IFRS Summary
Content
International
Standards
Financial
Reporting
This document contains summaries, history and resources for International Financial Reporting Standards
(IFRS) issued by the International Accounting Standards Board (IASB).
Table of contents
IFRSs at a glance....................................................................................................................................................................................3
IFRS 1 First-time Adoption of International Financial Reporting Standards...................................................................................4
Overview..............................................................................................................................................................................................4
Definition of first-time adoption............................................................................................................................................................4
Measurement.......................................................................................................................................................................................7
Disclosures in the financial statements of a first-time adopter............................................................................................................8
Exceptions to the retrospective application of other IFRSs.................................................................................................................9
IFRS 2 Share-based Payment..............................................................................................................................................................14
Overview............................................................................................................................................................................................14
Definition of share-based payment....................................................................................................................................................14
Scope.................................................................................................................................................................................................14
Recognition and measurement..........................................................................................................................................................15
Illustration – Recognition of employee share option grant................................................................................................................15
Disclosure..........................................................................................................................................................................................18
IFRS 3 Business Combinations..........................................................................................................................................................19
Overview............................................................................................................................................................................................19
Key definitions....................................................................................................................................................................................19
Scope.................................................................................................................................................................................................19
Determining whether a transaction is a business combination.........................................................................................................20
Method of accounting for business combinations..............................................................................................................................20
Choice in the measurement of non-controlling interests (NCI)..........................................................................................................23
Business combination achieved in stages (step acquisitions)...........................................................................................................24
Disclosure..........................................................................................................................................................................................27
IFRS 4 Insurance Contracts................................................................................................................................................................30
Overview............................................................................................................................................................................................30
Scope.................................................................................................................................................................................................30
Disclosures.........................................................................................................................................................................................32
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations.......................................................................................34
Overview............................................................................................................................................................................................34
Held-for-sale classification.................................................................................................................................................................34
Held for distribution to owners classification......................................................................................................................................34
Disposal group concept.....................................................................................................................................................................35
Measurement.....................................................................................................................................................................................35
Presentation.......................................................................................................................................................................................36
Disclosures.........................................................................................................................................................................................36
Classification as discontinuing...........................................................................................................................................................36
IFRS 6 Exploration for and Evaluation of Mineral Resources.........................................................................................................38
Overview............................................................................................................................................................................................38
Definitions..........................................................................................................................................................................................38
Accounting policies for exploration and evaluation............................................................................................................................38
Presentation and disclosure...............................................................................................................................................................39
IFRS 7 Financial Instruments: Disclosures.......................................................................................................................................40
Overview............................................................................................................................................................................................40
Disclosure requirements of IFRS 7....................................................................................................................................................40
Nature and extent of exposure to risks arising from financial instruments........................................................................................43
Transfers of financial assets..............................................................................................................................................................44
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IFRS 8 Operating Segments................................................................................................................................................................46
Overview............................................................................................................................................................................................46
Scope.................................................................................................................................................................................................46
Operating segments...........................................................................................................................................................................46
Reportable segments.........................................................................................................................................................................46
Disclosure requirements....................................................................................................................................................................47
IFRS 9 Financial Instruments..............................................................................................................................................................49
Overview............................................................................................................................................................................................49
Initial measurement of financial instruments.....................................................................................................................................49
Subsequent measurement of financial assets...................................................................................................................................49
Debt instruments................................................................................................................................................................................50
Fair value option.................................................................................................................................................................................50
Measurement guidance.....................................................................................................................................................................51
Derecognition of financial assets.......................................................................................................................................................52
Derecognition of financial liabilities....................................................................................................................................................53
Qualifying criteria for hedge accounting............................................................................................................................................54
Impairment.........................................................................................................................................................................................59
Scope of Impairment model...............................................................................................................................................................59
Disclosures.........................................................................................................................................................................................63
IFRS 10 Consolidated Financial Statements.....................................................................................................................................64
Overview............................................................................................................................................................................................64
Key definitions....................................................................................................................................................................................64
Accounting requirements...................................................................................................................................................................66
Disclosure..........................................................................................................................................................................................69
IFRS 11 Joint Arrangements................................................................................................................................................................70
Overview............................................................................................................................................................................................70
Key definitions....................................................................................................................................................................................70
Financial statements of parties to a joint arrangement......................................................................................................................72
Disclosure..........................................................................................................................................................................................73
IFRS 12 Disclosure of Interests in Other Entities.............................................................................................................................74
Overview............................................................................................................................................................................................74
Key definitions....................................................................................................................................................................................75
Disclosures required..........................................................................................................................................................................75
IFRS 13 Fair Value Measurement........................................................................................................................................................77
Overview............................................................................................................................................................................................77
Key definitions....................................................................................................................................................................................77
Fair value hierarchy...........................................................................................................................................................................78
Measurement of fair value.................................................................................................................................................................79
Valuation techniques..........................................................................................................................................................................80
Disclosure..........................................................................................................................................................................................81
Specific disclosures required.............................................................................................................................................................82
IFRS 14 Regulatory Deferral Accounts..............................................................................................................................................84
Overview............................................................................................................................................................................................84
Scope.................................................................................................................................................................................................84
Key definitions....................................................................................................................................................................................85
Accounting policies for regulatory deferral account balances...........................................................................................................85
Presentation in financial statements..................................................................................................................................................85
Disclosures.........................................................................................................................................................................................86
IFRS 15 Revenue from Contracts with Customers...........................................................................................................................87
Overview............................................................................................................................................................................................87
Scope.................................................................................................................................................................................................87
Key definitions....................................................................................................................................................................................88
Accounting requirements for revenue................................................................................................................................................89
Contract costs....................................................................................................................................................................................93
Presentation in financial statements..................................................................................................................................................94
Disclosures.........................................................................................................................................................................................94
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IFRSs at a glance
Date
Effective
issued
Date
24 Nov 2008
01 Jul 2009
IFRS 2 — Share-based Payment
19 Feb 2004
01 Jan 2005
IFRS 3 — Business Combinations
10 Jan 2008
01 Jul 2009
IFRS 4 — Insurance Contracts (N/E)
31 Mar 2004
01 Jan 2005
31 Mar 2004
01 Jan 2005
09 Dec 2004
01 Jan 2006
IFRS 7 — Financial Instruments: Disclosures
18 Aug 2005
01 Jan 2007
IFRS 8 — Operating Segments
30 Nov 2006
01 Jan 2009
IFRS 9 — Financial Instruments
24 Jul 2014
01 Jan 2018
IFRS 10 — Consolidated Financial Statements
12 May 2011
01 Jan 2013
IFRS 11 — Joint Arrangements
12 May 2011
01 Jan 2013
IFRS 12 — Disclosure of Interests in Other Entities (N/E)
12 May 2011
01 Jan 2013
IFRS 13 — Fair Value Measurement (N/I)
12 May 2011
01 Jan 2013
IFRS 14 — Regulatory Deferral Accounts (N/E)
30 Jan 2014
01 Jan 2016
IFRS 15 — Revenue from Contracts with Customers (N/E)
28 May 2014
01 Jan 2017
Title
IFRS
1
—
First-time
Adoption
of
International
Financial
Reporting Standards
IFRS 5 — Non-current Assets Held for Sale and Discontinued
Operