (DRC) 1316
6.2 Accounting for valuation surpluses and deficits 1317
6.3 Reversals of downward valuations 1319
6.4 Adopting a policy of revaluation 1320
6.5 Assets held under finance leases 1321
7 DERECOGNITION AND DISPOSAL 1321
7.1 IFRS 5 1322
– Non-current Assets Held for Sale and Discontinued Operations 1322
7.2 Sale of assets held for rental 1323
7.3 Partial disposals and undivided interests 1324
8 IAS 16 DISCLOSURE REQUIREMENTS 1326
8.1 General disclosures 1327
8.2 Additional disclosures for revalued assets 1329
8.3 Other disclosures 1331
References 1331
Chapter 19 Investment property 1333
1 INTRODUCTION 1337
2 DEFINITIONS AND SCOPE 1338
2.1 Property interests held under operating leases 1340
2.2 Land 1340
2.3 Property leased to others 1340
2.4 Property held for own use (‘owner-occupied’) 1341
2.5 Investment property under construction 1341
2.6 Property held or under construction for sale in the ordinary course of business 1342
2.7 Property with dual uses 1342
2.8 Property with the provision of ancillary services 1344
2.9 Property where rentals are determined by reference to the operations in the property 1345
2.10 Group of assets leased out under a single operating lease 1345
3 RECOGNITION 1347
3.1 Expenditure prior to planning permissions/zoning consents 1347
3.2 Other aspects of cost recognition 1347
3.2.1 Repairs and maintenance 1347
3.2.2 Allocation into parts 1348
3.3 Acquisition of investment property or a business combination? 1348
3.3.1 Possible future developments – exposure draft on definition of a business 1349
4 INITIAL MEASUREMENT 1351
4.1 Attributable costs 1351
4.2 Start-up costs and self-built property 1352
4.3 Deferred payments 1352
4.4 Reclassifications from property, plant and equipment (‘PP& E’) or from inventory
4.5 Initial measurement of property held under a lease 1352
4.6 Initial measurement of assets acquired in exchange transactions 1353
4.7 Initial recognition of tenanted investment property subsequently measured using the cost model 1353
4.8 Borrowing costs 1354
4.9 Lease incentives and initial costs of leasing a property 1354
4.10 Contingent costs 1356
4.11 Income from tenanted property during development 1357
4.12 Payments by the vendor to the purchaser 1357
5 MEASUREMENT AFTER INITIAL RECOGNITION 1358
5.1 Property held under an operating lease 1358
5.2 Measurement by insurers and similar entities 1359
6 THE FAIR VALUE MODEL 1359
6.1 Estimating fair value 1360
6.1.1 Methods of estimation 1362
6.1.2 Observable data 1363
6.1.3 Comparison with value in use 1363
6.1.4 ‘Double counting’ 1364
6.2 Inability to determine fair value of completed investment property 1364
6.3 The fair value of investment property under construction 1365
6.4 Transaction costs incurred by the reporting entity on acquisition 1367
6.5 Fixtures and fittings subsumed within fair value 1368
6.6 Prepaid and accrued operating lease income 1368
6.6.1 Accrued rental income and lease incentives 1368
6.6.2 Prepaid rental income 1369
6.7 Valuation adjustment to the fair value of properties held under a lease 1370
6.8 Future capital expenditure and development value (‘Highest and best use’) 1372
6.9 Negative present value 1373
6.10 Deferred taxation for property held by a ‘single asset’ entity 1373
7 THE COST MODEL 1374
7.1 Initial recognition 1374
7.1.1 Identification of tangible parts 1374
7.1.2 Identification of intangible parts 1375
7.2 Incidence of use of the cost model 1375
7.3 Impairment 1376
8 IFRS 5 AND INVESTMENT PROPERTY 1376
9 TRANSFER OF ASSETS INTO OR FROM INVESTMENT PROPERTY 1378
9.1 Transfers from inventory (including draft amendments to IAS 40) 1378
9.2 Transfers to inventory 1381
9.3 Treatment of transfers 1381
9.4 Transfers of investment property held under operating leases 1383
10 DISPOSAL OF INVESTMENT PROPERTY 1384
10.1 Calculation of gain or loss on disposal 1385
10.2 Sale prior to completion of construction 1386
10.3 Replacement of parts of investment property 1386
10.4 Compensation from third parties 1387
11 INTERIM REPORTING AND IAS 40 1387
12 THE DISCLOSURE REQUIREMENTS OF IAS 40 1388
12.1 Disclosures under both fair value and cost models 1388
12.1.1 Methods and assumptions in fair value estimates 1389
12.1.2 Level of aggregation for IFRS 13 disclosures 1396
12.1.3 Disclosure of direct operating expenses 1396
12.2 Additional disclosures for the fair value model 1397
12.2.1 Presentation of changes in fair value 1397
12.2.2 Extra disclosures where fair value cannot be determined reliably 1399
12.3 Additional disclosures for the cost model 1399
12.4 Presentation of sales proceeds 1400
13 FUTURE DEVELOPMENTS 1400
13.1 New revenue recognition standard: IFRS 15 1400
13.2 New leases standard: IFRS 16 1402
References 1403
Chapter 20 Impairment of fixed assets and goodwill 1405
1 INTRODUCTION 1411
1.1 The theory behind the impairment review 1411
1.2 Key features of the impairment review 1412
2 THE REQUIREMENTS OF IAS 36 1414
2.1 Scope 1414
2.2 When an impairment test is required 1415
2.2.1 Indicators of impairment 1416
2.2.1.A Market capitalisation 1417
2.2.1.B (Future) performance 1417
2.2.1.C Individual assets or part of CGU? 1417
2.2.1.D Interest rates 1418
2.3 Recoverable amount 1418
2.3.1 Impairment of assets held for sale 1419
3 FAIR VALUE LESS COSTS OF DISPOSAL 1420
3.1 Estimating FVLCD 1421
3.1.1 FVLCD and the unit of account 1423
3.1.2 Depreciated replacement cost or current replacement cost as FVLCD 1425
4 DETERMINING VALUE IN USE (VIU) 1426
4.1 Dividing the entity into cash-generating units (CGUs) 1427
4.1.1 CGUs and intangible assets 1434
4.1.2 Active markets and identifying CGUs 1434
4.2 Goodwill and its allocation to cash-generating units 1435
4.2.1 The composition of goodwill 1437
4.2.2 Identifying synergies and identifying CGUs or CGU groups for allocating goodwill 1439
4.2.3 Measuring the goodwill allocated to CGUs or CGU groups 1440
4.2.4 The effect of IFRS 8 1441
4.2.4 The effect of IFRS 8 – Operating Segments – on impairment tests 1441
4.2.4.A Changes to operating segments 1441
4.2.4.B Aggregation of operating segments for disclosure purposes 1442
4.2.4.C Impairment testing when a CGU crosses more than one operatingsegment 1442
4.2.5 Goodwill initially unallocated to cash-generating units 1443
4.3 Identifying the carrying amount of CGU assets 1444
4.3.1 Consistency and the impairment test 1445
4.3.1.A Environmental provisions and similar provisions and liabilities 1446
4.3.1.B Finance leases 1447
4.3.1.C Trade debtors and creditors 1448
4.3.1.D Pensions 1449
4.3.1.E Cash flow hedges 1449
4.3.2 Corporate assets 1450
4.4 Estimating the future pre-tax cash flows of the CGU under review 1452
4.4.1 Budgets and cash flows 1452
4.4.1.A Cash inflows and outflows from improvements and enhancements 1454
4.4.1.B Restructuring 1457
4.4.1.C Terminal values 1457
4.4.1.D Foreign currency cash flows 1458
4.4.1.E Internal transfer pricing 1459
4.4.1.F Overheads 1459
4.4.1.G Events after the reporting period 1460
4.4.1.H ‘Traditional’ and ‘expected cash flow’ approach to present value 1460
4.5 Identifying an appropriate discount rate and discounting the future cash flows 1461
4.5.1 Discount rates and the weighted average cost of capital 1464
4.5.2 Calculating a pre-tax discount rate 1465
4.5.3 Calculating VIU using post-tax cash flows 1467
4.5.4 Approximations and short cuts 1472
4.5.5 Disclosing pre-tax discount rates when using a post-tax methodology 1473
4.5.6 Determining pre-tax rates taking account of tax losses 1475
4.5.7 Entity-specific WACCs and different project risks within the entity 1475
4.5.8 Entity-specific WACCs and capital structure 1476
4.5.9 Use of discount rates other than the WACC 1478
4.6 Differences between fair value and value in use 1478
5 IMPAIRMENT OF GOODWILL 1479
5.1 When to test cash-generating units with goodwill for impairment 1479
5.1.1 Timing of impairment tests 1479
5.1.2 Sequence of impairment tests for goodwill and other assets 1480
5.1.3 Carry forward of a previous impairment test calculation 1481
5.1.4 Reversal of impairment loss for goodwill prohibited 1481
5.2 Impairment of assets and goodwill recognised on acquisition 1481
5.2.1 Testing goodwill ‘created’ by deferred tax for impairment 1482
5.2.2 Deferred tax assets and losses of acquired businesses 1485
5.3 Non-controlling interests 1486
5.3.1 Testing for impairment in entities with non-controlling interests measured at the proportionate share of net identifiable 1488
5.3.1.A Acquisitions of non-controlling interests measured at the proportionateshare of net identifiable assets 1490
5.3.2 Testing for impairment in entities with non-controlling interests initially measured at fair value 1490
5.3.3 Testing for impairment in entities with non-controlling interests: alternative allocation methodologies 1491
5.4 Disposal of operation within a cash-generating unit to which goodwill has been allocated 1494
5.4.1 Changes in composition of cash-generating units 1495
5.5 Impairment of intangible assets with an indefinite useful life 1498
6 RECOGNISING AND REVERSING IMPAIRMENT LOSSES 1499
6.1 Impairment losses on individual assets 1500
6.2 Impairment losses and CGUs 1501
6.3 Reversal of impairment loss relating to goodwill prohibited 1503
6.4 Reversal of impairment losses relating to assets other than goodwill 1503
6.4.1 Reversals of impairments – cash-generating units 1506
6.4.2 Reversals of impairments – revalued assets 1506
7 DISCLOSURES REQUIRED BY IAS 36 1507
7.1 Introduction 1507
7.2 IAS 36 disclosures 1507
7.2.1 Disclosures required for impairment losses or reversals 1507
7.2.2 Material impairments 1508
7.3 Annual impairment disclosures required for goodwill and intangible assets with an indefinite useful life 1509
8 TESTING FOR IMPAIRMENT: GROUP ISSUES 1515
8.1 Separate financial statements of parent entities: FVLCD for investments in subsidiaries, associates and joint ventures 1516
8.1.1 FVLCD and the unit of account for investments with quoted prices 1516
8.1.2 FVLCD for investments without quoted prices and other group assets 1517
8.2 Separate financial statements of parent entities: calculating VIU for investments in subsidiaries, associates and joint vent 1517
8.2.1 VIU: relevant cash flows and non-arm’s length prices (transfer pricing) 1517
8.2.2 VIU of investments in subsidiaries, associates and joint ventures using dividend discount models 1519
8.2.3 VIU of investments in subsidiaries, associates and joint ventures based on cash flows generated by underlying assets 1519
8.3 Sub group consolidated financial statements and impairment testing 1520
8.3.1 VIU of associates or joint ventures 1520
8.3.1.A Indicators of impairment 1521
8.3.1.B Equity accounted investments and the unit of account 1521
8.3.1.C Equity accounted investments and CGUs 1522
8.3.1.D Equity accounted investments and testing goodwill for impairment 1522
8.3.2 Testing goodwill for impairment in individual (or subgroup) financial statements 1523
8.3.2.A Allocating goodwill in the consolidated subgroups 1523
8.3.2.B Acquisitions by subsidiaries and determining the level at which thegroup tests goodwill for impairment 1524
8.3.2.C Group reorganisations and the carrying value of investments insubsidiaries 1525
References 1527
Chapter 21 Capitalisation of borrowing costs 1529
1 INTRODUCTION 1531
2 THE REQUIREMENTS OF IAS 23 1532
2.1 Core principle 1532
2.2 Scope 1532
3 QUALIFYING ASSETS 1532
3.1 Inventories 1532
3.2 Assets measured at fair value 1533
3.3 Construction contracts 1534
3.4 Financial assets 1534
4 DEFINITION OF BORROWING COSTS 1534
4.1 The definition of borrowing costs in IAS 23 1534
4.2 Other finance costs 1535
5 BORROWING COSTS ELIGIBLE FOR CAPITALISATION 1535
5.1 Directly attributable borrowing costs 1535
5.2 Specific borrowings 1536
5.3 General borrowings 1536
5.3.1 Definition of general borrowings 1537
5.3.1.A General borrowings related to specific non-qualifying assets 1537
5.3.1.B Borrowing costs on borrowings related to completed qualifying assets 1538
5.3.2 Calculation of capitalisation rate 1539
5.3.3 Accrued costs and trade payables 1542
5.3.4 Assets carried below cost in the statement of financial position 1542
5.4 Exchange differences as a borrowing cost 1542
5.5 Other finance costs as a borrowing cost 1544
5.5.1 Derivative financial instruments 1544
5.5.2 Gains and losses on derecognition of borrowings 1546
5.5.3 Gains or losses on termination of derivative financial instruments 1547
5.5.4 Dividends payable on shares classified as financial liabilities 1547
5.6 Capitalisation of borrowing costs in hyperinflationary economies 1548
5.7 Group considerations 1548
5.7.1 Borrowings in one company and development in another 1548
5.7.2 Qualifying assets held by joint arrangements 1549
6 COMMENCEMENT, SUSPENSION AND CESSATION OF CAPITALISATION 1549
6.1 Commencement of capitalisation 1549
6.2 Suspension of capitalisation 1551
6.2.1 Impairment considerations 1551
6.3 Cessation of capitalisation 1552
7 DISCLOSURE REQUIREMENTS 1553
7.1 The requirements of IAS 23 1553
7.2 Disclosure requirements in other IFRSs 1553
References 1554
Chapter 22 Inventories 1555
1 INTRODUCTION 1557
2 THE SCOPE OF IAS 2 1558
2.1 Scope issues: IAS 2 or another IFRS 1559
2.1.1 Core inventories and spare parts – IAS 2 or IAS 16 1559
2.1.2 Broadcast rights – IAS 2 or IAS 38 1559
2.1.3 Emission rights – IAS 2 or IAS 38 1561
3 MEASUREMENT 1561
3.1 What may be included in cost? 1562
3.1.1 Storage and distribution costs 1564
3.1.2 General and administrative overheads 1564
3.1.3 Borrowing costs 1565
3.1.4 Service providers 1566
3.1.5 Forward contracts to purchase inventory 1566
3.1.6 Drug production costs within the pharmaceutical industry 1567
3.2 Cost measurement methods 1567
3.3 Transfers of rental assets to inventory 1569
3.4 Net realisable value 1569
3.5 Consignment stock and sale and repurchase agreements 1571
4 REAL ESTATE INVENTORY 1572
4.1 Classification of real estate as inventory 1572
4.2 Costs of real estate inventory 1572
4.2.1 Allocation of costs to individual units in multi-unit developments 1572
4.2.2 Property demolition and operating lease costs 1573
5 RECOGNITION IN PROFIT OR LOSS 1574
6 DISCLOSURE REQUIREMENTS OF IAS 2 1574
References 1576
Chapter 23 Construction contracts (IAS 11) 1577
1 INTRODUCTION 1579
1.1 Scope and definitions of IAS 11 1579
1.2 Whether an arrangement is a construction contract 1580
1.3 Service concession agreements 1582
1.4 Sale of real estate based on a third party’s specifications 1582
2 COMBINATION AND SEGMENTATION OF CONTRACTS 1583
2.1 Options for the construction of an additional asset 1584
3 CONTRACT REVENUE, COSTS AND EXPENSES 1585
3.1 Contract revenue 1585
3.2 Contract costs 1587
3.2.1 Borrowing costs 1588
3.3 The recognition of contract revenue and expenses 1588
3.3.1 Types of construction contract 1589
3.3.1.A Fixed price contracts 1589
3.3.1.B Cost plus contracts 1589
3.3.2 The stage of completion method 1589
3.3.3 Changes in estimates 1594
3.3.4 The determination of contract revenue and expenses 1594
3.3.5 Inability to estimate the outcome of a contract reliably 1596
3.3.6 Loss-making contracts 1596
3.3.7 Contract inefficiencies 1596
3.3.8 Contracts that contain sales of assets and construction contracts 1597
4 DISCLOSURE REQUIREMENTS OF IAS 11 1598
References 1601
Chapter 24 Leases (IAS 17) 1603
1 INTRODUCTION 1607
2 WHAT IS A LEASE? 1607
2.1 Determining whether an arrangement contains a lease 1608
2.1.1 Identification of an asset 1609
2.1.2 Parts of assets and the unit of account 1610
2.1.3 The arrangement conveys a right to use the item 1611
2.1.4 Fixed or current market prices and control of the asset 1614
2.1.5 When to assess the arrangements 1615
2.1.6 Separation of leases from other payments within the arrangement 1615
2.1.7 Disclosure requirements 1617
2.2 Transactions that involve the legal form of a lease but are not, in substance, leases 1617
2.2.1 The arrangement 1618
2.2.2 Accounting for assets and liabilities arising under the arrangement 1619
2.2.3 Fee income 1620
2.2.4 Presentation and disclosure requirements. 1620
3 SCOPE AND DEFINITIONS OF IAS 17 1621
3.1 Scope of IAS 17 1621
3.1.1 Leases and licensing agreements 1621
3.1.2 Arrangements over intangible assets 1622
3.2 Lease classification 1623
3.2.1 Finance and operating leases 1623
3.2.2 Determining the substance of transactions 1624
3.2.2.A Residual value guarantees by the lessee 1626
3.2.2.B Rental rebates 1627
3.2.3 Changes to lease terms and provisions 1628
3.3 Leases of land – finance or operating leases? 1631
3.3.1 Measurement and presentation of operating leases over land 1632
3.3.2 Separating land and buildings 1633
3.3.3 Leases and investment properties 1635
3.4 Defined terms 1636
3.4.1 Inception and commencement of the lease 1636
3.4.2 Fair value 1637
3.4.3 Minimum lease payments 1637
3.4.4 Lease term and non-cancellable period 1637
3.4.5 Interest rate implicit in the lease and incremental borrowing rate 1638
3.4.6 Residual value 1638
3.4.6.A Residual value guarantors 1639
3.4.7 Contingent rents and embedded derivatives 1639
3.4.7.A Contingent rents and operating leases 1640
3.4.8 Initial direct costs 1641
3.4.9 Calculation of the implicit interest rate and present value of minimum lease payments 1641
3.5 Leases as financial instruments 1642
4 ACCOUNTING FOR FINANCE LEASES 1643
4.1 Accounting by lessees 1644
4.1.1 Initial recognition 1644
4.1.2 Allocation of finance costs 1644
4.1.3 Recording the liability 1646
4.1.4 Accounting for the leased asset 1646
4.2 Accounting by lessors 1647
4.2.1 The lessor’s net investment in the lease 1648
4.2.2 Allocation of finance income 1648
4.2.3 Residual values 1649
4.2.3.A Unguaranteed residual values 1649
4.2.4 Disposals by lessors of assets held under finance leases – measurement 1650
4.3 Termination of finance leases 1650
4.3.1 Termination of finance leases by lessees 1651
4.3.1.A Early termination by lessees 1651
4.3.2 Termination and impairment of finance leases by lessors 1652
4.3.2.A Impairment of lease receivables 1652
4.3.2.B Early termination of finance leases for lessors 1653
4.4 Manufacturer or dealer lessors 1653
5 ACCOUNTING FOR OPERATING LEASES 1656
5.1 Operating leases in the financial statements of lessees 1656
5.1.1 Leases that include payments for services 1656
5.1.2 Straight-line recognition over the lease term 1656
5.1.3 Notional or actual interest paid to lessors 1657
5.1.4 Lease incentives – accounting by lessees 1658
5.1.5 Onerous contracts 1659
5.2 Operating leases in the financial statements of lessors 1660
5.2.1 Accounting for assets subject to operating leases 1660
5.2.2 Lease incentives – accounting by lessors 1661
5.3 Payments made in connection with the termination of operating leases 1662
5.3.1 Compensation for loss of profits 1664
6 MODIFYING THE TERMS OF LEASES 1664
6.1 IAS 17 and accounting for renegotiations 1664
6.1.1 Determining whether there is a different classification 1665
6.1.2 Accounting for reclassified leases 1668
6.1.3 Accounting for modifications to finance leases 1669
6.1.4 Tax and interest variation clauses 1671
6.1.5 Accounting for changes to the terms of operating leases 1671
7 SALE AND LEASEBACK TRANSACTIONS 1672
7.1 Sale and finance leaseback 1672
7.2 Operating leaseback 1673
7.3 Sale and leaseback arrangements including repurchase agreements and options 1675
7.3.1 Sale and leaseback arrangements with put and call options 1676
8 SUB-LEASES AND BACK-TO-BACK LEASES 1677
8.1 Introduction 1677
8.1.1 The original lessor and the ultimate lessee 1678
8.1.2 The intermediate party 1678
9 DISCLOSURES REQUIRED BY IAS 17 1680
9.1 Disclosures relating to financial assets and liabilities 1680
9.2 Disclosure by lessees 1680
9.2.1 Disclosure of finance leases 1680
9.2.2 Disclosure of operating leases 1682
9.3 Disclosure by lessors 1683
9.3.1 Disclosure of finance leases 1683
9.3.2 Disclosure of operating leases 1685
References 1686
Chapter 25 Leases (IFRS 16) 1687
1 INTRODUCTION 1693
2 OBJECTIVE AND SCOPE OF IFRS 16 1694
2.1 Objective of IFRS 16 1694
2.2 Scope of IFRS 16 1694
2.3 Recognition exemptions 1695
3 WHAT IS A LEASE? 1695
3.1 Determining whether an arrangement contains a lease 1695
3.1.1 Joint arrangements 1695
3.1.2 Identified asset 1696
3.1.3 Substantive substitution rights 1697
3.1.4 Right to obtain substantially all of the economic benefits from use of the identified asset 1699
3.1.5 Right to direct the use of the identified asset 1700
3.1.5.A How and for what purpose the asset is used 1701
3.1.5.B Relevant decisions about how and for what purpose the asset is used are predetermined 1702
3.1.5.C Specifying the output of an asset before the period of use 1702
3.1.5.D Protective rights 1703
3.1.6 Flowchart of the decision making process 1704
3.1.7 Reassessment of the contract 1705
3.2 Identifying and separating lease and non-lease components of a contract 1705
3.2.1 Identifying and separating lease components of a contract 1705
3.2.2 Identifying and separating lease from non-lease components of a contract 1706
3.2.2.A Lessee reimbursements 1707
3.2.2.B Practical expedient – lessees 1707
3.2.3 Determining and allocating the consideration in the contract – lessees 1708
3.2.3.A Determining the consideration in the contract 1708
3.2.3.B Allocating the consideration in the contract – lessees 1708
3.2.4 Determining and allocating the consideration in the contract – lessors 1709
3.2.4.A Determining the consideration in the contract 1709
3.2.4.B Allocating the consideration in the contract – lessors 1709
3.3 Contract combinations 1711
4 KEY CONCEPTS 1711
4.1 Inception of a contract 1711
4.2 Commencement date of the lease 1711
4.3 Lessee involvement with the underlying asset before the commencement date 1712
4.4 Lease term and purchase options 1712
4.4.1 Cancellable leases 1715
4.4.2 Reassessment of lease term and purchase options – lessees 1715
4.4.3 Reassessment of lease term and purchase options – lessors 1716
4.5 Lease payments 1717
4.5.1 In-substance fixed lease payments 1717
4.5.2 Lease incentives 1718
4.5.3 Variable lease payments that depend on an index or rate 1718
4.5.4 The exercise price of a purchase option 1719
4.5.5 Payments for penalties for terminating a lease 1719
4.5.6 Amounts expected to be payable under residual value guarantees – lessees only 1719
4.5.7 Amounts expected to be payable under residual value guarantees – lessors only 1719
4.5.8 Amounts not included in lease payments 1720
4.5.9 Reassessment of the lease liability 1720
4.5.10 Remeasurement by lessors 1720
4.6 Discount rates 1720
4.7 Initial direct costs 1721
4.8 Economic life 1721
4.9 Fair value 1721
5 LESSEE ACCOUNTING 1722
5.1 Initial recognition 1722
5.1.1 Short-term leases 1722
5.1.2 Leases of low-value assets 1723
5.2 Initial measurement 1724
5.2.1 Right-of-use assets 1724
5.2.2 Lease liabilities 1724
5.3 Subsequent measurement 1725
5.3.1 Right-of-use assets 1725
5.3.1.A Cost model 1725
5.3.1.B Other measurement models 1725
5.3.2 Lease liabilities 1726
5.3.3 Expense recognition 1726
5.4 Remeasurement of lease liabilities and right-of-use assets 1727
5.5 Lease modifications 1728
5.5.1 Determining whether a lease modification results in a separate lease 1729
5.5.2 Lessee accounting for a modification that does not result in a separate lease 1729
5.6 Other lessee matters 1733
5.6.1 Impairment of right-of-use assets 1733
5.6.2 Leases denominated in a foreign currency 1733
5.6.3 Portfolio approach 1733
5.6.4 Income tax accounting 1734
5.7 Presentation 1734
5.8 Disclosure 1735
5.8.1 Disclosure objective 1735
5.8.2 Disclosures of assets, liabilities, expenses and cash flows 1736
5.8.3 Additional disclosures 1737
6 LESSOR ACCOUNTING 1737
6.1 Lease classification 1737
6.1.1 Criteria for lease classification 1737
6.1.2 Lease classification test for land and buildings 1739
6.1.3 Residual value guarantees included in the lease classification test 1739
6.1.4 Reassessment of lease classification 1739
6.2 Finance leases 1740
6.2.1 Initial measurement 1740
6.2.2 Manufacturer or dealer lessors 1740
6.2.3 Subsequent measurement 1741
6.2.4 Remeasurement of the net investment in the lease 1743
6.3 Operating leases 1743
6.4 Lease modifications 1744
6.4.1 Determining whether a modification to a finance lease results in a separate lease 1744
6.4.2 Lessor accounting for a modification to a finance lease that does not result in a separate lease 1744
6.4.3 Modification to an operating lease 1745
6.5 Other lessor matters 1745
6.5.1 Portfolio approach 1745
6.6 Presentation 1745
6.7 Disclosure 1745
6.7.1 Disclosure objective 1745
6.7.2 Disclosures for all lessors 1745
6.7.3 Disclosures for finance leases 1746
6.7.4 Disclosures for operating leases 1746
7 SUBLEASES 1746
7.1 Definition 1746
7.2 Intermediate lessor accounting 1747
7.3 Sublessee accounting 1749
7.4 Presentation 1749
7.5 Disclosure 1749
8 SALE AND LEASEBACK TRANSACTIONS 1749
8.1 Determining whether the transfer of an asset is a sale 1750
8.2 Transactions in which the transfer of an asset is a sale 1751
8.2.1 Accounting for the sale 1751
8.2.2 Accounting for the leaseback 1751
8.2.3 Adjustment for off-market terms 1752
8.3 Transactions in which the transfer of an asset is not a sale 1753
8.4 Disclosures 1754
9 BUSINESS COMBINATIONS 1754
9.1 Acquiree in a business combination is a lessee 1754
9.2 Acquiree in a business combination is a lessor 1755
10 EFFECTIVE DATE AND TRANSITION 1755
10.1 Effective date 1755
10.2 Transition 1755
10.3 Lessee transition 1756
10.3.1 Full retrospective approach 1756
10.3.2 Modified retrospective approach 1756
10.3.2.A Leases previously classified as operating leases 1756
10.3.2.B Leases previously classified as finance leases 1757
10.4 Lessor transition 1758
10.4.1 Subleases 1758
10.5 Other considerations 1758
10.5.1 Sale and leaseback transactions 1758
10.5.2 Amounts previously recognised in a business combination 1758
10.6 Disclosure 1759
Chapter 26 Government grants 1761
1 INTRODUCTION 1763
1.1 Overview of IAS 20 1763
1.2 Terms used in this chapter 1764
2 SCOPE OF IAS 20 1765
2.1 Government assistance 1765
2.2 Government grants 1766
2.2.1 Grants with no specific relation to operating activities (SIC-10) 1766
2.3 Scope exclusions 1767
2.3.1 Investment tax credits 1767
3 RECOGNITION AND MEASUREMENT 1769
3.1 General requirements of IAS 20 1769
3.2 Non-monetary grants 1770
3.3 Forgivable loans 1770
3.4 Loans at lower than market rates of interest 1771
3.5 Recognition in the income statement 1773
3.5.1 Achieving the most appropriate matching 1774
3.5.2 The period to be benefited by the grant 1776
3.5.3 Separating grants into elements 1776
3.6 Repayment of government grants 1776
3.7 Government assistance 1777
4 PRESENTATION OF GRANTS 1777
4.1 Presentation of grants related to assets 1777
4.1.1 Cash flows 1778
4.1.2 Impairment testing of assets that qualified for government grants 1778
4.2 Presentation of grants related to income 1779
5 GOVERNMENT GRANTS RELATED TO BIOLOGICAL ASSETS IN THE SCOPE OF IAS 41 1780
6 DISCLOSURES 1780
6.1 Government assistance 1782
References 1782
Chapter 27 Service concession arrangements 1783
1 INTRODUCTION 1787
1.1 The Interpretations Committee’s approach to accounting for service concessions 1789
1.2 Terms used in this chapter 1790
2 SCOPE OF IFRIC 12 1790
2.1 Public-to-private service concession arrangements within scope 1792
2.1.1 Private sector entity (the operator) 1792
2.1.2 Public sector body (the grantor) 1792
2.1.3 Service concession arrangement (‘SCA’) 1793
2.1.4 Infrastructure assets within the scope of IFRIC 12 1794
2.1.5 Operator does not ‘merely act as an agent’ 1795
2.1.6 A contract with the grantor 1795
2.2 Arrangements that are not in the scope of IFRIC 12 1796
2.3 IFRIC 4 and IFRIC 12: outsourcing arrangements and SCAs 1797
2.3.1 The private sector entity acting as lessor or provider of outsourcing services 1798
2.3.2 Entities applying IFRS 16 1799
2.4 Private-to-private arrangements 1800
2.5 Accounting by grantors 1801
3 THE CONTROL MODEL 1801
3.1 Regulation of services 1801
3.2 Control of the residual interest 1802
3.3 Assets within scope 1805
3.3.1 Periodic payments to the grantor for the right to use assets 1805
3.3.2 Previously held assets used for the concession 1806
3.3.3 Accounting for service concession arrangements for which the infrastructure is leased from a party other than the grantor 1807
3.4 Partially regulated assets 1808
4 ACCOUNTING BY THE CONCESSION OPERATOR: THE FINANCIAL ASSET AND INTANGIBLE ASSET MODELS 1809
4.1 Consideration for services provided and the choice between the two models 1811
4.1.1 Allocating the consideration 1812
4.1.2 Determining the accounting model 1812
4.2 The financial asset model 1814
4.3 The intangible asset model 1818
4.3.1 Amortisation of the intangible asset 1819
4.3.2 Impairment during the construction phase 1822
4.4 Revenue recognition implications of the two models 1823
4.5 ‘Bifurcation’ – single arrangements that contain both financial and intangible assets 1823
4.6 Accounting for residual interests 1824
4.7 Accounting for contractual payments to be made by an operator to a grantor 1826
4.7.1 Accounting for variable payments in a service concession 1827
4.7.2 Accounting for contractual payments under the financial asset model 1827
4.7.3 Accounting for contractual payments under the intangible asset model 1830
5 REVENUE AND EXPENDITURE DURING THE OPERATIONS PHASE OF THE CONCESSION AGREEMENT 1831
5.1 Additional construction and upgrade services 1832
5.1.1 Subsequent construction services that are part of the initial infrastructure asset 1833
5.1.2 Subsequent construction services that comprise a new infrastructure asset 1834
5.2 Accounting for the operations phase 1834
5.3 Items provided to the operator by the grantor 1837
5.4 Additional considerations for entities applying IFRS 15 1838
5.4.1 Determining the separate performance obligations to account for 1838
5.4.2 Recognising construction revenue over time or at a point in time 1839
5.4.3 Additional considerations for entities applying IFRS 9 and IFRS 15 1840
6 DISCLOSURE REQUIREMENTS: SIC-29 1841
References 1845
Chapter 28 Provisions, contingent liabilities and contingent assets 1847
1 INTRODUCTION 1851
1.1 Background 1851
1.2 Interpretations related to the application of IAS 37 1852
1.2.1 IFRIC 1 1852
1.2.2 IFRIC 3 1852
1.2.3 IFRIC 5 1852
1.2.4 IFRIC 6 1852
1.2.5 IFRIC 21 1852
1.3 Terms used in this chapter 1853
2 OBJECTIVE AND SCOPE OF IAS 37 1854
2.1 Objective 1854
2.2 Scope of IAS 37 1854
2.2.1 Items outside the scope of IAS 37 1856
2.2.1.A Executory contracts, except where the contract is onerous 1856
2.2.1.B Items covered by another standard 1856
2.2.1.C Entities adopting IFRS 15 1857
2.2.1.D Entities adopting IFRS 16 1858
2.2.2 Provisions compared to other liabilities 1858
2.2.3 Distinction between provisions and contingent liabilities 1859
3 RECOGNITION 1860
3.1 Determining when a provision should be recognised 1860
3.1.1 ‘An entity has a present obligation (legal or constructive) as a result of a past event’ 1860
3.1.2 ‘It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation’ 1864
3.1.3 ‘A reliable estimate can be made of the amount of the obligation’ 1864
3.2 Contingencies 1864
3.2.1 Contingent liabilities 1865
3.2.2 Contingent assets 1866
3.2.2.A Obligations contingent on the successful recovery of a contingent asset 1867
3.2.3 How probability determines whether to recognise or disclose 1868
3.3 Recognising an asset when recognising a provision 1868
4 MEASUREMENT 1869
4.1 Best estimate of provision 1869
4.2 Dealing with risk and uncertainty in measuring a provision 1871
4.3 Discounting the estimated cash flows to a present value 1871
4.3.1 Real versus nominal rate 1872
4.3.2 Adjusting for risk and using a government bond rate 1872
4.3.3 Own credit risk is not taken into account 1875
4.3.4 Pre-tax discount rate 1875
4.3.5 Unwinding of the discount 1875
4.3.6 The effect of changes in interest rates on the discount rate applied 1878
4.4 Anticipating future events that may affect the estimate of cash flows 1880
4.5 Reimbursements, insurance and other recoveries from third parties 1880
4.6 Joint and several liability 1881
4.7 Provisions are not reduced for gains on disposal of related assets 1882
4.8 Changes and uses of provisions 1883
4.9 Changes in contingent liabilities recognised in a business combination 1883
5 CASES IN WHICH NO PROVISION SHOULD BE RECOGNISED 1883
5.1 Future operating losses 1884
5.2 Repairs and maintenance of owned assets 1884
5.3 Staff training costs 1886
5.4 Rate-regulated activities 1887
6 SPECIFIC EXAMPLES OF PROVISIONS AND CONTINGENCIES 1889
6.1 Restructuring provisions 1889
6.1.1 Definition 1889
6.1.2 Recognition of a restructuring provision 1890
6.1.3 Recognition of obligations arising from the sale of an operation 1892
6.1.4 Costs that can (and cannot) be included in a restructuring provision 1893
6.2 Onerous contracts 1895
6.2.1 Recognition of provisions for vacant leasehold property 1897
6.2.2 Recognition of provisions for occupied leasehold property 1900
6.2.3 When an entity ceases to occupy part of a leased property 1900
6.3 Decommissioning provisions 1901
6.3.1 Changes in estimated decommissioning costs (IFRIC 1) 1903
6.3.2 Changes in legislation after construction of the asset 1907
6.3.3 Funds established to meet an obligation (IFRIC 5) 1907
6.3.3.A Accounting for an interest in a fund 1909
6.3.3.B Accounting for obligations to make additional contributions 1911
6.3.3.C Gross presentation of interest in the fund and the decommissioningliability 1911
6.3.3.D Disclosure of interests arising from decommissioning, restoration andenvironmental rehabilitation funds 1912
6.4 Environmental provisions – general guidance in IAS 37 1912
6.5 Liabilities associated with emissions trading schemes 1914
6.6 Green certificates compared to emissions trading schemes 1916
6.7 EU Directive on ‘Waste Electrical and Electronic Equipment’ (IFRIC 6) 1917
6.8 Levies imposed by governments 1919
6.8.1 Scope of IFRIC 21 1920
6.8.2 Recognition and measurement of levy liabilities 1921
6.8.3 Recognition of an asset or expense when a levy is recorded 1923
6.9 Dilapidation and other provisions relating to leased assets 1924
6.10 Warranty provisions 1926
6.11 Litigation and other legal claims 1927
6.12 Refunds policy 1928
6.13 Self insurance 1928
6.14 Obligations to make donations to non-profit organisations 1929
7 DISCLOSURE REQUIREMENTS 1931
7.1 Provisions 1931
7.2 Contingent liabilities 1934
7.3 Contingent assets 1935
7.4 Reduced disclosure when information is seriously prejudicial 1935
References 1937
Chapter 29 Revenue recognition (IAS 18) 1939
1 INTRODUCTION 1943
2 THE TIMING OF REVENUE RECOGNITION 1944
2.1 The critical event approach 1944
2.1.1 The recognition of revenue at the completion of production 1944
2.1.2 The recognition of revenue at the time of sale 1945
2.1.3 The recognition of revenue subsequent to delivery 1945
2.2 The accretion approach 1947
3 THE REQUIREMENTS OF IAS 18 1948
3.1 Scope 1948
3.2 The distinction between income, revenue and gains 1949
3.3 Revenue and agency relationships 1950
3.4 Income and distributable profits 1951
3.5 Measurement of revenue 1951
3.6 Identifying the transaction 1952
3.7 The sale of goods 1954
3.8 The rendering of services 1957
3.9 Exchanges of goods and services 1960
3.10 Exchanges of property plant and equipment and intangible assets 1961
3.11 Barter transactions involving advertising services 1961
3.12 Interest, royalties and dividends 1963
3.13 Uncollectible revenue 1964
3.14 Disclosure 1964
3.15 Revenue in the statement of profit or loss and other comprehensive income 1965
3.15.1 Interest and other finance income 1965
3.15.2 Gains on disposal of property, plant and equipment and intangible assets 1968
4 REVENUE RECOGNITION UNDER US GAAP 1968
4.1 Applicability of US literature 1968
4.2 The general approach to revenue recognition under US GAAP 1968
4.3 US GAAP requirements for multiple-element transactions 1969
5 PRACTICAL ISSUES 1970
5.1 Sale of goods 1972
5.1.1 ‘Bill and hold’ sales 1972
5.1.2 Goods shipped subject to conditions 1972
5.1.3 Layaway sales 1973
5.1.4 Payments in advance 1973
5.1.5 Sale and repurchase agreements 1975
5.1.6 Instalment sales 1975
5.2 Receipt of initial fees 1975
5.2.1 Franchise fees 1975
5.2.2 Advance royalty or licence receipts 1977
5.2.3 Financial service fees 1979
5.2.3.A Fees that are an integral part of the effective interest rate of a financialinstrument 1979
5.2.3.B Fees earned as services are provided 1981
5.2.3.C Fees that are earned on the execution of a significant act 1981
5.2.4 Initial and ongoing fees received by a fund manager 1982
5.2.5 Insurance agency commissions 1984
5.2.6 Credit card fees 1984
5.2.7 Admission, entrance and membership fees 1984
5.3 Subscriptions to publications 1985
5.4 Installation fees 1985
5.5 Advertising revenue 1985
5.6 Software revenue recognition 1986
5.6.1 The basic principles of ASC 985-605 1987
5.6.2 Accounting for software arrangements with multiple elements 1988
5.6.3 Accounting for arrangements which require significant production, modification or customisation of software 1988
5.7 Revenue recognition issues in the telecommunications sector 1989
5.7.1 Recording revenue for multiple service elements (‘bundled offers’) 1989
5.7.1.A Accounting for handsets and monthly service arrangements 1990
5.7.1.B ‘Free’ services 1991
5.7.1.C Connection and upfront fees 1992
5.7.2 ‘Gross versus net’ issues 1994
5.7.3 Accounting for roll-over minutes 1995
5.7.4 Accounting for the sale of pre-paid calling cards 1995
5.8 Excise taxes and goods and services taxes: recognition of gross versus net revenues 1996
5.9 Sales incentives 1998
5.10 Film exhibition and television broadcast rights 2001
5.11 The disposal of property, plant and equipment 2002
5.11.1 Sale of assets held for rental 2004
5.12 IFRIC 15 and pre-completion contracts 2004
5.12.1 Applicable standard: IAS 18 or IAS 11 2005
5.12.2 Continuous transfer 2007
5.12.3 Separation into components 2009
5.12.4 Disclosure 2010
5.13 Regulatory assets and liabilities 2011
5.14 Transfers of assets from customers and IFRIC 18 2011
5.15 Customer loyalty programmes and IFRIC 13 2015
5.15.1 The scope of IFRIC 13 2017
5.15.2 The requirements of IFRIC 13 2017
5.15.3 Measuring the fair value of award credits 2020
5.16 Revenue recognition from gambling 2021
References 2023
Chapter 30 Revenue from contracts with customers (IFRS 15) 2025
1 OBJECTIVE, EFFECTIVE DATE AND TRANSITION 2039
1.1 Overview of the standard 2040
1.1.1 Core principle of the standard 2041
1.1.2 Changes to the standard since issuance 2042
1.2 Effective date 2043
1.3 Transition methods 2044
1.3.1 Full retrospective adoption 2046
1.3.2 Modified retrospective adoption 2048
1.3.3 Other transition considerations 2051
1.3.4 Disclosures prior to adoption of IFRS 15 2053
1.4 Definitions 2054
2 SCOPE 2055
2.1 Other scope considerations 2055
2.2 Definition of a customer 2056
2.3 Collaborative arrangements 2057
2.4 Interaction with other standards 2057
2.4.1 Implementation questions on scope 2058
2.4.1.A Islamic financing transactions 2058
2.4.1.B Certain fee-generating activities of financial institutions 2059
2.4.1.C Credit card arrangements 2060
2.4.1.D Credit card-holder rewards programmes 2060
2.4.1.E Contributions 2061
2.4.1.F Fixed-odds wagering contracts 2061
3 IDENTIFY THE CONTRACT WITH THE CUSTOMER 2061
3.1 Attributes of a contract 2062
3.1.1 Parties have approved the contract and are committed to perform their respective obligations 2063
3.1.2 Each party’s rights regarding the goods or services to be transferred can be identified 2064
3.1.3 Payment terms can be identified 2064
3.1.4 Commercial substance 2065
3.1.5 Collectability 2065
3.1.5.A Assessing collectability for a portfolio of contracts 2068
3.1.5.B Determining when to reassess collectability 2068
3.2 Contract enforceability and termination clauses 2069
3.2.1 Implementation questions on contract enforceability and termination clauses 2070
3.2.1.A Evaluating termination clauses and termination payments indetermining the contract term 2070
3.2.1.B Evaluating the contract term when only the customer has the right tocancel the contract without cause 2070
3.2.1.C Evaluating the contract term when an entity has a past practice of notenforcing termination payments 2071
3.2.1.D Accounting for a partial termination of a contract 2071
3.3 Combining contracts 2072
3.3.1 Portfolio approach practical expedient 2073
3.4 Contract modifications 2074
3.4.1 Contract modification represents a separate contract 2077
3.4.2 Contract modification is not a separate contract 2078
3.4.3 Implementation questions on contract modifications 2081
3.4.3.A Reassessing the contract criteria if a contract is modified 2081
3.5 Arrangements that do not meet the definition of a contract under the standard 2081
3.5.1 Implementation questions on arrangements that do not meet the definition of a contract under the standard 2083
3.5.1.A Determining when a contract is terminated for the purpose ofapplying paragraph 15(b) of IFRS 15 2083
4 IDENTIFY THE PERFORMANCE OBLIGATIONS IN THE CONTRACT 2083
4.1 Identifying the promised goods and services in the contract 2084
4.1.1 Identifying promised goods or services that are not identified as deliverables under current revenue requirements 2088
4.1.2 Implementation questions on identifying promised goods or services 2089
4.1.2.A Assessing whether pre-production activities are a promised good orservice 2089
4.1.2.B The nature of the promise in a typical stand-ready obligation 2090
4.1.2.C Considering whether contracts with a stand-ready element include asingle performance obligation that is satisfied over time 2091
4.2 Determining when promises are performance obligations 2091
4.2.1 Determination of ‘distinct’ 2092
4.2.1.A Capable of being distinct 2093
4.2.1.B Distinct within the context of the contract 2094
4.2.2 Series of distinct goods and services that are substantially the same and have the same pattern of transfer 2098
4.2.2.A The series requirement: concurrent versus consecutive transfer ofgoods or services 2100
4.2.2.B The series requirement versus treating the distinct goods or services asseparate performance obligations 2101
4.2.2.C Assessing whether a performance obligation consists of distinct goodsor services that are ‘substantially the same’ 2101
4.2.3 Examples of identifying performance obligations 2103
4.3 Promised goods and services that are not distinct 2108
4.4 Principal versus agent considerations 2108
4.4.1 Identifying the specified good or service 2109
4.4.2 Control of the specified good or service 2111
4.4.2.A Principal indicators 2113
4.4.3 Recognising revenue as principal or agent 2116
4.4.4 Examples of principal verses agent assessments 2117
4.4.5 Implementation questions on principal versus agent considerations 2121
4.4.5.A Presentation of amounts billed to customers (e.g. shipping andhandling, reimbursement of out-of-pocket expenses and taxes) 2121
4.5 Consignment arrangements 2122
4.6 Customer options for additional goods or services 2122
4.6.1 Implementation questions on customer options for additional goods or services 2123
4.6.1.A Which transactions to consider when assessing customer options foradditional goods or services 2123
4.6.1.B Nature of evaluation of customer options: quantitative versusqualitative 2124
4.6.1.C Distinguishing between a customer option and variable consideration 2124
4.6.1.D When, if ever, to consider the goods or services underlying a customeroption as a separate performance obligation when there are nocontractual penalties 2127
4.6.1.E Volume rebates and/or discounts on goods or services: customeroptions versus variable consideration 2128
4.6.1.F Considering whether prospective volume discounts determined to becustomer options are material rights 2128
4.6.1.G Accounting for the exercise of a material right 2129
4.6.1.H Customer options that provide a material right: Evaluating whetherthere is a significant financing component 2130
4.7 Sale of products with a right of return 2131
5 DETERMINE THE TRANSACTION PRICE 2132
5.1 Presentation of sales (and other similar) taxes 2133
5.2 Variable consideration 2133
5.2.1 Forms of variable consideration 2134
5.2.1.A Implicit price concessions 2135
5.2.1.B Liquidated damages, penalties or compensation from other similarclauses: variable consideration versus warranty provisions 2137
5.2.1.C Identifying variable consideration: undefined quantities with fixed perunit contractual prices 2138
5.2.1.D If a contract is denominated in a currency other than that of theentity’s functional currency, should changes in the contract price dueto exchange rate fluctuations be accounted for as variableconsideration? 2138
5.2.2 Estimating variable consideration 2139
5.2.3 Constraining estimates of variable consideration 2141
5.2.3.A Applying the constraint on variable consideration: contract levelversus performance obligation level 2147
5.2.3.B Do the variable consideration requirements (including application ofthe constraint) apply to all types of variable consideration? 2147
5.2.3.C Would an entity be required to follow a two-step approach to estimatevariable consideration? 2147
5.2.4 Reassessment of variable consideration 2148
5.3 Refund liabilities 2148
5.4 Accounting for specific types of variable consideration 2149
5.4.1 Rights of return 2149
5.4.1.A Is an entity applying the portfolio approach practical expedient whenaccounting for rights of return? 2151
5.4.1.B Accounting for restocking fees for goods that are expected to bereturned 2152
5.4.1.C Accounting for restocking costs for goods that are expected to bereturned 2153
5.4.2 Sales-based and usage-based royalties on licences of intellectual property 2153
5.5 Significant financing component 2153
5.5.1 Examples of significant financing components 2157
5.5.2 Implementation questions on identifying and accounting for significant financing components 2161
5.5.2.A Payment terms reflect reasons other than the provision of finance 2161
5.5.2.B Existence of a financing component when the promised considerationis equal to the cash selling price 2161
5.5.2.C Accounting for financing components that are not significant 2162
5.5.2.D Determining whether the significant financing component practicalexpedient applies to contracts with a single payment stream formultiple performance obligations 2162
5.5.2.E Calculating the adjustment to revenue for significant financingcomponents 2163
5.5.2.F Allocating a significant financing component when there are multipleperformance obligations in a contract 2163
5.5.3 Financial statement presentation of financing component 2164
5.6 Non-cash consideration 2164
5.6.1 Non-cash consideration implementation considerations 2166
5.7 Consideration paid or payable to a customer 2167
5.7.1 Determining who is an entity’s customer when applying the requirements for consideration payable to a customer 2168
5.7.2 Classification of different types of consideration paid or payable to a customer 2169
5.7.3 Forms of consideration paid or payable to a customer 2169
5.7.3.A Payments to a customer that are within the scope of the requirementsfor consideration payable to a customer 2170
5.7.4 Timing of recognition of consideration paid or payable to a customer 2171
5.8 Non-refundable upfront fees 2172
5.8.1 Implementation questions on non-refundable upfront fees 2174
5.8.1.A Recognition period for a non-refundable upfront fee that does notrelate to the transfer of a good or service 2174
5.9 Changes in the transaction price 2174
6 ALLOCATE THE TRANSACTION PRICE TO THE PERFORMANCE OBLIGATIONS 2174
6.1 Determining stand-alone selling prices 2175
6.1.1 Factors to consider when estimating the stand-alone selling price 2176
6.1.2 Possible estimation approaches 2177
6.1.3 Updating estimated stand-alone selling prices 2181
6.1.4 Additional considerations for determining the stand-alone selling price 2181
6.1.4.A When estimating the stand-alone selling price, does an entity have toconsider its historical pricing for the sale of the good or serviceinvolved? 2182
6.1.4.B When using an expected cost plus margin approach to estimate astand-alone selling price, how would an entity determine anappropriate margin? 2182
6.1.5 Measurement of options that are separate performance obligations 2183
6.1.5.A Could the form of an option (e.g. a gift card versus a coupon) affecthow an option’s stand-alone selling price is estimated? 2185
6.2 Applying the relative stand-alone selling price method 2186
6.3 Allocating variable consideration 2187
6.3.1 Implementation questions on the variable consideration allocation exception 2191
6.3.1.A In order to meet the criteria to allocate variable consideration entirelyto a specific part of a contract, must the allocation be made on arelative stand-alone selling price basis? 2191
6.4 Allocating a discount 2191
6.4.1 Implementation questions on the discount allocation exception 2194
6.4.1.A Interaction between the two allocation exceptions: variable discounts 2194
6.5 Changes in transaction price after contract inception 2194
6.6 Allocation of transaction price to components outside the scope of IFRS 15 2195
7 SATISFACTION OF PERFORMANCE OBLIGATIONS 2196
7.1 Performance obligations satisfied over time 2197
7.1.1 Customer simultaneously receives and consumes benefits as the entity performs 2198
7.1.1.A Evaluating whether a customer simultaneously receives and consumesthe benefits of a commodity as the entity performs 2200
7.1.2 Customer controls asset as it is created or enhanced 2200
7.1.3 Asset with no alternative use and right to payment 2201
7.1.3.A Alternative use 2201
7.1.3.B Enforceable right to payment for performance completed to date 2203
7.1.3.C Enforceable right to payment: does an entity need a presentunconditional right to payment? 2209
7.1.3.D Enforceable right to payment: non-refundable upfront payments thatrepresent the full transaction price 2209
7.2 Measuring progress over time 2209
7.2.1 Output methods 2211
7.2.1.A Practical expedient for measuring progress towards satisfaction of aperformance obligation 2212
7.2.2 Input methods 2213
7.2.2.A Adjustments to the measure of progress based on an input method 2214
7.2.3 Examples of measures of progress 2217
7.2.4 Implementation questions on measuring progress over time 2217
7.2.4.A Measuring progress toward satisfaction of a stand-ready obligation thatis satisfied over time 2217
7.2.4.B Selecting a measure of progress when there is more than onepromised good or service within a performance obligation 2218
7.2.4.C Determining the appropriate single measure of progress for acombined performance obligation that is satisfied over time 2218
7.2.4.D Can control of a good or service underlying a performance obligationsatisfied over time be transferred at discrete points in time? 2219
7.2.4.E Use of the ‘right to invoice’ practical expedient for a contract thatincludes rates that change over the contractual term 2219
7.2.4.F Recognising revenue when fulfilment costs are incurred prior to thecontract establishment date for a specifically anticipated contract 2220
7.3 Control transferred at a point in time 2220
7.3.1 Customer acceptance 2223
7.4 Repurchase agreements 2226
7.4.1 Forward or call option held by the entity 2227
7.4.2 Put option held by the customer 2229
7.4.2.A When an entity has a conditional call option to remove and replaceexpired products (e.g. out-of-date perishable goods, expiredmedicine), does the customer obtain control of the products (or is itakin to a right of return)? 2230
7.4.3 Sales with residual value guarantees 2231
7.5 Consignment arrangements 2232
7.6 Bill-and-hold arrangements 2232
7.7 Recognising revenue for licences of intellectual property 2234
7.8 Recognising revenue when a right of return exists 2234
7.9 Recognising revenue for customer options for additional goods and services 2235
7.10 Breakage and prepayments for future goods or services 2235
7.10.1 Implementation questions on breakage 2236
7.10.1.A Are customers’ unexercised rights (i.e. breakage) a form of variableconsideration? 2236
8 LICENCES OF INTELLECTUAL PROPERTY 2237
8.1 Identifying performance obligations in a licensing arrangement 2238
8.1.1 Licences of intellectual property that are distinct 2239
8.1.2 Licences of intellectual property that are not distinct 2241
8.1.3 Contractual restrictions 2242
8.1.4 Guarantees to defend or maintain a patent 2243
8.1.5 Implementation questions on identifying performance obligations in a licensing arrangement 2244
8.1.5.A How should entities account for modifications to licences ofintellectual property? 2244
8.2 Determining the nature of the entity’s promise in granting a licence 2244
8.2.1 Applying the licensing application guidance to a single performance obligation that includes a licence of intellectual pro 2247
8.3 Transfer of control of licensed intellectual property 2249
8.3.1 Right to access 2250
8.3.2 Right to use 2251
8.3.3 Use and benefit requirement 2252
8.4 Licence renewals 2252
8.5 Sales-based or usage-based royalties on licences of intellectual property 2253
8.5.1 Recognition of royalties for a licence that provides a right to access intellectual property 2257
8.5.2 Implementation questions on the sales-based or usage-based royalty exception 2259
8.5.2.A Can the recognition constraint for sales-based or usage-based royaltiesbe applied to royalties that are paid in consideration for sales ofintellectual property (rather than just licences of intellectual property)? 2259
8.5.2.B If a contract for a licence of intellectual property includes paymentswith fixed amounts (e.g. milestone payments) that are determined byreference to sales-based or usage-based thresholds, would the royaltyexception need to be applied? 2259
8.5.2.C Can an entity recognise revenue for sales-based or usage-basedroyalties for licences of intellectual property on a lag if actual sales orusage data is not available at the end of a reporting period? 2260
9 OTHER MEASUREMENT AND RECOGNITION TOPICS 2260
9.1 Warranties 2260
9.1.1 Determining whether a warranty is an assurance-type or service-type warranty 2261
9.1.1.A Evaluating whether a product warranty is a service-type warranty (i.e.a performance obligation) when it is not separately priced 2262
9.1.1.B Should repairs provided outside the warranty period be accounted foras a service-type warranty? 2262
9.1.1.C Customer’s return of a defective item in exchange for compensation:right of return versus assurance-type warranty 2263
9.1.2 Service-type warranties 2263
9.1.3 Assurance-type warranties 2264
9.1.4 Contracts that contain both assurance and service-type warranties 2264
9.2 Onerous contracts 2266
9.3 Contract costs 2267
9.3.1 Costs to obtain a contract 2267
9.3.1.A Would an entity capitalise commissions paid on contract modifications? 2269
9.3.1.B Would fringe benefits on commission payments be included in thecapitalised amounts? 2270
9.3.1.C Must an entity apply the practical expedient to expense contractacquisition costs to all of its qualifying contracts across the entity orcan it apply the practical expedient to individual contracts? 2270
9.3.1.D How would an entity account for capitalised commissions upon amodification of the contract that is treated as the termination of anexisting contract and the creation of a new contract? 2270
9.3.2 Costs to fulfil a contract 2270
9.3.2.A Can an entity defer costs of a transferred good or service that wouldotherwise generate an up-front loss because variable consideration isfully or partially constrained? 2273
9.3.2.B Accounting for fulfilment costs incurred prior to the contractestablishment date that are outside the scope of another standard 2273
9.3.3 Amortisation of capitalised costs 2274
9.3.3.A Can an entity attribute the capitalised contract costs to the individualperformance obligations in the contract to determine the appropriateamortisation period? 2275
9.3.3.B Over what period should an entity amortise a sales commission (thatis only paid once a threshold is met) that is determined to be anincremental cost to obtain a contract? 2275
9.3.3.C How should capitalised contract costs and its amortisation bepresented in the statement of financial position and statement of profitand loss and other comprehensive income, respectively? 2276
9.3.4 Impairment of capitalised costs 2277
10 PRESENTATION AND DISCLOSURE 2278
10.1 Presentation requirements for contract assets and contract liabilities 2279
10.1.1 Implementation questions on presentation of contract assets and liabilities 2282
10.1.1.A Determining the presentation of contract assets and liabilities forcontracts that contain multiple performance obligations 2282
10.1.1.B Determining the presentation of two or more contracts that arerequired to be combined under the standards 2282
10.1.1.C Offsetting contract assets and liabilities against other statement offinancial position items (e.g. accounts receivable) 2283
10.1.1.D Is a refund liability a contract liability (and, thus, subject to thepresentation and disclosure requirements of a contract liability)? 2283
10.1.1.E Accounting for a contract asset that exists when a contract is modifiedif the modification is treated as the termination of an existing contractand the creation of a new contract 2283
10.1.1.F Determining when an entity has an unconditional right to payment if ithas not transferred a good or service 2284
10.2 Other presentation considerations 2285
10.3 Disclosure objective and general requirements 2285
10.4 Specific disclosure requirements 2286
10.4.1 Contracts with customers 2286
10.4.1.A Disaggregation of revenue 2287
10.4.1.B Contract balances 2289
10.4.1.C Performance obligations 2290
10.4.1.D Use of the ‘backlog’ practical expedient when the criteria to use the‘right to invoice’ practical expedient are not met 2294
10.4.2 Significant judgements 2295
10.4.2.A Determining the timing of satisfaction of performance obligations 2295
10.4.2.B Determining the transaction price and the amounts allocated toperformance obligations 2296
10.4.3 Assets recognised from the costs to obtain or fulfil a contract 2297
10.4.4 Practical expedients 2297
10.5 Transition disclosure requirements 2297
References 2298
Chapter 31 Income taxes 2303
1 INTRODUCTION 2313
1.1 The nature of taxation 2313
1.2 Allocation between periods 2313
1.2.1 No provision for deferred tax (‘flow through’) 2314
1.2.2 Provision for deferred tax (the temporary difference approach) 2315
1.3 The development of IAS 12 2316
1.3.1 References to income taxes in standards other than IAS 12 2317
2 OBJECTIVE AND SCOPE OF IAS 12 2317
2.1 Objective 2317
2.2 Overview 2318
3 DEFINITIONS 2319
4 SCOPE 2320
4.1 What is an ‘income tax’? 2321
4.1.1 Levies 2322
4.1.2 Hybrid taxes (including minimum taxes) 2322
4.2 Withholding and similar taxes 2323
4.3 Investment tax credits 2324
4.4 Interest and penalties 2327
4.5 Effectively tax-free entities 2327
5 CURRENT TAX 2328
5.1 Enacted or substantively enacted tax legislation 2328
5.1.1 Meaning of substantive enactment in various jurisdictions 2329
5.2 Uncertain tax treatments 2329
5.3 ‘Prior year adjustments’ of previously presented tax balances and expense (income) 2330
5.4 Intra-period allocation, presentation and disclosure 2330
6 DEFERRED TAX – TAX BASES AND TEMPORARY DIFFERENCES 2331
6.1 Tax base 2332
6.1.1 Tax base of assets 2332
6.1.2 Tax base of liabilities 2333
6.1.3 Assets and liabilities whose tax base is not immediately apparent 2334
6.1.4 Tax base of items not recognised as assets or liabilities in financial statements 2334
6.1.5 Equity items with a tax base 2335
6.1.6 Items with more than one tax base 2336
6.1.7 Tax bases disclaimed or with no economic value 2336
6.2 Examples of temporary differences 2336
6.2.1 Taxable temporary differences 2336
6.2.1.A Transactions that affect profit or loss 2336
6.2.1.B Transactions that affect the statement of financial position 2338
6.2.1.C Revaluations 2339
6.2.1.D Tax re-basing 2339
6.2.1.E Business combinations and consolidation 2340
6.2.1.F Foreign currency differences 2340
6.2.1.G Hyperinflation 2341
6.2.2 Deductible temporary differences 2341
6.2.2.A Transactions that affect profit of loss 2341
6.2.2.B Transactions that affect the statement of financial position 2342
6.2.2.C Revaluations 2342
6.2.2.D Tax re-basing 2343
6.2.2.E Business combinations and consolidation 2343
6.2.2.F Foreign currency differences 2343
6.2.3 Assets and liabilities with no temporary difference (because tax base equals carrying amount) 2344
7 DEFERRED TAX – RECOGNITION 2345
7.1 The basic principles 2345
7.1.1 Taxable temporary differences (deferred tax liabilities) 2345
7.1.2 Deductible temporary differences (deferred tax assets) 2345
7.1.3 Interpretation issues 2345
7.1.3.A Accounting profit 2345
7.1.3.B Taxable profit ‘at the time of the transaction’ 2346
7.2 The initial recognition exception 2346
7.2.1 Acquisition of tax losses 2348
7.2.2 Initial recognition of goodwill 2348
7.2.2.A Taxable temporary differences 2348
7.2.2.B Deductible temporary differences 2349
7.2.2.C Tax deductible goodwill 2350
7.2.3 Initial recognition of other assets and liabilities 2350
7.2.4 Changes to temporary differences after initial recognition 2351
7.2.4.A Depreciation, amortisation or impairment of initial carrying value 2352
7.2.4.B Change in carrying value due to revaluation 2353
7.2.4.C Change in tax base due to deductions in tax return 2354
7.2.4.D Temporary difference altered by legislative change 2355
7.2.5 Intragroup transfers of assets with no change in tax base 2356
7.2.6 Partially deductible and super-deductible assets 2356
7.2.7 Transactions involving the initial recognition of an asset and liability 2360
7.2.7.A Decommissioning costs 2360
7.2.7.B Finance leases taxed as operating leases 2362
7.2.8 Initial recognition of compound financial instruments by the issuer 2363
7.2.9 Acquisition of subsidiary not accounted for as a business combination 2365
7.3 Assets carried at fair value or revalued amount 2365
7.4 Restrictions on recognition of deferred tax assets 2366
7.4.1 Restrictions imposed by relevant tax laws 2366
7.4.2 Sources of ‘probable’ taxable profit – taxable temporary differences 2366
7.4.3 Sources of ‘probable’ taxable profit – estimates of future taxable profits 2367
7.4.3.A Ignore the origination of new future deductible temporary differences 2367
7.4.3.B Ignore the reversal of existing deductible temporary differences 2368
7.4.4 Tax planning opportunities 2368
7.4.5 Unrealised losses on available-for-sale debt securities 2369
7.4.5.A The existence of a deductible temporary difference 2370
7.4.5.B Recovering an asset for more than its carrying amount 2371
7.4.5.C Excluding the reversal of existing deductible temporary differences 2372
7.4.5.D The basis for assessing the recoverability of deductible temporarydifferences 2372
7.4.5.E Transitional relief on initial application of the amendments to IAS 12 2375
7.4.6 Unused tax losses and unused tax credits 2375
7.4.7 Re-assessment of deferred tax assets 2376
7.4.7.A Previously recognised assets 2376
7.4.7.B Previously unrecognised assets 2377
7.4.8 Effect of disposals on recoverability of tax losses 2377
7.4.8.A Tax losses of subsidiary disposed of recoverable against profits of thatsubsidiary 2377
7.4.8.B Tax losses of retained entity recoverable against profits of subsidiarydisposed of 2378
7.4.8.C Tax losses of subsidiary disposed of recoverable against profits ofretained entity 2378
7.5 ‘Outside’ temporary differences relating to subsidiaries, branches, associates and joint arrangements 2378
7.5.1 Calculation of ‘outside’ temporary differences 2379
7.5.1.A Consolidated financial statements 2381
7.5.1.B Separate financial statements 2381
7.5.2 Taxable temporary differences 2382
7.5.3 Deductible temporary differences 2383
7.5.4 Anticipated intragroup dividends in future periods 2383
7.5.4.A Consolidated financial statements of receiving entity 2383
7.5.4.B Separate financial statements of paying entity 2384
7.5.5 Unpaid intragroup interest, royalties, management charges etc. 2384
7.5.6 Other overseas income taxed only on remittance 2385
7.6 ‘Tax-transparent’ (‘flow-through’) entities 2385
7.7 Deferred taxable gains 2386
8 DEFERRED TAX – MEASUREMENT 2387
8.1 Legislation at the end of the reporting period 2387
8.2 Uncertain tax treatments 2387
8.3 ‘Prior year adjustments’ of previously presented tax balances and expense (income) 2388
8.4 Expected manner of recovery of assets or settlement of liabilities 2388
8.4.1 Tax planning strategies 2388
8.4.2 Carrying amount 2388
8.4.3 Assets and liabilities with more than one tax base 2389
8.4.4 Determining the expected manner of recovery of assets 2390
8.4.5 Depreciable PP& E and intangible assets
8.4.6 Non-depreciable PP& E and intangible assets
8.4.6.A PP& E accounted for using the revaluation model
8.4.6.B Non-amortised or indefinite life intangible assets 2393
8.4.7 Investment properties 2394
8.4.8 Other assets and liabilities 2395
8.4.9 ‘Outside’ temporary differences relating to subsidiaries, branches, associates and joint arrangements 2395
8.4.10 ‘Single asset’ entities 2396
8.4.11 Change in expected manner of recovery of an asset or settlement of a liability 2398
8.5 Different tax rates applicable to retained and distributed profits 2398
8.5.1 Effectively tax-free entities 2398
8.5.2 Withholding tax or distribution tax? 2399
8.6 Discounting 2400
8.7 Unrealised intragroup profits and losses in consolidated financial statements 2400
8.7.1 Intragroup transfers of goodwill and intangible assets 2402
8.7.1.A Individual financial statements of buyer 2402
8.7.1.B Individual financial statements of seller 2402
8.7.1.C Consolidated financial statements 2402
8.7.1.D When the tax base of goodwill is retained by the transferor entity 2403
9 UNCERTAIN TAX TREATMENTS 2404
9.1 Scope of DI/2015/1 and definitions used 2405
9.2 Whether to consider uncertain tax treatments collectively (unit of account) 2406
9.3 Assumptions about the examination of tax treatments (‘detection risk’) 2407
9.4 Determining an uncertain tax treatment or group of tax treatments 2407
9.5 Consideration of changes in facts and circumstances 2410
9.6 Disclosures relating to uncertain tax treatments 2410
9.7 Recognition of an asset for payments on account 2411
10 ALLOCATION OF TAX CHARGE OR CREDIT 2412
10.1 Revalued and rebased assets 2413
10.1.1 Non-monetary assets with a tax base determined in a foreign currency 2414
10.2 Retrospective restatements or applications 2415
10.3 Dividends and transaction costs of equity instruments 2416
10.3.1 Dividend subject to differential tax rate 2416
10.3.2 Dividend subject to withholding tax 2416
10.3.3 Intragroup dividend subject to withholding tax 2417
10.3.4 Incoming dividends 2417
10.3.5 Tax benefits of distributions and transaction costs of equity instruments 2417
10.4 Gains and losses reclassified (‘recycled’) to profit or loss 2418
10.5 Gain/loss in profit or loss and loss/gain outside profit or loss offset for tax purposes 2419
10.6 Discontinued operations 2421
10.7 Defined benefit pension plans 2422
10.7.1 Tax on refund of pension surplus 2424
10.8 Share-based payment transactions 2424
10.8.1 Allocation of tax deduction between profit or loss and equity 2425
10.8.2 Determining the tax base 2427
10.8.3 Allocation when more than one award is outstanding 2430
10.8.4 Staggered exercise of awards 2431
10.8.5 Replacement awards in a business combination 2434
10.8.6 Share-based payment transactions subject to transitional provisions of IFRS 1 and IFRS 2 2435
10.9 Change in tax status of entity or shareholders 2436
10.10 Previous revaluation of PP& E treated as deemed cost on transition to IFRS
10.11 Disposal of an interest in a subsidiary that does not result in a loss of control 2436
11 CONSOLIDATED TAX RETURNS AND OFFSET OF TAXABLE PROFITS AND LOSSES WITHIN GROUPS 2438
11.1 Payments for intragroup transfer of tax losses 2438
12 BUSINESS COMBINATIONS 2439
12.1 Measurement and recognition of deferred tax in a business combination 2440
12.1.1 Determining the manner of recovery of assets and settlement of liabilities 2440
12.1.2 Deferred tax assets arising on a business combination 2442
12.1.2.A Assets of the acquirer 2442
12.1.2.B Assets of the acquiree 2442
12.1.3 Deferred tax liabilities of acquired entity 2442
12.2 Tax deductions for replacement share-based payment awards in a business combination 2442
12.3 Apparent immediate impairment of goodwill created by deferred tax 2443
12.4 Tax deductions for acquisition costs 2443
12.4.1 Business combinations accounted for under ‘old’ IFRS 3 2443
12.4.2 Business combinations accounted for under ‘new’ IFRS 3 2444
13 PRESENTATION 2445
13.1 Statement of financial position 2445
13.1.1 Offset 2445
13.1.1.A Current tax 2445
13.1.1.B Deferred tax 2445
13.1.1.C Offset of current and deferred tax 2446
13.2 Statement of comprehensive income 2446
13.3 Statement of cash flows 2447
14 DISCLOSURE 2447
14.1 Components of tax expense 2447
14.2 Other disclosures 2447
14.2.1 Tax (or tax rate) reconciliation 2449
14.2.2 Temporary differences relating to subsidiaries, associates, branches and joint arrangements 2450
14.3 Reason for recognition of certain tax assets 2451
14.4 Dividends 2451
14.5 Example of disclosures 2452
14.6 Discontinued operations – interaction with IFRS 5 2454
References 2455
Chapter 32 Share-based payment 2457
1 INTRODUCTION 2471
1.1 Background 2471
1.2 Development of IFRS 2 2472
1.2.1 IFRS 2 research project 2473
1.3 Scope of the chapter and referencing convention 2474
1.4 Overall approach of IFRS 2 2474
1.4.1 Classification differences between IFRS 2 and IAS 32/IAS 39 2475
2 THE OBJECTIVE AND SCOPE OF IFRS 2 2475
2.1 Objective 2475
2.2 Scope 2476
2.2.1 Definitions 2476
2.2.2 Transactions within the scope of IFRS 2 2477
2.2.2.A Group schemes and transactions with group shareholders: scope issues 2478
2.2.2.B Transactions with employee benefit trusts and similar vehicles 2484
2.2.2.C Transactions where the identifiable consideration received appears tobe less than the consideration given 2485
2.2.2.D ‘All employee’ share plans 2486
2.2.2.E Vested transactions 2486
2.2.3 Transactions not within the scope of IFRS 2 2487
2.2.3.A Transactions with shareholders in their capacity as such 2487
2.2.3.B Transfer of assets in group restructuring arrangements 2488
2.2.3.C Business combinations 2488
2.2.3.D Common control transactions and formation of joint arrangements 2488
2.2.3.E Transactions in the scope of IAS 32 and IAS 39 2489
2.2.3.F Transactions in financial assets outside the scope of IAS 32 and IAS 39 2489
2.2.4 Some practical applications of the scope requirements 2490
2.2.4.A Remuneration in non-equity shares and arrangements with put rightsover equity shares 2490
2.2.4.B Equity-settled award of subsidiary with put option against the parent –treatment in consolidated accounts of parent 2491
2.2.4.C Increase in ownership interest with no change in number of shares held 2492
2.2.4.D Awards for which the counterparty has paid ‘fair value’ 2492
2.2.4.E Cash bonus dependent on share price performance 2493
2.2.4.F Cash-settled awards based on an entity’s ‘enterprise value’ or otherformula 2493
2.2.4.G Awards with a foreign currency strike price 2494
2.2.4.H Holding own shares to satisfy or ‘hedge’ awards 2495
2.2.4.I Shares or warrants issued in connection with a financial liability 2495
2.2.4.J Options over puttable instruments classified as equity under specificexception in IAS 32 2495
2.2.4.K Special discounts to certain categories of investor on a share issue 2496
3 GENERAL RECOGNITION PRINCIPLES 2497
3.1 Vesting conditions 2498
3.1.1 ‘Malus’ clauses and clawback conditions 2499
3.2 Non-vesting conditions (conditions that are neither service conditions nor performance conditions) 2501
3.2.1 Background 2501
3.2.2 Defining a non-vesting condition 2502
3.2.3 Non-compete agreements 2504
3.3 Vesting period 2505
3.4 Vesting and non-vesting conditions: issues referred to the Interpretations Committee and the IASB 2506
4 EQUITY-SETTLED TRANSACTIONS – OVERVIEW 2506
4.1 Summary of accounting treatment 2506
4.2 The credit entry 2508
5 EQUITY-SETTLED TRANSACTIONS – COST OF AWARDS 2508
5.1 Cost of awards – overview 2508
5.2 Transactions with employees 2510
5.2.1 Who is an ‘employee’? 2510
5.2.2 Basis of measurement 2511
5.3 Grant date 2511
5.3.1 Determination of grant date 2512
5.3.2 Communication of awards to employees and services in advance of grant date 2513
5.3.3 Exercise price or performance target dependent on a formula or future share price 2514
5.3.4 Exercise price paid in shares (net settlement of award) 2515
5.3.5 Award of equity instruments to a fixed monetary value 2515
5.3.6 Awards over a fixed pool of shares (including ‘last man standing’ arrangements) 2516
5.3.7 Awards with multiple service and performance periods 2517
5.3.8 Awards subject to modification by entity after original grant date 2518
5.3.8.A Significant equity restructuring or transactions 2519
5.3.8.B Interpretation of general terms 2519
5.3.8.C Discretion to make further awards 2520
5.3.9 ‘Good leaver’ arrangements 2520
5.3.9.A Provision for ‘good leavers’ made in original terms of award 2521
5.3.9.B Discretionary awards to ‘good leavers’ 2522
5.3.9.C Automatic full or pro rata entitlement on leaving employment 2522
5.3.10 Special purpose acquisition companies (‘SPACs’) 2523
5.4 Transactions with non-employees 2524
5.4.1 Effect of change of status from employee to non-employee (or vice versa) 2524
5.5 Determining the fair value of equity instruments 2525
5.5.1 Reload features 2526
6 EQUITY-SETTLED TRANSACTIONS – ALLOCATION OF EXPENSE 2526
6.1 Overview 2526
6.1.1 The continuous estimation process of IFRS 2 2528
6.1.2 Vesting and forfeiture 2528
6.1.3 Accounting after vesting 2529
6.2 Vesting conditions other than market conditions 2530
6.2.1 Awards with service conditions 2530
6.2.2 Equity instruments vesting in instalments (‘graded’ vesting) 2531
6.2.3 Transactions with variable vesting periods due to non-market performance vesting conditions 2532
6.2.4 Transactions with variable number of equity instruments awarded depending on non-market performance vesting conditions 2534
6.2.5 Transactions with variable exercise price due to non-market performance vesting conditions 2535
6.3 Market conditions 2536
6.3.1 What is a ‘market condition’? 2536
6.3.2 Summary of accounting treatment 2538
6.3.3 Transactions with market conditions and known vesting periods 2540
6.3.4 Transactions with variable vesting periods due to market conditions 2541
6.3.5 Transactions with multiple outcomes depending on market conditions 2542
6.3.6 Transactions with independent market conditions, non-market vesting conditions or non-vesting conditions 2543
6.3.6.A Independent market and non-market vesting conditions 2543
6.3.6.B Independent market conditions and non-vesting conditions 2544
6.3.7 Transactions with hybrid or interdependent market conditions and nonmarket vesting conditions 2545
6.3.8 Awards based on the market value of a subsidiary or business unit 2545
6.3.8.A Awards with a condition linked to flotation price 2547
6.4 Non-vesting conditions 2547
6.4.1 Awards with no conditions other than non-vesting conditions 2547
6.4.2 Awards with non-vesting conditions and variable vesting periods 2547
6.4.3 Failure to meet non-vesting conditions 2548
7 EQUITY-SETTLED TRANSACTIONS – MODIFICATION, CANCELLATION AND SETTLEMENT 2548
7.1 Background 2548
7.2 Valuation requirements when an award is modified, cancelled or settled 2550
7.3 Modification 2550
7.3.1 Modifications that increase the value of an award 2551
7.3.1.A Increase in fair value of equity instruments granted 2551
7.3.1.B Increase in number of equity instruments granted 2552
7.3.1.C Removal or mitigation of non-market vesting conditions 2552
7.3.2 Modifications that decrease the value of an award 2554
7.3.2.A Decrease in fair value of equity instruments granted 2554
7.3.2.B Decrease in number of equity instruments granted 2555
7.3.2.C Additional or more onerous non-market vesting conditions 2555
7.3.3 Modifications with altered vesting period 2556
7.3.4 Modifications that reduce the number of equity instruments granted but maintain or increase the value of an award (‘value 2557
7.3.5 Modification of award from equity-settled to cash-settled (and vice versa) 2559
7.4 Cancellation and settlement 2560
7.4.1 Distinction between cancellation and forfeiture 2561
7.4.1.A Termination of employment by entity 2561
7.4.1.B Surrender of award by employee 2561
7.4.2 Distinction between cancellation and modification 2562
7.4.3 Calculation of the expense on cancellation 2562
7.4.4 Replacement awards 2564
7.4.4.A Designation of award as replacement award 2564
7.4.4.B Incremental fair value of replacement award 2564
7.4.4.C Replacement of vested awards 2567
7.5 Replacement and ex gratia awards on termination of employment 2568
7.6 Entity’s plans for future modification or replacement of award – impact on estimation process at reporting date 2570
7.7 Two awards running ‘in parallel’ 2571
7.8 Share splits and consolidations 2572
8 EQUITY-SETTLED TRANSACTIONS – VALUATION 2573
8.1 Introduction 2573
8.2 Options 2574
8.2.1 Call options – overview 2574
8.2.2 Call options – valuation 2574
8.2.3 Factors specific to employee share options 2576
8.2.3.A Non-transferability 2577
8.2.3.B Continued employment requirement 2577
8.2.3.C Vesting and non-vesting conditions 2577
8.2.3.D Periods during which exercise is restricted 2577
8.2.3.E Limited ability to hedge option values 2577
8.2.3.F Dilution effects 2578
8.3 Selection of an option-pricing model 2578
8.3.1 The Black-Scholes-Merton formula 2579
8.3.2 The binomial model 2581
8.3.2.A Lattice models – number of time steps 2584
8.3.3 Monte Carlo Simulation 2585
8.4 Adapting option-pricing models for share-based payment transactions 2586
8.4.1 Non-transferability 2587
8.4.2 Treatment of vesting and non-vesting conditions 2587
8.4.2.A Market-based performance measures and non-vesting conditions 2587
8.4.2.B Non-market vesting conditions 2588
8.5 Selecting appropriate assumptions for option-pricing models 2588
8.5.1 Expected term of the option 2589
8.5.1.A Expected term under the Black-Scholes-Merton formula 2589
8.5.2 Exercise and termination behaviour 2591
8.5.2.A Grouping employees with homogeneous exercise behaviour 2592
8.5.2.B Post-vesting termination behaviour 2593
8.5.3 Expected volatility of share price 2593
8.5.3.A Newly listed entities 2595
8.5.3.B Unlisted entities 2595
8.5.3.C Listed entities that have undergone significant restructuring 2595
8.5.3.D Expected volatility under the Black-Scholes-Merton formula 2595
8.5.3.E Expected volatility under lattice models 2596
8.5.4 Expected dividends 2596
8.5.4.A Expected dividends under the Black-Scholes-Merton formula 2597
8.5.4.B Expected dividends under the binomial model and other lattice models 2597
8.5.5 Risk-free interest rate 2597
8.5.5.A Risk-free interest rate under the Black-Scholes-Merton formula 2598
8.5.5.B Risk-free interest rate under binomial and other lattice models 2598
8.6 Capital structure effects and dilution 2598
8.7 Other awards requiring the use of option valuation models 2599
8.7.1 Shares 2599
8.7.2 Non-recourse loans 2600
8.7.3 Share appreciation rights (SARs) 2600
8.7.4 Performance rights 2600
8.8 Awards whose fair value cannot be measured reliably 2600
8.8.1 Intrinsic value method – the basic accounting treatment 2600
8.8.2 Modification, cancellation and settlement 2602
8.9 Awards with reload features 2603
8.10 Awards of equity instruments to a fixed monetary value 2603
9 CASH-SETTLED TRANSACTIONS 2605
9.1 Scope of requirements 2605
9.2 What constitutes a cash-settled award? 2605
9.2.1 Economic compulsion for cash settlement (including unlisted company schemes) 2606
9.2.2 Market purchases of own equity used to satisfy awards 2606
9.2.3 Market purchases of own equity following equity-settlement of award 2607
9.2.4 Arrangements to sell employees’ shares including ‘broker settlement’ 2608
9.3 Required accounting 2609
9.3.1 Basic accounting treatment 2609
9.3.2 Application of the accounting treatment 2610
9.3.2.A Determining the vesting period 2611
9.3.2.B Periodic allocation of cost 2612
9.3.2.C Non-market vesting conditions 2612
9.3.2.D Market conditions and non-vesting conditions 2613
9.3.2.E Modification, cancellation and settlement 2614
9.4 Modification of award from equity-settled to cash-settled or from cashsettled to equity-settled 2614
9.4.1 Equity-settled award modified to cash-settled award 2614
9.4.2 Cash-settled award modified to equity-settled award 2621
9.4.2.A Modification that changes the classification of an award from cash-settled to equity-settled: amendment to IFRS 2 2624
10 TRANSACTIONS WITH EQUITY AND CASH ALTERNATIVES 2625
10.1 Transactions where the counterparty has choice of settlement in equity or in cash 2626
10.1.1 Transactions in which the fair value is measured directly 2626
10.1.2 Transactions in which the fair value is measured indirectly – including transactions with employees 2627
10.1.3 Accounting treatment 2628
10.1.3.A During vesting period 2628
10.1.3.B Settlement 2629
10.1.4 Transactions with cash-settlement alternative for employee introduced after grant date 2630
10.1.5 ‘Backstop’ cash settlement rights 2631
10.1.6 Convertible bonds issued to acquire goods or services 2631
10.2 Transactions where the entity has choice of settlement in equity or in cash 2632
10.2.1 Transactions treated as cash-settled 2633
10.2.1.A Economic compulsion for cash settlement (including unlisted entityawards with a presumption of cash settlement) 2633
10.2.2 Transactions treated as equity-settled 2634
10.2.3 Change in entity’s settlement policy or intention leading to change in classification of award after grant date 2635
10.3 Awards requiring cash settlement in specific circumstances (awards with contingent cash settlement) 2636
10.3.1 Analysis 1 – Treat as cash-settled if contingency is outside entity’s control 2636
10.3.2 Analysis 2 – Treat as cash-settled if contingency is outside entity’s control and probable 2637
10.3.3 Analysis 3 – Treat as two mutually exclusive awards and determine cashand equity elements based on probability of contingency 2637
10.3.4 Application of Analysis 1 and Analysis 2 to awards requiring cash settlement on a change of control 2638
10.3.5 Accounting for change in manner of settlement where award iscontingent on future events outside the control of the entity and thecounterparty 2639
10.3.5.A Distinction between re-assessment of settlement method andmodification of terms of award 2640
10.3.6 Manner of settlement contingent on future events: possible future developments 2640
10.4 Cash settlement alternative not based on share price or value 2641
11 REPLACEMENT SHARE-BASED PAYMENT AWARDS ISSUED IN A BUSINESS COMBINATION 2642
11.1 Background 2642
11.2 Replacement awards in business combinations accounted for under IFRS 3 2642
11.2.1 Awards that the acquirer is ‘obliged’ to replace 2643
11.2.1.A Illustrative examples of awards that the acquirer is ‘obliged’ to replace 2644
11.2.2 Acquiree awards that the acquirer is not ‘obliged’ to replace 2646
11.2.3 Accounting for changes in vesting assumptions after the acquisition date 2647
11.3 Acquiree award not replaced by acquirer 2648
11.4 Financial statements of the acquired entity 2649
12 GROUP SHARE SCHEMES 2649
12.1 Typical features of a group share scheme 2650
12.2 Accounting treatment of group share schemes – summary 2652
12.2.1 Background 2652
12.2.2 Scope of IFRS 2 for group share schemes 2652
12.2.3 Entity receiving goods or services 2653
12.2.4 Entity settling the transaction 2654
12.2.5 Transactions settled in equity of the entity or its parent 2654
12.2.5.A Awards settled in equity of subsidiary 2654
12.2.5.B Awards settled in equity of the parent 2655
12.2.6 Cash-settled transactions not settled by the entity receiving goods or services 2655
12.2.7 Intragroup recharges and management charges 2656
12.2.7.A Timing of recognition of intercompany recharges: discussion by theIFRS Interpretations Committee 2658
12.3 Employee benefit trusts (‘EBTs’) and similar arrangements 2658
12.3.1 Background 2658
12.3.2 Accounting for EBTs 2659
12.3.3 Illustrative Examples – awards satisfied by shares purchased by, or issued to, an EBT 2661
12.3.4 Separate financial statements 2663
12.3.5 Financial statements of the EBT 2665
12.4 Illustrative example of group share scheme – equity-settled award satisfied by market purchase of shares 2665
12.4.1 Consolidated financial statements 2665
12.4.2 Parent 2666
12.4.2.A EBT treated as separate entity 2666
12.4.2.B EBT treated as extension of the parent 2667
12.4.2.C Parent company as employing company 2668
12.4.3 Employing subsidiary 2669
12.5 Illustrative example of group share scheme – equity-settled award satisfied by fresh issue of shares 2670
12.5.1 Consolidated financial statements 2670
12.5.2 Parent 2671
12.5.2.A EBT treated as separate entity 2672
12.5.2.B EBT treated as extension of parent 2672
12.5.2.C Parent company as employing company 2673
12.5.3 Employing subsidiary 2675
12.6 Illustrative example – cash-settled transaction not settled by the entity receiving goods or services 2675
12.6.1 Consolidated financial statements 2676
12.6.2 Parent company 2676
12.6.3 Employing subsidiary 2677
12.7 Employee transferring between group entities 2678
12.8 Group reorganisations 2678
12.9 Share-based payments to employees of joint ventures or associates 2679
12.9.1 Financial statements of the associate or joint venture 2680
12.9.2 Consolidated financial statements of the investor 2680
12.9.3 Separate financial statements of the investor 2681
13 DISCLOSURES 2682
13.1 Nature and extent of share-based payment arrangements 2682
13.2 Valuation of share-based payment arrangements 2684
13.3 Impact of share-based payment transactions on financial statements 2685
13.4 Example of IFRS 2 disclosures 2686
14 TAXES RELATED TO SHARE-BASED PAYMENT TRANSACTIONS 2691
14.1 Income tax deductions for the entity 2691
14.2 Employment taxes of the employer 2691
14.2.1 Applicable standard 2691
14.2.1.A IAS 37 2691
14.2.1.B IFRS 2 2692
14.2.1.C IAS 19 2692
14.2.2 Recovery of employer’s taxes from employees 2693
14.2.3 Holding of own shares to ‘hedge’ tax liabilities 2694
14.3 Sale or surrender of shares by employee to meet employee’s tax liability (‘sell to cover’) 2695
14.3.1 Share-based payments with a net settlement feature for withholding taxobligations: amendment to IFRS 2 (accounting periods beginning on orafter 1 January 2018) 2697
15 OTHER PRACTICAL ISSUES 2699
15.1 Matching share awards (including deferred bonuses delivered in shares) 2700
15.2 Loans to employees to purchase shares (limited recourse and full recourse loans) 2705
15.3 Awards entitled to dividends during the vesting period 2707
15.4 Awards vesting or exercisable on an exit event or change of control (flotation, trade sale etc.) 2709
15.4.1 Grant date 2709
15.4.2 Vesting period 2710
15.4.3 Is flotation or sale a vesting condition or a non-vesting condition? 2710
15.4.4 Awards requiring achievement of a minimum price on flotation or sale 2711
15.4.5 Awards ‘purchased for fair value’ 2712
15.4.6 ‘Drag along’ and ‘tag along’ rights 2713
15.5 South African black economic empowerment (‘BEE’) and similar arrangements 2714
15.5.1 Nature of the trust 2716
15.5.2 Measurement and timing of the accounting cost 2717
15.5.3 Classification of awards as equityor cash-settled 2718
16 FIRST-TIME ADOPTION AND TRANSITIONAL PROVISIONS 2719
16.1 First-time adoption provisions 2719
16.2 Transitional provisions for June 2016 amendments 2720
References 2721
Chapter 33 Employee benefits 2723
1 INTRODUCTION 2727
2 OBJECTIVE AND SCOPE OF IAS 19 2727
2.1 Objective 2727
2.2 Scope 2728
2.2.1 General scope requirements of IAS 19 2728
2.2.2 Employee benefits settled by a shareholder or another group entity 2729
3 PENSIONS AND OTHER POST-EMPLOYMENT BENEFITS – DEFINED CONTRIBUTION AND DEFINED BENEFIT PLANS 2729
3.1 The distinction between defined contribution plans and defined benefit plans 2729
3.2 Insured benefits 2730
3.3 Multi-employer plans 2732
3.3.1 Multi-employer plans other than plans sharing risks between entities under common control 2732
3.3.1.A The treatment of multi-employer plans 2732
3.3.1.B What to do when ‘sufficient information’ becomes available 2734
3.3.1.C Withdrawal from or winding-up of a multi-employer scheme 2735
3.3.2 Defined benefit plans sharing risks between entities under common control 2735
3.4 State plans 2736
3.5 Plans that would be defined contribution plans but for the existence of a minimum return guarantee 2737
3.6 Death-in-service benefits 2739
4 DEFINED CONTRIBUTION PLANS 2741
4.1 Accounting requirements 2741
4.1.1 General 2741
4.1.2 Defined contribution plans with vesting conditions 2742
5 DEFINED BENEFIT PLANS – GENERAL 2743
6 DEFINED BENEFIT PLANS – PLAN ASSETS 2744
6.1 Definition of plan assets 2744
6.2 Measurement of plan assets 2745
6.3 Qualifying insurance policies 2745
6.4 Reimbursement rights 2745
6.5 Contributions to defined benefit funds 2746
6.6 Longevity swaps 2746
7 DEFINED BENEFIT PLANS – PLAN LIABILITIES 2747
7.1 Legal and constructive obligations 2747
7.2 Contributions by employees and third parties 2748
7.3 Actuarial methodology 2751
7.4 Attributing benefit to years of service 2753
7.5 Actuarial assumptions 2756
7.6 Discount rate 2758
7.6.1 High quality corporate bonds 2759
7.6.2 No deep market 2761
7.7 Frequency of valuations 2761
8 DEFINED BENEFIT PLANS – TREATMENT OF THE PLAN SURPLUS OR DEFICIT IN THE STATEMENT OF FINANCIAL POSITION 2762
8.1 Net defined benefit liability (asset) 2762
8.2 Restriction of assets to their recoverable amounts 2762
8.2.1 IFRIC Interpretation 14 – general requirements concerning the limit on a defined benefit asset 2763
8.2.2 Economic benefits available as reduced future contributions when there are no minimum funding requirements for future serv 2765
8.2.3 IFRIC Interpretation 14 – the effect of a minimum funding requirement on the economic benefit available as a reduction in 2766
8.2.4 IFRIC Interpretation 14 – when a minimum funding requirement may give rise to a liability 2769
9 DEFINED BENEFIT PLANS – PRESENTATION OF THE NET DEFINED BENEFIT LIABILITY (ASSET) 2771
10 DEFINED BENEFIT PLANS – TREATMENT IN PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME 2771
10.1 Service cost 2772
10.1.1 Past service cost 2772
10.1.2 Settlements 2774
10.2 Net interest on the net defined benefit liability (asset) 2775
10.3 Remeasurements 2776
10.3.1 Actuarial gains and losses 2776
10.3.2 The return on plan assets, excluding amounts included in net interest on the net defined benefit liability (asset) 2777
11 DEFINED BENEFIT PLANS – COSTS OF ADMINISTERING EMPLOYEE BENEFIT PLANS 2777
12 SHORT-TERM EMPLOYEE BENEFITS 2778
12.1 General recognition criteria for short-term employee benefits 2778
12.2 Short-term paid absences 2779
12.2.1 Accumulating absences 2779
12.2.2 Non-accumulating paid absences 2780
12.3 Profit-sharing and bonus plans 2780
12.3.1 Present legal or constructive obligation 2780
12.3.2 Reliable estimate of provision 2781
12.3.3 Statutory profit-sharing based on taxable profit. 2781
13 LONG-TERM EMPLOYEE BENEFITS OTHER THAN POSTEMPLOYMENT BENEFITS 2782
13.1 Meaning of other long-term employee benefits 2782
13.2 Recognition and measurement 2782
13.2.1 Attribution to years of service 2782
13.2.2 Long-term disability benefit 2783
14 TERMINATION BENEFITS 2783
14.1 Statutory termination indemnities 2784
14.2 Recognition 2785
14.3 Measurement 2785
15 DISCLOSURE REQUIREMENTS 2787
15.1 Defined contribution plans 2787
15.2 Defined benefit plans 2787
15.2.1 Characteristics of defined benefit plans and risks associated with them 2788
15.2.2 Explanation of amounts in the financial statements 2789
15.2.3 Amount, timing and uncertainty of future cash flows 2792
15.2.4 Multi-employer plans 2793
15.2.4.A Plans accounted for as defined benefit plans 2794
15.2.4.B Plans accounted for as defined contribution plans 2794
15.2.5 Defined benefit plans that share risks between entities under common control 2794
15.2.5.A Plans accounted for as defined benefit plans 2795
15.2.5.B Plans accounted for as defined contribution plans 2795
15.2.6 Disclosure requirements in other IFRSs 2797
15.3 Other employee benefits 2797
16 POSSIBLE FUTURE DEVELOPMENTS 2797
16.1 IASB activities 2797
16.2 Interpretations Committee activities 2797
16.2.1 Remeasurements following a plan amendment, curtailment or settlement 2798
16.2.2 The availability of a refund from a defined benefit plan 2799
References 2801
Chapter 34 Operating segments 2803
1 INTRODUCTION 2805
1.1 Background 2805
1.2 The main features of IFRS 8 2805
1.3 Terms used in IFRS 8 2807
1.4 Transitional provisions 2808
2 OBJECTIVE AND SCOPE OF IFRS 8 2808
2.1 Objective 2808
2.2 Scope of IFRS 8 2809
2.2.1 The meaning of ‘traded in a public market’ 2809
2.2.2 Consolidated financial statements presented with those of the parent 2810
2.2.3 Entities providing segment information on a voluntary basis 2810
3 IDENTIFYING A SINGLE SET OF OPERATING SEGMENTS 2810
3.1 Definition of an operating segment 2810
3.1.1 Revenue earning business activities 2811
3.1.2 ‘Chief operating decision maker’ and ‘segment manager’ 2811
3.1.3 Availability of discrete financial information 2814
3.1.4 When a single set of components is not immediately apparent 2815
3.1.5 An equity accounted investment can be an operating segment 2815
3.2 Identifying externally reportable segments 2816
3.2.1 Aggregation criteria – aggregating internally reported operating segments into single reportable operating segments 2818
3.2.2 Quantitative thresholds – operating segments which are reportable because of their size 2822
3.2.3 Combining small operating segments into a larger reportable segment 2823
3.2.4 ‘All other segments’ 2823
3.2.5 A ‘practical limit’ for the number of reported operating segments 2824
3.2.6 Restatement of segments reported in comparative periods 2824
4 MEASUREMENT 2825
5 INFORMATION TO BE DISCLOSED ABOUT REPORTABLE SEGMENTS 2826
5.1 General information about reportable segments 2827
5.1.1 Disclosure of how operating segments are aggregated 2827
5.2 A measure of segment profit or loss, total assets and total liabilities 2829
5.2.1 Other measures of segment performance 2829
5.3 Disclosure of other elements of revenue, income and expense 2830
5.4 Additional disclosures relating to segment assets 2831
5.5 Explanation of the measurements used in segment reporting 2832
5.6 Reconciliations 2834
5.7 Restatement of previously reported information 2835
5.7.1 Changes in organisation structure 2835
5.7.2 Changes in segment measures 2837
5.8 Disclosure of commercially sensitive information 2837
6 ENTITY-WIDE DISCLOSURES FOR ALL ENTITIES 2838
6.1 Information about products and services 2838
6.2 Information about geographical areas 2839
6.3 Information about major customers 2840
6.3.1 Customers known to be under common control 2841
7 RESULTS OF THE POST-IMPLEMENATION REVIEW OF IFRS 8 2842
References 2844
Chapter 35 Earnings per share 2845
1 INTRODUCTION 2849
1.1 Definitions 2849
2 OBJECTIVE AND SCOPE OF IAS 33 2849
2.1 Objective 2849
2.2 Scope 2850
3 THE BASIC EPS 2851
3.1 Earnings 2851
3.2 Number of shares 2851
4 CHANGES IN OUTSTANDING ORDINARY SHARES 2854
4.1 Weighted average number of shares 2854
4.2 Purchase and redemption of own shares 2855
4.3 Changes in ordinary shares without corresponding changes in resources 2855
4.3.1 Capitalisation, bonus issue, share split and share consolidation 2855
4.3.1.A Capitalisation, bonus issues and share splits 2855
4.3.1.B Stock dividends 2856
4.3.1.C Share consolidations 2857
4.3.2 Share consolidation with a special dividend 2857
4.3.3 Rights issue 2857
4.3.4 B share schemes 2859
4.3.5 Put warrants priced above market value 2859
4.4 Options exercised during the year 2861
4.5 Post balance sheet changes in capital 2861
4.6 Issue to acquire another business 2861
4.6.1 Acquisitions 2861
4.6.2 Reverse acquisitions 2861
4.6.3 Establishment of a new parent undertaking 2862
4.7 Adjustments to EPS in historical summaries 2863
5 MATTERS AFFECTING THE NUMERATOR 2863
5.1 Earnings 2863
5.2 Preference dividends 2863
5.3 Retrospective adjustments 2865
5.4 Participating equity instruments and two class shares 2865
5.5 Other bases 2867
6 DILUTED EARNINGS PER SHARE 2867
6.1 The need for diluted EPS 2867
6.2 Calculation of diluted EPS 2868
6.2.1 Diluted earnings 2868
6.2.2 Diluted number of shares 2869
6.3 Dilutive potential ordinary shares 2870
6.3.1 Dilution judged by effect on profits from continuing operations 2870
6.3.2 Dilution judged by the cumulative impact of potential shares 2871
6.4 Particular types of dilutive instruments 2873
6.4.1 Convertible instruments 2873
6.4.1.A Convertible debt 2873
6.4.1.B Convertible preference shares 2874
6.4.1.C Participating equity instruments and two class shares with conversionrights 2875
6.4.2 Options, warrants and their equivalents 2875
6.4.2.A The numerator 2875
6.4.2.B Written call options 2877
6.4.2.C Written put options and forward purchase agreements 2879
6.4.2.D Options over convertible instruments 2880
6.4.2.E Settlement of option exercise price with debt or other instruments ofthe entity 2880
6.4.2.F Specified application of option proceeds 2880
6.4.3 Purchased options and warrants 2881
6.4.4 Partly paid shares 2881
6.4.5 Share-based payments 2882
6.4.6 Contingently issuable shares 2883
6.4.6.A Earnings-based contingencies 2884
6.4.6.B Share price-based contingencies 2886
6.4.6.C Other contingencies 2887
6.4.7 Potential ordinary shares of investees 2887
6.4.8 Contingently issuable potential ordinary shares 2889
7 PRESENTATION, RESTATEMENT AND DISCLOSURE 2889
7.1 Presentation 2889
7.2 Restatement 2890
7.3 Disclosure 2891
8 APPENDIX 2892
References 2898
Chapter 36 Events after the reporting period 2899
1 INTRODUCTION 2901
2 REQUIREMENTS OF IAS 10 2902
2.1 Objective, scope and definitions 2902
2.1.1 Date when financial statements are authorised for issue 2902
2.1.1.A Re-issuing financial statements 2904
2.1.2 Adjusting events 2906
2.1.3 Non-adjusting events 2907
2.2 The treatment of adjusting events 2909
2.2.1 Events requiring adjustment to the amounts recognised, or disclosures, in the financial statements 2909
2.2.2 Events indicating that the going concern basis is not appropriate 2909
2.3 The treatment of non-adjusting events 2911
2.3.1 Declaration to distribute non-cash assets to owners 2912
2.3.2 Breach of a long-term loan covenant and its subsequent rectification 2913
2.4 Other disclosure requirements 2914
3 PRACTICAL ISSUES 2914
3.1 Valuation of inventory 2915
3.2 Percentage of completion estimates 2916
3.3 Insolvency of a debtor 2916
3.4 Valuation of investment property at fair value and tenant insolvency 2916
3.5 Discovery of fraud after the reporting period 2917
References 2918
Chapter 37 Related party disclosures 2919
1 INTRODUCTION 2923
1.1 The related party issue 2923
1.2 Possible solutions 2924
1.2.1 Remeasurement of related party transactions at fair values 2924
1.2.2 Disclosure of transactions 2924
2 REQUIREMENTS OF IAS 24 2924
2.1 Objective and scope 2924
2.1.1 Objective 2924
2.1.2 Scope 2925
2.2 Identification of a related party and related party transactions 2925
2.2.1 Persons or close members of a person’s family that are related parties 2926
2.2.1.A Control 2928
2.2.1.B Joint control 2928
2.2.1.C Significant influence 2928
2.2.1.D Key management personnel 2929
2.2.2 Entities that are members of the same group 2930
2.2.3 Entities that are associates or joint ventures 2930
2.2.3.A Joint operations 2932
2.2.4 Entities that are joint ventures of the same third party 2932
2.2.5 Entities that are joint ventures and associates of the same third entity 2933
2.2.6 Post-employment benefit plans 2933
2.2.7 Entities under control or joint control of certain persons or close members of their family 2934
2.2.8 Entities under significant influence of certain persons or close members of their family 2935
2.2.9 Entities, or any member of the group of which they are a part, that provide key management personnel services 2935
2.2.10 Government-related entities 2936
2.3 Parties that are not related parties 2936
2.4 Disclosure of controlling relationships 2937
2.5 Disclosable transactions 2939
2.5.1 Materiality 2940
2.6 Disclosure of key management personnel compensation 2940
2.6.1 Compensation 2941
2.6.2 Short-term employee benefits 2942
2.6.3 Post-employment benefits 2942
2.6.4 Other long-term benefits 2943
2.6.5 Termination benefits 2943
2.6.6 Share-based payment transactions 2943
2.6.7 Reporting entity part of a group 2943
2.6.8 Key management personnel compensated by other entities 2943
2.6.9 Illustrative disclosure of key management personnel compensation 2944
2.7 Disclosure of other related party transactions, including commitments 2944
2.7.1 Related party transactions requiring disclosure 2944
2.7.1.A Aggregation of items of a similar nature 2945
2.7.1.B Commitments 2946
2.7.2 Disclosures required for related party transactions, including commitments 2947
2.8 Disclosure of expense incurred with management entity 2950
2.9 Disclosures with government-related entities 2950
References 2953
Chapter 38 Statement of cash flows 2955
1 INTRODUCTION 2959
1.1 Terms used in IAS 7 2959
2 OBJECTIVE AND SCOPE OF IAS 7 2960
2.1 Objective 2960
2.2 Scope 2960
3 CASH AND CASH EQUIVALENTS 2960
3.1 Policy for determining components of cash equivalents 2961
3.2 Components of cash and cash equivalents 2962
3.2.1 Demand deposits and short-term investments 2962
3.2.2 Money market funds 2963
3.2.3 Investments with maturities greater than three months 2964
3.2.4 Bank overdrafts 2965
3.3 Reconciliation with items in the statement of financial position 2965
3.4 Restrictions on the use of cash and cash equivalents 2965
4 CLASSIFICATION IN THE STATEMENT OF CASH FLOWS 2967
4.1 Cash flows from operating activities 2969
4.1.1 The direct method 2970
4.1.2 The indirect method 2971
4.2 Cash flows from investing activities 2973
4.3 Cash flows from financing activities 2974
4.4 Allocating items to operating, investing and financing activities 2975
4.4.1 Interest and dividends 2975
4.4.2 Taxes on income 2976
4.4.3 Sales taxes and other non-income tax cash flows 2976
4.4.4 Cash flows from factoring of trade receivables and supply-chain financing 2977
4.4.5 Property, plant and equipment held for rental 2978
4.4.6 Cash flows for service concession arrangements 2979
4.4.7 Treasury shares 2979
4.4.8 Cash flows related to the costs of a share issue 2980
4.4.9 Cash flows on derivative contracts 2980
4.4.10 Classification of cash flows – future developments 2981
5. OTHER CASH FLOW PRESENTATION ISSUES 2982
5.1 Exceptional and other material cash flows 2982
5.2 Gross or net presentation of cash flows 2983
5.3 Foreign currency cash flows 2983
5.3.1 Entities applying the direct method 2984
5.3.2 Entities applying the indirect method 2984
5.3.2.A Foreign currency operating transactions settled in the period 2984
5.3.2.B Unsettled foreign currency operating transactions 2985
5.3.2.C Determining the value of non-operating cash flows 2985
5.3.2.D The indirect method and foreign subsidiaries 2985
5.4 Non-cash transactions and transactions on deferred terms 2985
5.4.1 Asset purchases on deferred terms 2986
5.4.2 Asset disposals on deferred terms 2987
5.5 Changes in liabilities arising from financing activities 2987
5.6 Voluntary disclosures 2988
5.6.1 Cash flows to increase and maintain operating capacity 2988
5.6.2 Segment cash flow disclosures 2989
6 ADDITIONAL IAS 7 CONSIDERATIONS FOR GROUPS 2989
6.1 Preparing a consolidated statement of cash flows 2990
6.2 Transactions with non-controlling interests 2991
6.3 Acquisitions and disposals 2991
6.3.1 Acquisition-related costs 2993
6.3.2 Deferred and other non-cash consideration 2993
6.3.3 Contingent consideration 2993
6.3.3.A Business combinations 2993
6.3.3.B Asset acquisitions outside of business combinations 2994
6.3.4 Settlement of amounts owed by the acquired entity 2995
6.3.5 Settlement of intra-group balances on a demerger 2995
6.4 Cash flows of subsidiaries, associates and joint ventures 2995
6.4.1 Investments in associates and joint ventures 2995
6.4.2 Cash flows of joint operations 2996
6.4.3 Cash flows in investment entities 2996
6.5 Cash flows in separate financial statements 2996
6.5.1 Cash flows of subsidiaries, associates and joint ventures 2996
6.5.2 Group treasury arrangements 2997
7 ADDITIONAL IAS 7 CONSIDERATIONS FOR FINANCIAL INSTITUTIONS 2997
7.1 Operating cash flows 2998
7.2 Reporting cash flows on a net basis 2999
8 REQUIREMENTS OF OTHER STANDARDS 2999
8.1 Cash flows of discontinued operations 2999
8.2 Cash flows arising from insurance contracts 3000
8.3 Cash flows arising from the exploration of mineral resources 3001
8.4 Cash flows arising from interests in subsidiaries, joint ventures and associates 3001
References 3001
Chapter 39 Interim financial reporting 3003
1 INTRODUCTION 3009
1.1 Definitions 3010
2 OBJECTIVE AND SCOPE OF IAS 34 3010
2.1 Objective 3010
2.2 Scope 3010
3 COMPONENTS, FORM AND CONTENT OF AN INTERIM FINANCIAL REPORT UNDER IAS 34 3011
3.1 Complete set of interim financial statements 3012
3.2 Condensed interim financial statements 3012
3.3 Requirements for both complete and condensed interim financial information 3017
3.4 Management commentary 3017
4 DISCLOSURES IN CONDENSED FINANCIAL STATEMENTS 3018
4.1 Significant events and transactions 3018
4.1.1 Relevance of other standards in condensed financial statements 3019
4.2 Other disclosures required by IAS 34 3020
4.2.1 Location of the specified disclosures in an interim financial report 3022
4.3 Illustrative examples of disclosures 3022
4.3.1 Inventory write-down and reversals 3022
4.3.2 Impairment 3023
4.3.3 Reversal of restructuring provisions 3023
4.3.4 Acquisition and disposal of property, plant and equipment 3023
4.3.5 Capital commitments 3024
4.3.6 Litigation settlements 3024
4.3.7 Correction of prior period errors 3025
4.3.8 Changes in circumstances affecting fair values 3026
4.3.9 Default or breach of loan covenants not remedied before the end of interim period 3026
4.3.10 Related party transactions 3027
4.3.11 Transfers between different levels of fair value hierarchy 3028
4.3.12 Changes in classification of financial assets arising from changes in use 3029
4.3.13 Contingent liabilities 3030
4.3.14 Accounting policies and methods of computation 3031
4.3.15 Seasonality or cyclicality of operations 3032
4.3.16 Amounts that are unusual because of their nature, size or incidence 3033
4.3.17 Changes in estimates 3033
4.3.18 Issues, repurchases and repayments of debt and equity securities 3034
4.3.19 Dividends paid for each class of share 3034
4.3.20 Events after the interim reporting date 3034
4.3.21 Changes in the composition of the entity 3035
4.4 Segment information 3037
4.5 Fair value disclosures for financial instruments 3039
4.6 Disclosure of compliance with IFRS 3041
5 PERIODS FOR WHICH INTERIM FINANCIAL STATEMENTS ARE REQUIRED TO BE PRESENTED 3042
5.1 Other comparative information 3045
5.2 Length of interim reporting period 3047
5.3 Change in financial year-end 3047
5.4 Comparatives following a financial period longer than a year 3049
5.5 When the comparative period is shorter than the current period 3050
6 MATERIALITY 3051
7 DISCLOSURE IN ANNUAL FINANCIAL STATEMENTS 3051
8 RECOGNITION AND MEASUREMENT 3051
8.1 Same accounting policies as in annual financial statements 3052
8.1.1 Measurement on a year-to-date basis 3052
8.1.2 New accounting pronouncements and other changes in accounting policies 3053
8.1.2.A New pronouncements becoming mandatory during the current year 3054
8.1.2.B Voluntary changes of accounting policy 3055
8.1.2.C New pronouncements becoming mandatory in future annualreporting periods 3056
8.1.3 Change in going concern assumption 3056
8.1.4 Voluntary changes in presentation 3057
8.2 Seasonal businesses 3058
8.2.1 Revenues received seasonally, cyclically, or occasionally 3058
8.2.2 Costs incurred unevenly during the year 3058
9 EXAMPLES OF THE RECOGNITION AND MEASUREMENT PRINCIPLES 3059
9.1 Property, plant and equipment and intangible assets 3059
9.1.1 Depreciation and amortisation 3059
9.1.2 Impairment of assets 3060
9.1.3 Recognition of intangible assets 3060
9.1.4 Capitalisation of borrowing costs 3060
9.2 Reversal of impairment losses recognised in a previous interim period (IFRIC 10) 3060
9.3 Employee benefits 3062
9.3.1 Employer payroll taxes and insurance contributions 3062
9.3.2 Year-end bonuses 3062
9.3.3 Pensions 3063
9.3.4 Vacations, holidays, and other short-term paid absences 3064
9.4 Inventories and cost of sales 3065
9.4.1 Inventories 3065
9.4.2 Contractual or anticipated purchase price changes 3065
9.4.3 Interim period manufacturing cost variances 3065
9.5 Taxation 3065
9.5.1 Measuring interim income tax expense 3066
9.5.2 Changes in the effective tax rate during the year 3068
9.5.2.A Enacted changes for the current year that apply after the interimreporting date 3068
9.5.2.B Changes to previously reported estimated income tax rates for thecurrent year 3068
9.5.2.C Enacted changes applying only to subsequent years 3069
9.5.3 Difference in financial year and tax year 3070
9.5.4 Tax loss and tax credit carrybacks and carryforwards 3071
9.5.5 Tax credits 3073
9.6 Foreign currency translation 3074
9.6.1 Foreign currency translation gains and losses 3074
9.6.2 Interim financial reporting in hyperinflationary economies 3074
9.7 Provisions, contingencies and accruals for other costs 3076
9.7.1 Provisions 3076
9.7.2 Other planned but irregularly occurring costs 3076
9.7.3 Major planned periodic maintenance or overhaul 3077
9.7.4 Contingent lease payments 3077
9.7.5 Levies charged by public authorities 3077
9.8 Earnings per share 3081
10 USE OF ESTIMATES 3081
11 RESTATEMENT OF PREVIOUSLY REPORTED INTERIM PERIODS 3083
12 EFFECTIVE DATES AND TRANSITIONAL RULES 3084
12.1 First-time presentation of interim reports complying with IAS 34 3084
12.1.1 Condensed financial statements in the year of incorporation or when an entity converts from its local GAAP to IFRS 3084
12.2 Consequential amendments to IFRIC 10 when first adopting IFRS 9 3085
12.3 Consequential amendments to IFRS 7 when first adopting IFRS 9 3085
12.4 Consequential amendments to IAS 34 when first adopting IFRS 15 3086
References 3086
Chapter 40 Agriculture 3087
1 INTRODUCTION 3091
2 OBJECTIVE, DEFINITIONS AND SCOPE 3092
2.1 Objective 3092
2.2 Definitions 3092
2.2.1 Agriculture-related definitions 3092
2.2.1 Agriculture-related definitions 3092
2.2.2 General definitions 3096
2.3 Scope 3096
2.3.1 Biological assets outside the scope of IAS 41 3097
2.3.2 Agricultural produce before and after harvest 3097
2.3.3 Bearer plants and produce growing on a bearer plant 3097
2.3.4 Products that are the result of processing after harvest 3098
2.3.5 Leases of biological assets (excluding bearer plants) 3098
2.3.6 Concessions 3099
3 RECOGNITION AND MEASUREMENT PRINCIPLES 3099
3.1 Recognition 3099
3.1.1 Control 3100
3.2 Measurement 3100
3.2.1 Biological assets within the scope of IAS 41 3100
3.2.1.A Initial and subsequent measurement 3100
3.2.1.B Subsequent expenditure 3100
3.2.2 Agricultural produce 3101
3.2.3 Requirements for produce growing on a bearer plant 3101
3.2.3.A Requirements for bearer plants in the scope of IAS 16 3101
3.2.3.B Requirements for agricultural produce growing on bearer plants 3105
3.2.4 Gains and losses 3106
3.2.5 Inability to measure fair value reliably 3107
3.2.5.A Rebutting the presumption 3107
3.2.5.B The cost mode 3109
3.3 Government grants 3110
4 MEASURING FAIR VALUE LESS COSTS TO SELL 3111
4.1 The interaction between IAS 41 and IFRS 13 3111
4.2 Establishing what to measure 3111
4.2.1 Unit of account 3111
4.2.2 Grouping of assets 3111
4.3 When to measure fair value 3112
4.4 Determining costs to sell 3112
4.5 Measuring fair value: IAS 41-specific requirements 3112
4.5.1 Use of external independent valuers 3112
4.5.2 Obligation to re-establish a biological asset after harvest 3112
4.5.3 Forward sales contracts 3113
4.5.4 Onerous contracts 3113
4.5.5 Financing cash flows and taxation 3114
4.6 Measuring fair value: overview of IFRS 13’s requirements 3114
4.6.1 The fair value measurement framework 3114
4.6.2 Highest and best use and valuation premise 3115
4.6.2.A Biological assets attached to land 3116
4.6.3 Selecting appropriate assumptions 3119
4.6.3.A Condition and location 3120
4.6.4 Valuation techniques in IFRS 13 3120
4.6.4.A Cost as an approximation of fair value 3121
4.7 The problem of measuring fair value for part-grown biological assets 3122
5 DISCLOSURE 3124
5.1 General 3124
5.1.1 Statement of financial position 3124
5.1.1.A Current versus non-current classification 3125
5.1.2 Income statement 3126
5.1.3 Groups of biological assets 3128
5.1.4 Other disclosures 3129
5.2 Fair value measurement disclosures 3133
5.3 Additional disclosures if fair value cannot be measured reliably 3135
5.4 Government grants 3136
6 TRANSITION AND EFFECTIVE DATE 3136
6.1 Transition and effective date for the bearer plants amendments 3136
References 3136
Chapter 41 Extractive industries 3137
1 INTRODUCTION AND BACKGROUND 3145
1.1 Defining extractive industries 3145
1.1.1 Definition of key terms 3148
1.2 The development of IFRS 6 3148
– Exploration for and Evaluation of Mineral Resources 3148
1.3 April 2010 Discussion Paper: Extractive Activities 3149
1.3.1 Definitions of reserves and resources 3150
1.3.2 Asset recognition 3150
1.3.3 Asset measurement 3150
1.3.4 Disclosure 3151
1.3.5 Publish What You Pay proposals 3151
1.3.6 Status of Extractive Activities project 3152
1.4 Status of the Statement of Recommended Practice, UK Oil Industry Accounting Committee, June 2001 (OIAC SORP) 3152
1.5 Guidance under national accounting standards 3153
1.6 Upstream versus downstream activities 3154
1.6.1 Phases in upstream activities 3154
2 MINERAL RESERVES AND RESOURCES 3156
2.1 International harmonisation of reserve reporting 3157
2.2 Petroleum reserve estimation and reporting 3158
2.2.1 Basic principles and definitions 3158
2.2.2 Classification and categorisation guidelines 3161
2.3 Mining resource and reserve reporting 3162
2.3.1 CRIRSCO International Reporting Template (November 2013) 3163
2.3.1.A Scope 3163
2.3.1.B Reporting terminology 3164
2.4 Disclosure of mineral reserves and resources 3166
2.4.1 Oil and gas sector 3167
2.4.2 Mining sector 3167
2.4.3 Disclosure of the value of reserves 3168
2.4.3.A ASC 932-235-50 – disclosure of standardised measure of oil and gas 3169
3 IFRS 6 – EXPLORATION FOR AND EVALUATION OF MINERAL RESOURCES 3169
3.1 Objective and scope 3169
3.1.1 Scope exclusions in other standards relating to the extractive industries 3170
3.2 Recognition of exploration and evaluation assets 3171
3.2.1 Developing an accounting policy under IFRS 6 3171
3.2.2 Options for an exploration and evaluation policy 3171
3.2.3 Successful efforts method 3172
3.2.4 Full cost method 3175
3.2.5 Area-of-interest method 3176
3.2.6 Changes in accounting policies 3177
3.3 Measurement of exploration and evaluation assets 3178
3.3.1 Types of expenditure in the exploration and evaluation phase 3178
3.3.2 Capitalisation of borrowing costs in the exploration and evaluation phase 3181
3.4 Presentation and classification 3181
3.4.1 Reclassification of E& E assets
3.5 Impairment 3182
3.5.1 Impairment testing ‘triggers’ 3182
3.5.2 Specifying the level at which E& E assets are assessed for impairment
3.5.3 Cash-generating units comprising successful and unsuccessful E& E projects
3.5.4 Order of impairment testing 3184
3.5.5 Additional considerations if E& E assets are impaired
3.5.6 Income statement treatment of E& E write downs – impairment or exploration expense
3.5.7 Reversal of impairment losses 3185
3.6 Disclosure 3185
3.6.1 Statement of cash flows 3188
4 UNIT OF ACCOUNT 3188
4.1 Unit of account in the extractive industries 3189
5 LEGAL RIGHTS TO EXPLORE FOR, DEVELOP AND PRODUCE MINERAL PROPERTIES 3191
5.1 How does a mineral lease work? 3192
5.2 Concessionary agreements (concessions) 3193
5.3 Traditional production sharing contracts 3194
5.4 Pure-service contracts 3197
5.5 Evolving contractual arrangements 3198
5.5.1 Risk service contracts 3198
5.6 Joint operating agreements 3199
5.7 Different types of royalty interests 3199
5.7.1 Working interest and basic royalties 3200
5.7.2 Overriding royalties 3200
5.7.3 Production payment royalties 3200
5.7.4 Net profits interests 3201
5.7.5 Revenue and royalties: gross or net? 3201
6 RISK-SHARING ARRANGEMENTS 3202
6.1 Carried interests 3203
6.1.1 Types of carried interest arrangements 3203
6.1.2 Carried interest arrangements in the E& E phase
6.1.3 Financing-type carried interest arrangements in the development phase 3205
6.1.4 Purchase/sale-type carried interest arrangements in the development phase 3206
6.2 Farm-ins and farm-outs 3208
6.2.1 Farm-in arrangements in the E& E phase
6.2.2 Farm-in arrangements outside the E& E phase: accounting by the farmee
6.2.2.A Farming into an asset 3209
6.2.2.B Farming into a business which is a joint operation or results in theformation of a joint operation 3211
6.2.3 Farm-in arrangements outside the E& E phase: accounting by the farmor
6.3 Asset swaps 3213
6.3.1 E& E assets
6.3.2 PP& E, intangible assets and investment property
6.3.3 Exchanges of E& E assets for other types of assets
7 INVESTMENTS IN THE EXTRACTIVE INDUSTRIES 3214
7.1 Joint arrangements 3214
7.1.1 Assessing joint control 3216
7.1.1.A Relevant activities 3216
7.1.1.B Meaning of unanimous consent 3216
7.1.2 Determination of whether a manager of a joint arrangement has control 3217
7.1.2.A Implications of controlling a joint operation 3218
7.1.2.B Implications of controlling a joint venture 3219
7.1.3 Parties to a joint arrangement without joint control or control 3219
7.1.3.A Joint operations 3219
7.1.3.B Joint ventures 3220
7.1.4 Managers of joint arrangements 3220
7.1.4.A Reimbursements of costs 3220
7.1.4.B Direct legal liability for costs incurred and contracts entered into 3221
7.1.4.C Joint and several liability 3221
7.1.5 Non-operators of joint arrangements 3221
7.2 Undivided interests 3222
8 ACQUISITIONS 3222
8.1 Business combinations versus asset acquisitions 3222
8.1.1 Differences between asset purchase transactions and business combinations 3223
8.1.2 Definition of a business 3223
8.2 Business combinations 3224
8.2.1 Goodwill in business combinations 3224
8.2.2 Impairment of assets and goodwill recognised on acquisition 3226
8.2.3 Value beyond proven and probable reserves (VBPP) 3226
8.3 Acquisition of an interest in a joint operation that is a business 3229
8.4 Asset acquisitions 3230
8.4.1 Asset acquisitions and conditional purchase consideration 3230
8.4.2 Accounting for land acquisitions 3233
9 FUNCTIONAL CURRENCY 3233
9.1 Determining functional currency 3233
9.2 Changes in functional currency 3235
10 DECOMMISSIONING AND RESTORATION/REHABILITATION 3238
10.1 Recognition and measurement issues 3238
10.1.1 Initial recognition 3238
10.1.2 Measurement of the liability 3239
10.1.3 Decommissioning or restoration costs incurred in the production phase 3240
10.2 Treatment of foreign exchange differences 3240
10.3 Indefinite life assets 3240
11 IMPAIRMENT OF ASSETS 3241
11.1 Impairment indicators 3242
11.2 Identifying cash-generating units (CGUs) 3243
11.2.1 Markets for intermediate products 3244
11.2.2 External users of processing assets 3244
11.2.3 Shared infrastructure 3244
11.2.4 Fields or mines operated on a portfolio basis 3245
11.3 Basis of recoverable amount – value-in-use or fair value less costs of disposal 3246
11.4 Calculation of VIU 3246
11.4.1 Consistency in cash flows and book values attributed to the CGU 3246
11.4.1.A Environmental provisions and similar provisions and liabilities 3247
11.4.2 Projections of cash flows 3247
11.4.2.A Cash flows from mineral reserves and resources and the appropriatediscount rate 3247
11.4.3 Commodity price assumptions 3248
11.4.4 Future capital expenditure 3250
11.4.5 Foreign currency cash flows 3251
11.5 Calculation of FVLCD 3251
11.5.1 Projections of cash flows 3252
11.5.2 Commodity price assumptions 3252
11.5.3 Future capital expenditure 3252
11.5.4 Foreign currency cash flows 3252
11.6 Low mine or field profitability near end of life 3253
12 REVENUE RECOGNITION 3254
12.1 Revenue in the development phase 3254
12.1.1 Incidental revenue 3254
12.1.2 Integral to development 3255
12.1.2.A Future developments 3257
12.2 Sale of product with delayed shipment 3259
12.3 Exchanges of inventories 3259
12.4 Overlift and underlift (oil and gas) 3260
12.4.1 Sales method 3260
12.4.2 Entitlements method 3261
12.4.3 Settlement 3262
12.4.3.A Cash balancing 3262
12.4.3.B Physical settlement 3262
12.4.4 Facility imbalances 3262
12.4.5 Overlift and underlift in practice 3262
12.5 Forward-selling contracts to finance development 3263
12.5.1 Accounting by the producer 3264
12.5.2 Accounting by the investor 3266
12.6 Trading activities 3267
12.7 Impact of IFRS 15 3267
12.7.1 Embedded derivatives in commodity arrangements 3268
12.7.1.A Provisionally priced contracts 3269
12.7.2 Inventory exchanges with the same counterparty 3270
12.7.3 Overlift and underlift and production imbalances 3271
12.7.4 Production sharing contracts/arrangements (PSCs) 3271
12.7.5 Royalty income 3272
12.7.5.A Royalty arrangements with collaborative partners 3273
12.7.5.B Royalty arrangements with customers 3273
12.7.5.C Royalty arrangements and the sale of non-financial items 3274
12.7.6 Modifications to commodity-based contracts 3275
12.7.7 Principal versus agent considerations in commodity-based contracts 3275
12.7.7.A Relationships with joint arrangement partners 3275
12.7.7.B Royalty payments 3275
12.7.8 Shipping 3276
12.7.8.A Identification of performance obligations 3276
12.7.8.B Satisfaction of performance obligations – control assessment 3277
12.7.9 Sale of product with delayed shipment 3277
12.7.10 Forward-selling contracts to finance development (streaming arrangements) 3277
12.7.10.A Sale of a mineral interest with a contract to provide services 3278
12.7.10.B Commodity contract – forward sale of future production 3278
12.7.11 Gold bullion sales (mining only) 3278
12.7.12 Repurchase agreements 3279
12.7.13 Multi-period commodity-based sales contracts 3279
12.7.13.A Identify the contract 3279
12.7.13.B Identify the performance obligations 3280
12.7.13.C Determine the transaction price 3280
12.7.13.D Allocate the transaction price 3281
12.7.13.E Recognise revenue 3282
12.7.14 Take-or-pay contracts 3282
12.7.14.A Volumes paid for, but not taken 3282
12.7.14.B Breakage (customers’ unexercised rights) 3283
13 FINANCIAL INSTRUMENTS 3284
13.1 Normal purchase and sales exemption 3284
13.2 Embedded derivatives 3286
13.2.1 Foreign currency embedded derivatives 3287
13.2.2 Provisionally priced contracts 3287
13.2.3 Long-term supply contracts 3290
13.2.4 Development of gas markets 3291
13.3 Volume flexibility in supply contracts 3292
13.4 Hedging sales of metal concentrate (mining) 3293
14 INVENTORIES 3295
14.1 Recognition of work in progress 3295
14.2 Sale of by-products and joint products 3297
14.2.1 By-products 3298
14.2.2 Joint products 3299
14.3 Core inventories 3300
14.4 Carried at fair value 3302
14.5 Stockpiles of low grade ore (mining) 3303
14.6 Heap leaching (mining) 3305
15 PROPERTY, PLANT AND EQUIPMENT 3307
15.1 Major maintenance and turnarounds / renewals and reconditioning costs 3307
15.2 Well workovers and recompletions (oil and gas) 3309
15.3 Care and maintenance 3309
15.4 Unitisations and redeterminations 3310
15.4.1 Unitisations 3310
15.4.2 Redeterminations 3312
15.4.2.A Redeterminations as capital reimbursements 3313
15.4.2.B ‘Make-up’ oil 3316
15.4.2.C Decommissioning provisions 3316
15.5 Stripping costs in the production phase of a surface mine (mining) 3317
15.5.1 Scope of IFRIC 20 3317
15.5.2 Recognition criteria – stripping activity asset 3318
15.5.3 Initial recognition 3318
15.5.3.A Allocating costs between inventory and the stripping activity asset 3319
15.5.3.B Identifying the component of the ore body 3323
15.5.4 Subsequent measurement 3324
15.5.5 Disclosures 3325
16 DEPRECIATION, DEPLETION AND AMORTISATION (DD& A)
16.1 Requirements under IAS 16 and IAS 38 3327
16.1.1 Mineral reserves 3327
16.1.2 Assets depreciated using the straight-line method 3328
16.1.3 Assets depreciated using the units of production method 3329
16.1.3.A Units of production formula 3330
16.1.3.B Reserves base 3332
16.1.3.C Unit of measure 3337
16.1.3.D Joint and by-products 3338
16.2 Block caving – depreciation, depletion and amortisation (mining) 3339
17 LONG-TERM CONTRACTS AND LEASES 3340
17.1 Embedded leases 3340
17.2 Take-or-pay contracts 3341
17.2.1 Make-up product and undertake 3343
18 TOLLING ARRANGEMENTS 3344
19 TAXATION 3345
19.1 Excise duties, production taxes and severance taxes 3346
19.1.1 Production-based taxation 3346
19.1.2 Petroleum revenue tax (or resource rent tax) 3347
19.2 Grossing up of notional quantities withheld 3349
20 EVENTS AFTER THE REPORTING PERIOD 3350
20.1 Reserves proven after the reporting period 3350
20.2 Business combinations – application of the acquisition method 3350
20.3 Completion of E& E activity after the reporting period
21 GLOSSARY 3353
References 3357
Chapter 42 Financial instruments: Introduction 3359
1 STANDARDS APPLYING TO FINANCIAL INSTRUMENTS 3361
1.1 IAS 32 3361
1.2 IAS 39 3362
1.3 IFRS 7 3363
1.4 IFRS 9 3363
1.5 Structure and objectives of the standards 3365
2 ADOPTION OF IFRS IN THE EUROPEAN UNION 3365
3 HOW FINANCIAL INSTRUMENTS ARE DEALT WITH IN CHAPTERS 42 TO 54 3366
References 3368
Chapter 43 Financial instruments: Definitions and scope 3369
1 INTRODUCTION 3371
2 WHAT IS A FINANCIAL INSTRUMENT? 3372
2.1 Definitions 3372
2.2 Applying the definitions 3373
2.2.1 The need for a contract 3373
2.2.2 Simple financial instruments 3373
2.2.3 Contingent rights and obligations 3374
2.2.4 Leases 3375
2.2.5 Non-financial assets and liabilities and contracts thereon 3375
2.2.6 Payments for goods and services 3377
2.2.7 Equity instruments 3378
2.2.8 Derivative financial instruments 3378
2.2.9 Dividends payable 3380
3 SCOPE 3380
3.1 Subsidiaries, associates, joint ventures and similar investments 3380
3.2 Leases 3382
3.3 Insurance contracts 3382
3.3.1 Weather derivatives 3383
3.3.2 Contracts with discretionary participation features 3384
3.4 Financial guarantee contracts 3384
3.4.1 Definition of a financial guarantee contract 3384
3.4.1.A Reimbursement for loss incurred 3384
3.4.1.B Debt instrument 3385
3.4.1.C Form and existence of contract 3386
3.4.2 Issuers of financial guarantee contracts 3386
3.4.3 Holders of financial guarantee contracts 3387
3.4.4 Financial guarantee contracts between entities under common control 3388
3.5 Loan commitments 3388
3.6 Equity instruments 3391
3.6.1 Equity instruments issued 3391
3.6.2 Equity instruments held 3391
3.7 Business combinations 3391
3.7.1 Contingent consideration in a business combination 3391
3.7.1.A Payable by an acquirer 3391
3.7.1.B Receivable by a vendor 3392
3.7.2 Contracts between an acquirer and a vendor in a business combination 3392
3.8 Contingent pricing of property, plant and equipment and intangible assets 3393
3.9 Employee benefit plans and share-based payment 3394
3.10 Reimbursement rights in respect of provisions 3395
3.11 Disposal groups classified as held for sale and discontinued operations 3395
3.12 Indemnification assets 3395
4 CONTRACTS TO BUY OR SELL COMMODITIES AND OTHER NON-FINANCIAL ITEMS 3396
4.1 Contracts that may be settled net 3396
4.2 Normal sales and purchases (or own use contracts) 3397
4.2.1 Net settlement of similar contracts 3398
4.2.2 Commodity broker-traders and similar entities 3399
4.2.3 Written options that can be settled net 3399
4.2.4 Electricity and similar ‘end-user’ contracts 3400
4.2.5 Other contracts containing volume flexibility 3401
4.2.6 Fair value option in IFRS 9 3402
References 3403
Chapter 44 Financial instruments: Derivatives and embedded derivatives 3405
1 INTRODUCTION 3409
2 DEFINITION OF A DERIVATIVE 3410
2.1 Changes in value in response to changes in underlying 3410
2.1.1 Notional amounts 3410
2.1.2 Underlying variables 3411
2.1.3 Non-financial variables specific to one party to the contract 3412
2.2 Initial net investment 3415
2.3 Future settlement 3417
3 EXAMPLES OF DERIVATIVES 3418
3.1 Common derivatives 3418
3.2 In-substance derivatives 3418
3.3 Regular way contracts 3419
4 EMBEDDED DERIVATIVES 3419
5 EMBEDDED DERIVATIVES: THE MEANING OF ‘CLOSELY RELATED’ 3421
5.1 Financial instrument hosts 3421
5.1.1 Foreign currency monetary items 3421
5.1.2 Interest rate indices 3422
5.1.3 Term extension and similar call, put and prepayment options in debt instruments 3423
5.1.4 Interest rate floors and caps 3426
5.1.5 Inflation-linked debt instruments 3427
5.1.6 Commodityand equity-linked interest and principal payments 3428
5.1.7 Credit-linked notes 3429
5.1.8 Convertible and exchangeable debt instruments 3429
5.1.9 Puttable instruments 3430
5.1.10 Callable equity instruments 3431
5.2 Contracts for the sale of goods or services 3431
5.2.1 Foreign currency derivatives 3431
5.2.1.A Functional currency of counterparty 3431
5.2.1.B Routinely denominated in commercial transactions 3432
5.2.1.C Commonly used currencies 3433
5.2.1.D Examples and other practical issues 3435
5.2.2 Inputs, ingredients, substitutes and other proxy pricing mechanisms 3436
5.2.3 Inflation-linked features 3437
5.2.4 Floors and caps 3437
5.2.5 Fund performance fees 3437
5.3 Leases 3438
5.3.1 Foreign currency derivatives 3438
5.3.2 Inflation-linked features 3438
5.3.3 Contingent rentals based on related sales 3438
5.3.4 Contingent rentals based on variable interest rates 3438
5.4 Insurance contracts 3438
6 IDENTIFYING THE TERMS OF EMBEDDED DERIVATIVES AND HOST CONTRACTS 3439
6.1 Embedded non-option derivatives 3439
6.2 Embedded option-based derivative 3440
6.3 Nature of a financial instrument host 3441
6.4 Multiple embedded derivatives 3443
7 REASSESSMENT OF EMBEDDED DERIVATIVES 3444
7.1 IFRIC 9 3444
7.2 Acquisition of contracts 3445
7.3 Business combinations 3445
7.4 Remeasurement issues arising from reassessment 3446
8 LINKED AND SEPARATE TRANSACTIONS AND ‘SYNTHETIC’ INSTRUMENTS 3446
References 3448
Chapter 45 Financial instruments: Financial liabilities and equity 3451
1 INTRODUCTION 3457
1.1 Background 3457
1.2 Development of IFRS on classification of liabilities and equity 3458
2 OBJECTIVE AND SCOPE 3459
2.1 Objective 3459
2.2 Scope 3459
3 DEFINITIONS 3459
4 CLASSIFICATION OF INSTRUMENTS 3462
4.1 Definition of equity instrument 3462
4.2 Contractual obligation to deliver cash or other financial assets 3463
4.2.1 Relationship between an entity and its members 3465
4.2.2 Implied contractual obligation to deliver cash or other financial assets 3466
4.3 Contingent settlement provisions 3467
4.3.1 Contingencies that are ‘not genuine’ 3468
4.3.2 Liabilities that arise only on liquidation 3469
4.3.3 Liabilities that arise only on a change of control 3470
4.3.4 Some typical contingent settlement provisions 3470
4.4 Examples of equity instruments 3472
4.4.1 Issued instruments 3472
4.4.2 Contracts to issue equity instruments 3472
4.5 Preference shares and similar instruments 3473
4.5.1 Instruments redeemable mandatorily or at the holder’s option 3473
4.5.2 Instruments redeemable only at the issuer’s option or not redeemable 3474
4.5.3 Instruments with a ‘dividend blocker’ or a ‘dividend pusher’ clause 3475
4.5.3.A Instruments with a ‘dividend blocker’ 3475
4.5.3.B Instruments with a ‘dividend pusher’ 3477
4.5.4 Perpetual instruments with a ‘step-up’ clause 3477
4.5.5 Relative subordination 3478
4.5.6 Economic compulsion 3479
4.5.7 ‘Linked’ instruments 3479
4.5.8 ‘Change of control’, ‘taxation change’ and ‘regulatory change’ clauses 3480
4.6 Puttable instruments and instruments repayable only on liquidation 3480
4.6.1 The issue 3480
4.6.2 Puttable instruments 3482
4.6.3 Instruments entitling the holder to a pro rata share of net assets only on liquidation 3483
4.6.4 Clarification of the exemptions in 4.6.2 and 4.6.3 above 3485
4.6.4.A Instruments issued by a subsidiary 3485
4.6.4.B Relative subordination of the instrument 3485
4.6.4.C Meaning of ‘identical features’ 3486
4.6.4.D No obligation to deliver cash or another financial asset 3487
4.6.4.E Instruments that substantially fix or restrict the residual return to theholder of an instrument 3487
4.6.4.F Transactions entered into by an instrument holder other than as ownerof the entity 3488
4.6.5 Reclassification of puttable instruments and instruments imposing an obligation only on liquidation 3489
4.6.6 IFRIC 2 3489
4.7 Perpetual debt 3490
4.8 Differences of classification between consolidated and single entity financial statements 3491
4.8.1 Consolidated financial statements 3491
4.8.2 Single entity financial statements 3491
4.9 Reclassification of instruments 3492
4.9.1 Change of terms 3493
4.9.1.A Equity instrument to financial liability 3493
4.9.1.B Financial liability to equity instrument 3494
4.9.2 Change of circumstances 3494
4.9.2.A Arguments against reclassification 3495
4.9.2.B Arguments for reclassification 3495
5 CONTRACTS SETTLED BY DELIVERY OF THE ENTITY’S OWN EQUITY INSTRUMENTS 3496
5.1 Contracts accounted for as equity instruments 3498
5.1.1 Comparison with IFRS 2 3498
– Share-based Payment 3498
5.1.2 Number of equity instruments issued adjusted for capital restructuring or other event 3499
5.1.3 Stepped up exercise price 3501
5.1.4 Exchange of fixed amounts of equity (equity for equity) 3501
5.2 Contracts accounted for as financial assets or financial liabilities 3502
5.2.1 Variable number of equity instruments 3502
5.2.2 Fixed number of equity instruments for variable consideration 3502
5.2.3 Fixed amount of cash (or other financial assets) denominated in a currency other than the entity’s functional currency 3503
5.2.3.A Rights issues with a price fixed in a currency other than the entity’sfunctional currency 3504
5.2.4 Instrument with equity settlement alternative of significantly higher value than cash settlement alternative 3504
5.2.5 Fixed number of equity instruments with variable value 3505
5.2.6 Fixed amount of cash determined by reference to share price 3505
5.2.7 Net-settled contracts over own equity 3505
5.2.8 Derivative financial instruments with settlement options 3505
5.3 Liabilities arising from gross-settled contracts for the purchase of the entity’s own equity instruments 3506
5.3.1 Contracts to purchase own equity during ‘closed’ or ‘prohibited’ periods 3507
5.3.2 Contracts to acquire non-controlling interests 3508
5.3.2.A Put options over non-controlling interests – Interpretations Committeeand IASB developments 3508
5.4 Gross-settled contracts for the sale or issue of the entity’s own equity instruments 3509
6 COMPOUND FINANCIAL INSTRUMENTS 3510
6.1 Background 3510
6.1.1 Treatment by holder and issuer contrasted 3511
6.2 Initial recognition – ‘split accounting’ 3511
6.2.1 Accounting for the equity component 3514
6.2.2 Temporary differences arising from split accounting 3514
6.3 Conversion, early repurchase and modification 3514
6.3.1 Conversion at maturity 3514
6.3.2 Conversion before maturity 3515
6.3.2.A ‘Fixed stated principal’ of a bond 3515
6.3.2.B Accounting treatment 3515
6.3.2.C Treatment of embedded derivatives on conversion 3516
6.3.3 Early redemption or repurchase 3516
6.3.3.A Early repurchase through negotiation with bondholders 3517
6.3.3.B Early repurchase through exercising an embedded call option 3519
6.3.4 Modification 3519
6.4 The components of a compound instrument 3520
6.4.1 Determining the components of a compound instrument 3520
6.4.2 Compound instruments with embedded derivatives 3521
6.4.2.A Issuer call option – ‘closely related’ embedded derivatives 3522
6.4.2.B Issuer call option – ‘not closely related’ embedded derivatives 3522
6.5 Other issues 3523
6.6 Common forms of convertible bonds 3523
6.6.1 Functional currency bond convertible into a fixed number of shares 3523
6.6.2 Contingent convertible bond 3524
6.6.3 Mandatorily convertible bond 3524
6.6.3.A Bond which is mandatorily convertible into a variable number ofshares with an option for the issuer to settle early for a maximumnumber of shares 3525
6.6.3.B Bond which is mandatorily convertible into a variable number ofshares upon a contingent ‘non-viability’ event 3526
6.6.4 Foreign currency convertible bond 3529
6.6.4.A Instrument issued by foreign subsidiary convertible into equity ofparent 3529
6.6.5 Convertibles with cash settlement at the option of the issuer 3531
6.6.6 Bond convertible into fixed percentage of equity 3531
7 SETTLEMENT OF FINANCIAL LIABILITY WITH EQUITY INSTRUMENT 3531
7.1 Scope and effective date of IFRIC 19 3532
7.2 Requirements of IFRIC 19 3532
7.3 Debt for equity swaps with shareholders 3533
8 INTEREST, DIVIDENDS, GAINS AND LOSSES 3533
8.1 Transaction costs of equity transactions 3534
8.2 Tax effects of equity transactions 3536
9 TREASURY SHARES 3536
9.1 Transactions in own shares not at fair value 3537
10 ‘HEDGING’ OF INSTRUMENTS CLASSIFIED AS EQUITY 3538
11 DERIVATIVES OVER OWN EQUITY INSTRUMENTS 3538
11.1 Forward contracts 3539
11.1.1 Forward purchase 3539
11.1.2 Forward sale 3542
11.1.3 ‘Back-to-back’ forward contracts 3544
11.2 Call options 3545
11.2.1 Purchased call option 3545
11.2.2 Written call option 3547
11.3 Put options 3549
11.3.1 Purchased put option 3549
11.3.2 Written put option 3552
12 POSSIBLE FUTURE DEVELOPMENTS 3555
References 3556
Chapter 46 Financial instruments: Classification (IAS 39) 3557
1 INTRODUCTION 3559
2 ASSETS AND LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS 3560
2.1 Assets and liabilities held for trading 3560
2.2 Instruments designated at fair value through profit or loss 3562
2.2.1 Designation eliminates or significantly reduces a measurement or recognition inconsistency (accounting mismatch) that woul 3563
2.2.2 A group of financial assets, financial liabilities or both is managed and its performance is evaluated on a fair value bas 3565
2.2.3 Instruments containing embedded derivatives 3567
3 HELD-TO-MATURITY INVESTMENTS 3568
3.1 Instruments that may or may not be classified as held-to-maturity 3569
3.2 Positive intention and ability to hold to maturity 3570
3.3 The tainting provisions 3571
3.3.1 Deterioration in issuer’s creditworthiness 3573
3.3.2 Major business combinations or disposals 3574
3.3.3 Significant changes in statutory or regulatory requirements 3574
3.3.4 Change of management 3574
4 LOANS AND RECEIVABLES 3575
5 AVAILABLE-FOR-SALE ASSETS 3576
6 RECLASSIFICATIONS 3577
6.1 Reclassifications to or from fair value through profit or loss 3577
6.1.1 Reclassifications from held for trading 3577
6.1.1.A Reclassifications to loans and receivables 3577
6.1.1.B Reclassifications in rare circumstances 3579
6.1.2 Re-designation and de-designation of derivatives as hedging instruments 3580
6.1.3 Changes in accounting policy for insurance contracts 3580
6.2 Reclassifications between available-for-sale financial assets and loans and receivables 3580
6.3 Reclassifications between held-to-maturity investments and available for sale financial assets 3581
6.4 Prohibited reclassifications 3581
7 CLASSIFICATION OF FINANCIAL INSTRUMENTS IN A BUSINESS COMBINATION 3581
8 FUTURE DEVELOPMENTS 3582
References 3582
Chapter 47 Financial instruments: Classification (IFRS 9) 3583
1 INTRODUCTION 3587
2 CLASSIFYING FINANCIAL ASSETS: AN OVERVIEW 3587
2.1 Debt instruments 3589
2.2 Equity instruments and derivatives 3590
3 CLASSIFYING FINANCIAL LIABILITIES 3591
4 FINANCIAL ASSETS AND FINANCIAL LIABILITIES HELD FOR TRADING 3592
5 FINANCIAL ASSETS: THE ‘BUSINESS MODEL’ ASSESSMENT 3593
5.1 The level at which the business model assessment is applied 3595
5.2 Hold to collect contractual cash flows 3595
5.2.1 Impact of sales on the assessment 3595
5.2.2 Transferred financial assets that are not derecognised 3598
5.3 Hold to collect contractual cash flows and selling financial assets 3598
5.4 Other business models 3599
5.5 Applying the business model test in practice 3600
6 CHARACTERISTICS OF THE CONTRACTUAL CASH FLOWS OF THE INSTRUMENT 3605
6.1 The meaning of ‘principal’ 3606
6.2 The meaning of ‘interest’ 3607
6.3 Contractual features that normally pass the test 3608
6.3.1 Conventional subordination features 3608
6.3.2 Full recourse loans secured by collateral 3609
6.3.3 Bonds with a capped or floored interest rate 3609
6.3.4 Lender has discretion to change the interest rate 3610
6.3.5 Unleveraged inflation-linked bonds 3610
6.4 Contractual features that may affect the classification 3611
6.4.1 De minimis and non-genuine features 3611
6.4.1.A De minimis features 3612
6.4.1.B Non-genuine features 3612
6.4.2 Contractual features that modify the consideration for the time value of money 3613
6.4.3 Regulated interest rates 3615
6.4.4 Other contractual features that change the timing or amount of contractual cash flows 3616
6.4.5 Contractual features that normally do not represent payments of principal and interest 3620
6.4.6 Loan commitments 3626
6.5 Contractually linked instruments 3626
6.5.1 Assessing the characteristics of the underlying pool 3630
6.5.2 Assessing the exposure to credit risk in the tranche held 3630
7 DESIGNATION AT FAIR VALUE THROUGH PROFIT OR LOSS 3632
7.1 Designation eliminates or significantly reduces a measurement or recognition inconsistency (accounting mismatch) that would 3633
7.2 A group of financial liabilities or financial assets and financial liabilities is managed and its performance is evaluated o 3634
7.3 Hybrid contracts with a host that is not a financial asset within the scope of IFRS 9 3635
8 DESIGNATION OF NON-DERIVATIVE EQUITY INVESTMENTS AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME 3636
9 RECLASSIFICATION OF FINANCIAL ASSETS 3638
10 EFFECTIVE DATE AND TRANSITION 3640
10.1 Effective date 3640
10.2 Transition provisions 3640
10.2.1 Date of initial application 3640
10.2.2 Applying the ‘business model’ assessment 3641
10.2.3 Applying the contractual cash flow characteristics test 3642
10.2.4 Making and revoking designations 3642
10.2.5 Restatement of comparatives 3643
10.2.6 Financial instruments derecognised prior to the date of initial application 3644
10.2.7 Transition adjustments and measurement of financial assets and liabilities 3644
10.2.7.A Hybrid financial assets 3644
10.2.7.B Financial assets and liabilities measured at amortised cost 3645
10.2.7.C Unquoted equity investments 3645
Chapter 48 Financial instruments: Recognition and initial measurement 3647
1 INTRODUCTION 3649
2 RECOGNITION (IAS 39 AND IFRS 9) 3649
2.1 General requirements 3649
2.1.1 Receivables and payables 3650
2.1.2 Firm commitments to purchase or sell goods or services 3650
2.1.3 Forward contracts 3650
2.1.4 Option contracts 3650
2.1.5 Planned future transactions (forecast transactions) 3651
2.1.6 Treatment by transferee of transfers of financial assets not qualifying for derecognition by transferor (symmetry of recog 3651
2.2 ‘Regular way’ transactions 3651
2.2.1 Trade date accounting 3653
2.2.2 Settlement date accounting 3653
2.2.3 Illustrative examples 3654
2.2.3.A Exchanges of non-cash financial assets 3657
3 INITIAL MEASUREMENT (IAS 39 AND IFRS 9) 3659
3.1 General requirements 3659
3.2 Initial fair value and ‘day 1’ profits 3659
3.2.1 Interest-free and low-interest long-term loans 3660
3.2.2 Measurement of financial instruments following modification ofcontractual terms that leads to initial recognition of a new instrument 3661
3.2.3 Financial guarantee contracts and off-market loan commitments 3661
3.2.4 Loans and receivables acquired in a business combination 3662
3.3 Transaction costs 3662
3.4 Embedded derivatives and financial instrument hosts 3663
3.5 Regular way transactions 3663
3.6 Assets and liabilities arising from loan commitments 3664
References 3665
Chapter 49 Financial instruments: Subsequent measurement (IAS 39) 3667
1 INTRODUCTION 3671
2 SUBSEQUENT MEASUREMENT AND RECOGNITION OF GAINS AND LOSSES 3671
2.1 Financial assets and financial liabilities at fair value through profit or loss 3672
2.2 Held-to-maturity investments 3673
2.3 Loans and receivables 3673
2.4 Available-for-sale assets 3673
2.5 Other financial liabilities 3675
2.6 Unquoted equity instruments and related derivatives 3676
2.7 Reclassifications of financial assets 3677
2.7.1 Reclassifications from held-for-trading 3677
2.7.2 Reclassifications from available-for-sale to loans and receivables 3677
2.7.3 Reclassifications between held-to-maturity investments and availablefor sale financial assets 3678
2.8 Financial guarantees and commitments to provide a loan at a belowmarket interest rate 3678
2.9 Exceptions to the general principles 3679
2.9.1 Hedging relationships 3679
2.9.2 Regular way transactions 3679
2.9.3 Liabilities arising from ‘failed derecognition’ transactions 3680
3 AMORTISED COST AND THE EFFECTIVE INTEREST METHOD 3680
3.1 Fixed interest, fixed term instruments 3681
3.2 Prepayment, call and similar options 3682
3.2.1 Revisions to estimated cash flows 3682
3.2.2 Special requirements for financial assets reclassified in accordance with IAS 39 3683
3.2.3 Interaction with the requirements for embedded derivatives 3683
3.3 Floating rate instruments 3686
3.4 Perpetual debt instruments 3688
3.5 Acquisition of credit impaired debt instruments 3688
3.6 Inflation-linked debt 3689
3.7 Other, more complex, instruments 3691
4 IMPAIRMENT 3692
4.1 Impairment reviews 3692
4.1.1 Examples of loss events 3693
4.1.2 Loss events related to investments in equity instruments 3694
4.1.3 Significant or prolonged declines in fair value 3694
4.2 Financial assets carried at amortised cost 3696
4.2.1 Individual and collective assessments 3696
4.2.2 Measurement – general requirements 3697
4.2.3 Measurement – detailed requirements 3700
4.2.4 Impairment of assets subject to hedges 3702
4.2.5 Reversal of impairment losses 3703
4.3 Available-for-sale assets measured at fair value 3703
4.3.1 Recognition of impairment 3703
4.3.2 Impairment of available-for-sale equity instruments subject to fair value hedges 3703
4.3.3 Reversals of impairment 3704
4.3.4 Further declines in the fair value of impaired equity instruments 3705
4.3.5 Timing of impairment tests and interaction with interim reporting 3706
4.4 Financial assets carried at cost in accordance with IAS 39 3707
4.5 Interest income after impairment recognition 3707
5 FOREIGN CURRENCIES 3707
5.1 Foreign currency instruments 3707
5.2 Foreign entities 3709
References 3710
Chapter 50 Financial instruments: Subsequent measurement (IFRS 9) 3713
1 INTRODUCTION 3719
2 SUBSEQUENT MEASUREMENT AND RECOGNITION OF GAINS AND LOSSES 3720
2.1 Financial assets and financial liabilities measured at fair value through profit or loss 3721
2.1.1 Liabilities at fair value through profit or loss: calculating the gain or loss attributable to changes in credit risk 3721
2.1.2 Liabilities at fair value through profit or loss: assessing whether an accounting mismatch is created or enlarged 3724
2.2 Investments in equity investments designated at fair value through other comprehensive income 3725
2.3 Debt instruments measured at fair value through other comprehensive income 3726
2.4 Financial assets measured at amortised cost 3726
2.5 Financial liabilities measured at amortised cost 3727
2.6 Unquoted equity instruments and related derivatives 3727
2.7 Reclassifications of financial assets 3728
2.8 Financial guarantees and commitments to provide a loan at a belowmarket interest rate 3728
2.9 Exceptions to the general principles 3729
2.9.1 Hedging relationships 3729
2.9.2 Regular way transactions 3729
2.9.3 Liabilities arising from failed derecognition transactions 3730
3 AMORTISED COST AND THE EFFECTIVE INTEREST METHOD 3730
3.1 Fixed interest, fixed term instruments 3733
3.2 Prepayment, call and similar options 3734
3.2.1 Revisions to estimated cash flows 3734
3.2.2 Interaction with the requirements for embedded derivatives 3735
3.3 Floating rate instruments 3737
3.4 Perpetual debt instruments 3739
3.5 Inflation-linked debt 3739
3.6 More complex financial liabilities 3742
4 FOREIGN CURRENCIES 3743
4.1 Foreign currency instruments 3743
4.2 Foreign entities 3746
5 IMPAIRMENT 3746
5.1 Introduction 3746
5.1.1 Brief history and background of the impairment project 3746
5.1.2 Overview of IFRS 9 impairment requirements 3751
5.1.3 Key changes from the IAS 39 impairment requirements and the main implications of these changes 3754
5.1.4 Key differences from the FASB’s standard 3756
5.1.5 The IFRS Transition Resource Group for Impairment of Financial Instruments (ITG) 3757
5.1.6 Other guidance on expected credit losses 3760
5.2 Scope 3760
5.3 Approaches 3761
5.3.1 General approach 3761
5.3.2 Simplified approach 3763
5.3.3 Purchased or originated credit-impaired financial assets 3764
5.4 Measurement of expected credit losses 3766
5.4.1 Lifetime expected credit losses 3767
5.4.2 12-month expected credit losses 3768
5.4.2.A Definition of default 3772
5.4.2.B Measurement of 12-month expected credit losses based on a loss rateapproach 3773
5.4.3 Expected life versus contractual period 3774
5.4.4 Probability-weighted outcome 3778
5.4.5 Time value of money 3782
5.4.6 Interaction between expected credit losses calculations and fair value hedge accounting 3784
5.4.7 Credit enhancements: collateral and financial guarantees 3785
5.4.8 Reasonable and supportable information 3789
5.4.8.A Undue cost or effort 3790
5.4.8.B Sources of information 3790
5.4.8.C Information about past events, current conditions and forecasts offuture economic conditions 3790
5.5 General approach: determining significant increases in credit risk 3795
5.5.1 Change in the risk of a default occurring 3797
5.5.2 Factors or indicators of changes in credit risk 3801
5.5.3 What is significant? 3812
5.5.4 Operational simplifications 3814
5.5.4.A Low credit risk operational simplification 3814
5.5.4.B Past due status and more than 30 days past due rebuttable presumption 3819
5.5.4.C 12-month risk as an approximation for change in lifetime risk 3821
5.5.4.D Assessment at the counterparty level 3822
5.5.4.E Determining maximum initial credit risk for a portfolio 3824
5.5.5 Collective assessment 3825
5.5.6 Multiple scenarios for ‘staging’ assessment 3832
5.6 Other matters and issues in relation to the IFRS 9 impairment requirements 3834
5.6.1 Other guidance on accounting for expected credit losses 3834
5.6.2 Global Public Policy Committee (GPPC) guidance 3839
5.6.3 Measurement dates of expected credit losses 3840
5.6.3.A Derecognition and initial recognition for foreign currency exposures 3840
5.6.3.B Trade date and settlement date accounting 3841
5.6.4 Interaction between the initial measurement of debt instruments acquired in a business combination and the impairment mode 3842
5.7 Modified financial assets 3843
5.8 Financial assets measured at fair value through other comprehensive income 3847
5.9 Trade receivables, contract assets and lease receivables 3856
5.9.1 Trade receivables and contract assets 3856
5.9.2 Lease receivables 3858
5.10 Loan commitments and financial guarantee contracts 3858
5.11 Revolving credit facilities 3861
5.12 Presentation of expected credit losses in the statement of financial position 3870
5.12.1 Allowance for financial assets measured at amortised cost, contract assets and lease receivables 3871
5.12.1.A Write-off 3871
5.12.1.B Presentation of the gross carrying amount and expected credit lossallowance for credit-impaired assets 3872
5.12.2 Provisions for loan commitments and financial guarantee contracts 3873
5.12.3 Accumulated impairment amount for debt instruments measured at fair value through other comprehensive income 3874
5.13 Disclosures 3874
6 EFFECTIVE DATE AND TRANSITION 3876
6.1 Effective date 3876
6.2 Transition 3876
6.2.1 Date of initial application 3877
6.2.2 Restatement of comparatives 3877
6.2.3 Own credit requirements 3878
6.2.4 Hybrid financial assets measured at fair value through profit or loss 3878
6.2.5 Effective interest rate 3879
6.2.6 Unquoted equity investments 3879
6.2.7 Initial credit risk and significant increases in credit risk on transition 3879
References 3880
Chapter 51 Financial instruments: Derecognition 3883
1 INTRODUCTION 3889
1.1 Off-balance sheet finance 3889
2 DEVELOPMENT OF IFRS 3891
2.1 Definitions 3891
3 DERECOGNITION – FINANCIAL ASSETS 3893
3.1 Background 3893
3.2 Decision tree 3894
3.2.1 Importance of applying tests in sequence 3896
3.3 Derecognition principles, parts of assets and groups of assets 3896
3.3.1 Credit enhancement through transferor’s waiver of right to future cash flows 3898
3.3.2 Derecognition of groups of financial assets 3899
3.3.2.A The IASB’s view and the Interpretations Committee’s tentativeconclusions 3900
3.3.2.B What are ‘similar assets’? 3901
3.3.3 Transfer of asset (or part of asset) for only part of its life 3902
3.3.4 ‘Financial asset’ includes whole or part of a financial asset 3902
3.4 Have the contractual rights to cash flows from the asset expired? 3903
3.4.1 Renegotiation of the terms of an asset 3903
3.4.2 Interpretations Committee discussions on asset restructuring in the context of Greek government debt 3904
3.4.3 Novation of contracts to intermediary counterparties 3906
3.4.4 Write-offs 3906
3.5 Has the entity ‘transferred’ the asset? 3906
3.5.1 Transfers of contractual rights to receive cash flows 3907
3.5.1.A Meaning of ‘transfers the contractual rights to receive the cash flows’ 3908
3.5.1.B Transfers subject to conditions 3910
3.5.2 Retention of rights to receive cash flows subject to obligation to pay over to others (pass-through arrangement) 3911
3.6 Securitisations 3912
3.6.1 Recourse to originator 3913
3.6.2 Short-term loan facilities 3913
3.6.3 Insurance protection 3914
3.6.4 Treatment of collection proceeds 3914
3.6.5 Transfers of non-optional derivatives along with a group of financial assets 3915
3.6.6 ‘Empty’ subsidiaries or SPEs 3916
3.7 Client money 3916
3.8 Has the entity transferred or retained substantially all the risks and rewards of ownership? 3917
3.8.1 Transfers resulting in transfer of substantially all risks and rewards 3918
3.8.2 Transfers resulting in retention of substantially all risks and rewards 3918
3.8.3 Transfers resulting in neither transfer nor retention of substantially all risks and rewards 3919
3.8.4 Evaluating the extent to which risks and rewards are transferred – practical example 3919
3.9 Has the entity retained control of the asset? 3922
3.9.1 Transferee’s ‘practical ability’ to sell the asset 3922
4 PRACTICAL APPLICATION OF THE DERECOGNITION CRITERIA 3923
4.1 Repurchase agreements (‘repos’) and securities lending 3923
4.1.1 Agreements to return the same asset 3923
4.1.1.A Transferee’s right to pledge 3924
4.1.2 Agreements with right to return the same or substantially the same asset 3924
4.1.3 Agreements with right of substitution 3924
4.1.4 Net cash-settled forward repurchase 3924
4.1.5 Agreement to repurchase at fair value 3925
4.1.6 Right of first refusal to repurchase at fair value 3925
4.1.7 Wash sale 3925
4.2 Transfers subject to put and call options 3925
4.2.1 Deeply in the money put and call options 3926
4.2.2 Deeply out of the money put and call options 3926
4.2.3 Options that are neither deeply out of the money nor deeply in the money 3926
4.2.3.A Assets readily obtainable in the market 3927
4.2.3.B Assets not readily obtainable in the market 3927
4.2.4 Option to put or call at fair value 3927
4.2.5 Net cash-settled options 3928
4.2.6 Removal of accounts provision 3928
4.2.7 Clean-up call options 3928
4.2.8 Same (or nearly the same) price put and call options 3928
4.2.9 Changes in probability of exercise of options after initial transfer of asset 3929
4.3 Subordinated retained interests and credit guarantees 3930
4.4 Transfers by way of swaps 3931
4.4.1 Total return swaps 3931
4.4.2 Interest rate swaps 3931
4.5 Factoring of trade receivables 3932
5 ACCOUNTING TREATMENT 3932
5.1 Transfers that qualify for derecognition 3932
5.1.1 Transferred asset part of larger asset 3933
5.1.2 Servicing assets and liabilities 3935
5.2 Transfers that do not qualify for derecognition through retention of risks and rewards 3938
5.3 Transfers with continuing involvement – summary 3942
5.3.1 Guarantees 3943
5.3.2 Options 3943
5.3.3 Associated liability 3943
5.3.4 Subsequent measurement of assets and liabilities 3944
5.3.5 Continuing involvement in part only of a larger asset 3944
5.4 Transfers with continuing involvement – accounting examples 3945
5.4.1 Transfers with guarantees 3945
5.4.2 Transfers of assets measured at amortised cost 3946
5.4.3 Transfers of assets measured at fair value 3948
5.4.3.A Transferor’s call option 3948
5.4.3.B Transferee’s put option 3950
5.4.3.C ‘Collar’ put and call options 3951
5.4.4 Continuing involvement in part only of a financial asset 3953
5.5 Miscellaneous provisions 3956
5.5.1 Offset 3956
5.5.2 Collateral 3956
5.5.3 Rights or obligations over transferred assets that continue to be recognised 3957
5.6 Reassessing derecognition 3957
5.6.1 Reassessment of consolidation of subsidiaries and SPEs 3957
6 DERECOGNITION – FINANCIAL LIABILITIES 3958
6.1 Extinguishment of debt 3958
6.1.1 What constitutes ‘part’ of a liability? 3958
6.1.2 Legal release by creditor 3959
6.1.3 ‘In-substance defeasance’ arrangements 3960
6.1.4 Extinguishment in exchange for transfer of assets not meeting the derecognition criteria 3960
6.2 Exchange or modification of debt by original lender 3961
6.2.1 Costs and fees 3962
6.2.2 Modification gains and losses 3964
6.2.3 Illustrative examples 3965
6.2.4 Settlement of financial liability with issue of new equity instrument 3967
6.3 Gains and losses on extinguishment of debt 3968
6.4 Derivatives that can be financial assets or financial liabilities 3968
6.5 Supply-chain finance 3969
7 FUTURE DEVELOPMENTS 3971
References 3973
Chapter 52 Financial instruments: Hedge accounting (IAS 39) 3975
1 INTRODUCTION 3981
1.1 Background 3981
1.2 What is hedge accounting? 3982
1.3 Development of hedge accounting standards 3983
2 HEDGING INSTRUMENTS AND HEDGED ITEMS 3984
2.1 Hedging instruments 3984
2.1.1 Derivative financial instruments 3984
2.1.1.A Options and collars 3985
2.1.1.B Credit break clauses 3987
2.1.2 Cash instruments 3987
2.1.3 Combinations of instruments 3988
2.1.4 Portions and proportions of hedging instruments 3989
2.1.4.A Time value of options 3990
2.1.4.B Interest elements of forwards 3991
2.1.4.C Proportions of instruments 3991
2.1.4.D Cash instruments 3991
2.1.4.E Notional decomposition 3992
2.1.4.F Restructuring of derivatives 3992
2.1.5 Reduction of risk 3992
2.1.6 Hedging different risks with one instrument 3993
2.1.7 Own equity instruments 3995
2.2 Hedged items 3996
2.2.1 Financial items: portions and proportions 3996
2.2.1.A Benchmark portions of interest rate risk 3997
2.2.1.B Partial term hedging 4000
2.2.1.C Foreign currency risk associated with publicly quoted shares 4000
2.2.1.D Inflation risk 4001
2.2.1.E Other portions 4001
2.2.2 Non-financial items: portions 4002
2.2.3 Groups of items as hedged items 4005
2.2.4 Hedges of general business risk 4006
2.2.5 Hedges of a firm commitment to acquire a business 4006
2.2.6 Held-to-maturity investments 4007
2.2.7 Derivatives and instruments measured at fair value through profit or loss 4007
2.2.8 Forecast acquisition or issuance of foreign currency monetary items 4009
2.2.9 Own equity instruments 4009
2.2.10 Core deposits 4009
2.2.11 Pension scheme assets 4010
2.3 Internal hedges and other group accounting issues 4011
2.3.1 Internal hedging instruments 4011
2.3.2 Offsetting internal hedging instruments 4013
2.3.2.A Interest rate risk 4013
2.3.2.B Foreign exchange risk 4015
2.3.3 Offsetting external hedging instruments 4022
2.3.4 Internal hedged items 4024
2.3.4.A Intragroup monetary items 4024
2.3.4.B Forecast intragroup transactions 4025
2.3.5 Hedged item and hedging instrument held by different group entities 4025
3 TYPES OF HEDGING RELATIONSHIPS 4026
3.1 Fair value hedges 4026
3.1.1 Hedges of firm commitments 4027
3.1.2 Hedges of foreign currency monetary items 4027
3.2 Cash flow hedges 4027
3.2.1 All-in-one hedges 4028
3.2.2 Hedges of firm commitments 4029
3.2.3 Hedges of foreign currency monetary items 4029
3.3 Hedges of net investments in foreign operations 4029
3.3.1 Nature of the hedged risk 4030
3.3.2 Amount of the hedged item for which a hedging relationship may be designated 4031
3.3.3 Where the hedging instrument can be held 4033
3.3.4 Disposal of a hedged foreign operation 4033
4 ACCOUNTING FOR EFFECTIVE HEDGES 4034
4.1 Fair value hedges 4034
4.1.1 Ongoing fair value hedge accounting 4034
4.1.2 Dealing with adjustments to the hedged item 4037
4.1.3 Discontinuing fair value hedge accounting 4039
4.2 Cash flow hedges 4040
4.2.1 Ongoing cash flow hedge accounting 4040
4.2.2 Reclassification of gains and losses recognised in other comprehensive income from equity to profit or loss 4043
4.2.3 Discontinuing cash flow hedge accounting 4047
4.2.3.A Impact of central clearing regulations on cash flow hedges 4048
4.2.4 Acquisitions and disposals 4050
4.3 Accounting for hedges of a net investment in a foreign operation 4050
4.4 Hedges of a firm commitment to acquire a business 4051
5 QUALIFYING CONDITIONS FOR HEDGE ACCOUNTING 4053
5.1 Documentation and designation 4053
5.1.1 Business combinations 4054
5.1.2 Dynamic hedging strategies 4054
5.2 Forecast transactions 4055
5.3 Assessing hedge effectiveness 4057
5.3.1 Basic requirements 4058
5.3.2 The ‘dollar-offset’ method 4060
5.3.2.A Law of small numbers 4066
5.3.3 Dollar-offset: comparison of spot rate and forward rate methods 4067
5.3.4 The impact of the hedging instrument’s credit quality 4072
5.3.4.A Discount rates for calculating the fair value of derivatives 4074
5.3.4.B Currency basis risk in cross-currency interest rate swaps 4075
5.3.5 Hedging using instruments with a non-zero fair value 4075
5.3.6 Regression analysis and other statistical methods 4075
5.3.6.A Basic concepts of regression 4076
5.3.6.B Summary 4080
5.3.7 ‘Short-cut method’ 4080
5.3.8 ‘Critical terms match’ approach 4080
5.3.9 Interest accruals and ‘clean’ versus ‘dirty’ values 4082
5.3.10 Effectiveness of options 4083
5.3.11 Hedged items with embedded optionality 4084
5.3.12 Net investment hedges: identifying the effective portion 4085
5.3.13 Net investment hedges: other practical issues 4087
5.3.13.A Non-derivative liabilities used as the hedging instrument 4087
5.3.13.B Derivatives used as the hedging instrument 4087
5.3.13.C Combinations of derivative and non-derivative instruments used as thehedging instrument 4090
5.3.13.D Individual or separate financial statements 4090
6 PORTFOLIO (OR MACRO) HEDGING 4091
References 4093
Chapter 53 Financial instruments: Hedge accounting (IFRS 9) 4095
1 INTRODUCTION 4101
1.1 Background 4101
1.2 The main changes in the IFRS 9 hedge accounting requirements 4102
2 RISK MANAGEMENT 4104
2.1 Objective of hedge accounting 4104
2.2 Risk management strategy versus risk management objective 4105
3 HEDGED ITEMS 4106
3.1 General requirements 4106
3.2 Hedges of exposures affecting other comprehensive income 4107
3.3 Aggregated exposures 4107
3.3.1 Introduction 4107
3.3.2 Background 4108
3.3.3 Accounting for aggregated exposures 4110
3.4 Risk components 4117
3.4.1 General requirements 4117
3.4.2 Contractually specified risk components 4118
3.4.3 Non-contractually specified risk components 4119
3.4.4 Inflation as a risk component 4120
3.4.5 The ‘sub-LIBOR issue’ 4121
3.5 Components of a nominal amount 4123
3.5.1 Definition 4123
3.5.2 Hedge accounting requirements in IAS 39 4124
3.5.3 Hedge accounting requirements in IFRS 9 4125
3.6 Groups of items 4127
3.6.1 General requirements 4128
3.6.2 Hedging a component of a group 4128
3.6.3 Cash flow hedge of a net position 4129
3.6.4 Nil net positions 4133
3.6.5 Macro hedging 4133
3.6.6 Applying hedge accounting for macro hedging strategies under IFRS 9 4134
3.6.7 Hedged items held at fair value through profit or loss 4136
4 HEDGING INSTRUMENTS 4138
4.1 General requirements 4138
4.2 Non-derivative financial instruments 4139
4.3 Hedges of a portion of a time period 4140
4.4 Hedges of foreign currency risk 4140
4.5 Time value of money, forward element and currency basis spread 4140
4.6 Embedded derivatives 4140
5 QUALIFYING CRITERIA 4141
5.1 General requirements 4141
5.2 Economic relationship 4142
5.3 Credit risk and the effectiveness assessment 4145
5.3.1 Credit risk on the hedging instrument 4145
5.3.2 Credit risk on the hedged item 4146
5.4 Setting the hedge ratio 4148
5.5 Designating ‘proxy hedges’ 4150
6 SUBSEQUENT ASSESSMENT OF EFFECTIVENESS, REBALANCING AND DISCONTINUATION 4151
6.1 Assessment of effectiveness 4151
6.2 Rebalancing 4152
6.2.1 Definition 4152
6.2.2 Requirement to rebalance 4154
6.2.3 Mechanics of rebalancing 4155
6.3 Discontinuation 4158
6.4 Measuring ineffectiveness 4162
6.4.1 The effect of the time value of money 4162
6.4.2 Hypothetical derivatives for measuring ineffectiveness 4163
7 ACCOUNTING FOR THE COSTS OF HEDGING 4166
7.1 Time value of options 4166
7.1.1 General requirements 4166
7.1.2 Aligned time value 4169
7.2 Forward element of forward contracts and foreign currency basis spread of financial instruments 4171
7.2.1 General requirements 4171
7.2.2 Foreign currency basis spreads 4173
8 PRESENTATION 4174
8.1 Cash flow hedges 4174
8.2 Fair value hedges 4175
8.3 Hedges of groups of items 4176
8.3.1 Cash flow hedges 4176
8.3.2 Fair value hedges 4176
9 DISCLOSURES 4177
9.1 Background and general requirements 4177
9.2 Risk management strategy 4178
9.3 The amount, timing and uncertainty of future cash flows 4179
9.4 The effects of hedge accounting on the financial position and performance 4180
10 ALTERNATIVES TO HEDGE ACCOUNTING 4182
10.1 Credit risk exposures 4182
10.2 Own use contracts 4183
11 EFFECTIVE DATE AND TRANSITION 4185
11.1 Effective date 4185
11.2 Prospective application in general 4186
11.3 Limited retrospective application 4186
11.3.1 Accounting for the time value of options 4187
11.3.2 Accounting for the forward element of forward contracts and foreign currency basis spread 4187
11.3.3 Re-designation of hedge relationships for non-financial risk components 4188
11.3.4 Designation of own use contracts at fair value through profit or loss 4189
References 4190
Chapter 54 Financial instruments: Presentation and disclosure 4191
1 INTRODUCTION 4197
1.1 IAS 32 4197
1.2 IFRS 7 4197
2 SCOPE OF IFRS 7 4198
2.1 Entities required to comply with IFRS 7 4198
2.2 Financial instruments within the scope of IFRS 7 4198
2.3 Interim reports 4199
3 STRUCTURING THE DISCLOSURES 4199
3.1 Level of detail 4200
3.2 Materiality 4200
3.3 Classes of financial instrument 4201
4 SIGNIFICANCE OF FINANCIAL INSTRUMENTS FOR AN ENTITY’S FINANCIAL POSITION AND PERFORMANCE 4201
4.1 Accounting policies 4202
4.2 Income, expenses, gains and losses 4203
4.2.1 Gains and losses by measurement category 4203
4.2.2 Interest income and expense 4205
4.2.3 Fee income and expense 4206
4.2.4 Impairment losses 4206
4.3 Hedge accounting 4206
4.3.1 Hedge accounting disclosures for entities applying IAS 39 4206
4.3.2 Hedge accounting disclosures for entities applying IFRS 9 4209
4.3.2.A The risk management strategy 4210
4.3.2.B The amount, timing and uncertainty of future cash flows 4211
4.3.2.C The effects of hedge accounting on financial position and performance 4212
4.3.2.D Option to designate a credit exposure as measured at fair valuethrough profit or loss 4216
4.4 Statement of financial position 4216
4.4.1 Categories of financial assets and financial liabilities 4216
4.4.2 Financial liabilities designated at fair value through profit or loss 4217
4.4.2.A Entities applying IAS 39 4217
4.4.2.B Entities applying IFRS 9 4219
4.4.3 Financial assets designated as measured at fair value through profit or loss 4220
4.4.4 Investments in equity instruments designated at fair value through other comprehensive income (IFRS 9) 4221
4.4.5 Reclassification 4221
4.4.5.A Reclassifications in accordance with the October 2008‘reclassification’ amendments to IAS 39 4222
4.4.5.B Other reclassifications under IAS 39 4222
4.4.5.C Reclassifications of financial assets in accordance with IFRS 9 4223
4.4.6 Collateral 4223
4.4.7 Allowance account for credit losses 4224
4.4.8 Compound financial instruments with multiple embedded derivatives 4226
4.4.9 Defaults and breaches of loans payable 4226
4.4.10 Interests in other entities accounted for in accordance with IAS 39 or IFRS 9 4226
4.5 Fair values 4227
4.5.1 General disclosure requirements 4227
4.5.2 Day 1 profits 4228
4.6 Business combinations 4230
4.6.1 Acquired receivables 4230
4.6.2 Contingent consideration and indemnification assets 4231
5 NATURE AND EXTENT OF RISKS ARISING FROM FINANCIAL INSTRUMENTS 4231
5.1 Qualitative disclosures 4234
5.2 Quantitative disclosures 4236
5.2.1 General matters 4236
5.2.2 Credit risk (entities applying IAS 39) 4237
5.2.2.A Maximum exposure to credit risk 4238
5.2.2.B Credit quality of financial assets 4241
5.2.2.C Financial assets that are either past due or impaired 4247
5.2.2.D Collateral and other credit enhancements obtained 4248
5.2.3 Credit risk (entities applying IFRS 9) 4249
5.2.3.A Scope and objectives 4249
5.2.3.B Credit risk management practices 4250
5.2.3.C Quantitative and qualitative information about amounts arising fromexpected credit losses 4251
5.2.3.D Credit risk exposure 4255
5.2.3.E Collateral and other credit enhancements obtained 4259
5.2.4 Liquidity risk 4259
5.2.4.A Information provided to key management 4259
5.2.4.B Maturity analyses 4260
5.2.4.C Management of associated liquidity risk 4268
5.2.4.D Puttable financial instruments classified as equity 4269
5.2.5 Market risk 4269
5.2.5.A ‘Basic’ sensitivity analysis 4270
5.2.5.B Value-at-risk and similar analyses 4275
5.2.5.C Other market risk disclosures 4277
5.2.6 Concentrations of risk 4278
5.2.7 Operational risk 4279
5.2.8 Capital disclosures 4279
6 TRANSFERS OF FINANCIAL ASSETS 4279
6.1 The meaning of ‘transfer’ 4280
6.2 Transferred financial assets that are not derecognised in their entirety 4280
6.3 Transferred financial assets that are derecognised in their entirety 4282
6.3.1 Meaning of continuing involvement 4283
6.3.2 Disclosure requirements 4284
7 PRESENTATION ON THE FACE OF THE FINANCIAL STATEMENTS AND RELATED DISCLOSURES 4287
7.1 Gains and losses recognised in profit or loss 4287
7.1.1 Presentation on the face of the statement of comprehensive income (or income statement) 4287
7.1.2 Further analysis of gains and losses recognised in profit or loss 4289
7.1.3 Offsetting and hedges 4291
7.1.4 Embedded derivatives 4293
7.1.5 Entities whose share capital is not equity 4293
7.2 Gains and losses recognised in other comprehensive income 4294
7.3 Statement of changes in equity 4295
7.4 Statement of financial position 4296
7.4.1 Offsetting financial assets and financial liabilities 4296
7.4.1.A Criterion (a): Enforceable legal right of set-off 4297
7.4.1.B Master netting agreements 4300
7.4.1.C Criterion (b): Intention to settle net or realise the gross amountsimultaneously (‘the net settlement criterion’) 4301
7.4.1.D Situations where offset is not normally appropriate 4302
7.4.1.E Cash pooling arrangements 4303
7.4.1.F Offsetting collateral amounts 4304
7.4.1.G Unit of account 4305
7.4.2 Offsetting financial assets and financial liabilities: disclosure 4305
7.4.2.A Objective 4305
7.4.2.B Scope 4306
7.4.2.C Disclosure requirements 4306
7.4.2.D Offsetting disclosures – illustrative examples 4309
7.4.3 Assets and liabilities 4314
7.4.4 The distinction between current and non-current assets and liabilities 4315
7.4.4.A Derivatives 4315
7.4.4.B Convertible loans 4316
7.4.4.C Long-term loans with repayment on demand terms 4316
7.4.4.D Debt with refinancing or roll over agreements 4316
7.4.4.E Loan covenants 4317
7.4.5 Equity 4317
7.4.6 Entities whose share capital is not equity 4318
7.5 Statement of cash flows 4320
8 EFFECTIVE DATES AND TRANSITIONAL PROVISIONS 4320
8.1 Adoption of IFRS 9: effective date and transitional provisions 4320
8.2 Adoption of IFRS 9: disclosure requirements 4320
8.3 Other amendments to IFRS 7 4322
8.4 IFRS 16 4322
9 FUTURE DEVELOPMENTS 4323
9.1 General developments 4323
9.2 Enhanced Disclosure Task Force 4323
References 4325
Chapter 55 Insurance contracts 4327
1 INTRODUCTION 4333
1.1 The history of the IASB’s insurance project 4333
1.2 The development of IFRS 4 4334
1.3 Mitigating the impact on insurers of applying IFRS 9 before the new insurance accounting standard 4335
1.4 Existing accounting practices for insurance contracts 4335
1.4.1 Non-life insurance 4335
1.4.2 Life insurance 4336
1.4.3 Embedded value 4336
2 THE OBJECTIVES AND SCOPE OF IFRS 4 4337
2.1 The objectives of IFRS 4 4337
2.2 The scope of IFRS 4 4337
2.2.1 Definitions 4337
2.2.2 Transactions within the scope of IFRS 4 4338
2.2.3 Transactions not within the scope of IFRS 4 4340
2.2.3.A Product warranties 4340
2.2.3.B Assets and liabilities arising from employment benefit plans 4341
2.2.3.C Contingent rights and obligations related to non-financial items 4341
2.2.3.D Financial guarantee cont 4341
2.2.3.E Contingent consideration payable or receivable in a business combination 4342
2.2.3.F Direct insurance contracts in which the entity is the policyholder 4342
2.2.4 The product classification process 4342
3 THE DEFINITION OF AN INSURANCE CONTRACT 4343
3.1 The definition 4343
3.2 Significant insurance risk 4344
3.2.1 The meaning of ‘significant’ 4344
3.2.2 The level at which significant insurance risk is assessed 4346
3.2.2.A Self insurance 4346
3.2.2.B Insurance mutuals 4347
3.2.2.C Intragroup insurance contracts 4347
3.2.3 Significant additional benefits 4347
3.3 Changes in the level of insurance risk 4348
3.4 Uncertain future events 4349
3.5 Payments in kind 4350
3.5.1 Service contracts 4350
3.6 The distinction between insurance risk and financial risk 4351
3.7 Adverse effect on the policyholder 4352
3.7.1 Lapse, persistency and expense risk 4353
3.7.2 Insurance of non-insurance risks 4353
3.8 Accounting differences between insurance and non insurance contracts 4353
3.9 Examples of insurance and non-insurance contracts 4355
3.9.1 Examples of insurance contracts 4355
3.9.2 Examples of transactions that are not insurance contracts 4357
4 EMBEDDED DERIVATIVES 4359
4.1 Unit-linked features 4363
5 UNBUNDLING OF DEPOSIT COMPONENTS 4364
5.1 The unbundling requirements 4365
5.2 Unbundling illustration 4365
5.3 Practical difficulties 4367
6 DISCRETIONARY PARTICIPATION FEATURES 4368
6.1 Discretionary participation features in insurance contracts 4372
6.2 Discretionary participation features in financial instruments 4374
6.3 Practical issues 4376
6.3.1 Negative DPF 4376
6.3.2 Contracts with switching features 4376
7 SELECTION OF ACCOUNTING POLICIES 4377
7.1 The hierarchy exemption 4378
7.2 Limits on the hierarchy exemption 4379
7.2.1 Catastrophe and equalisation provisions 4379
7.2.2 Liability adequacy testing 4380
7.2.2.A Using a liability adequacy test under existing accounting policies 4381
7.2.2.B Using the liability adequacy test specified in IFRS 4 4382
7.2.2.C Investment contracts with a discretionary participation feature 4383
7.2.2.D Interaction between the liability adequacy test and shadowaccounting 4383
7.2.3 Insurance liability derecognition 4384
7.2.4 Offsetting of insurance and related reinsurance contracts 4385
7.2.5 Impairment of reinsurance assets 4386
7.2.6 Accounting policy matters not addressed by IFRS 4 4387
7.2.6.A Derecognition of insurance and reinsurance assets 4387
7.2.6.B Impairment of insurance assets 4388
7.2.6.C Gains and losses on buying reinsurance 4388
7.2.6.D Acquisition costs 4389
7.2.6.E Salvage and subrogation 4390
7.2.6.F Policy loans 4390
7.2.6.G Investments held in a fiduciary capacity 4391
8 CHANGES IN ACCOUNTING POLICIES 4391
8.1 Criteria for accounting policy changes 4391
8.2 Specific issues 4392
8.2.1 Continuation of existing practices 4393
8.2.1.A Measuring insurance liabilities on an undiscounted basis 4393
8.2.1.B Measuring contractual rights to future investment management fees inexcess of their fair value 4393
8.2.1.C Introducing non-uniform accounting policies for the insurancecontracts of subsidiaries 4394
8.2.2 Current market interest rates 4395
8.2.3 Prudence 4395
8.2.4 Future investment margins 4396
8.3 Shadow accounting 4398
8.4 Redesignation of financial assets 4400
8.5 Practical issues 4401
8.5.1 Changes to local GAAP 4401
9 INSURANCE CONTRACTS ACQUIRED IN BUSINESS COMBINATIONS AND PORTFOLIO TRANSFERS 4402
9.1 Expanded presentation of insurance contracts 4402
9.1.1 Practical issues 4404
9.1.1.A The difference between a business combination and a portfolio transfer 4404
9.1.1.B Fair value of an insurer’s liabilities 4405
9.1.1.C Deferred taxation 4405
9.1.1.D Negative intangible assets 4405
9.2 Customer lists and relationships not connected to contractual insurance rights and obligations 4406
10 DISCLOSURE 4406
10.1 Explanation of recognised amounts 4408
10.1.1 Disclosure of accounting policies 4408
10.1.2 Recognised assets, liabilities, income and expense 4411
10.1.2.A Assets and liabilities 4412
10.1.2.B Income and expense 4416
10.1.2.C Cash flows 4419
10.1.3 Gains or losses on buying reinsurance 4419
10.1.4 Process used to determine significant assumptions 4420
10.1.5 The effects of changes in assumptions 4425
10.1.6 Reconciliations of changes in insurance assets and liabilities 4427
10.2 Nature and extent of risks arising from insurance contracts 4430
10.2.1 Objectives, policies and processes for managing insurance contract risks 4432
10.2.2 Insurance risk – general matters 4434
10.2.3 Insurance risk – sensitivity information 4438
10.2.4 Insurance risk – concentrations of risk 4441
10.2.5 Insurance risk – claims development information 4444
10.2.6 Credit risk, liquidity risk and market risk disclosures 4448
10.2.6.A Credit risk disclosures 4448
10.2.6.B Liquidity risk disclosures 4451
10.2.6.C Market risk disclosures 4453
10.2.7 Exposures to market risk from embedded derivatives 4454
10.2.8 Other disclosure matters 4456
10.2.8.A IAS 1 capital disclosures 4456
10.2.8.B Financial guarantee contracts 4457
10.2.8.C Fair value disclosures 4458
10.2.8.D Key performance indicators 4459
11 APPLYING IFRS 9 – FINANCIAL INSTRUMENTS – WITH IFRS 4 – INSURANCE CONTRACTS 4459
11.1 The temporary exemption from IFRS 9 4460
11.1.1 Activities that are predominantly connected with insurance 4462
11.1.2 Initial assessment and reassessment of the temporary exemption 4465
11.1.3 First-time adopters 4466
11.1.4 Relief for investors in associates and joint ventures 4467
11.1.5 Disclosures required for entities using the temporary exemption 4468
11.1.5.A Disclosures required to understand how an insurer qualified for thetemporary exemption 4468
11.1.5.B Disclosures required in order to compare insurers applying thetemporary exemption with entities applying IFRS 9 4469
11.2 The overlay approach 4472
11.2.1 Designation and de-designation of eligible financial assets 4473
11.2.2 First-time adopters 4474
11.2.3 Disclosures required for entities applying the overlay approach 4475
12 FUTURE DEVELOPMENTS IN INSURANCE CONTRACT ACCOUNTING 4476
12.1 The Phase II discussion paper 4476
12.2 The Phase II Exposure Draft 4476
12.3 The revised Phase II Exposure Draft 4478
12.4 Subsequent decisions made by the IASB during deliberations of the revised ED 4482
12.5 The road ahead 4484
References 4484
Index of extracts from financial statements 4487
Index of standards 4495
Index 4591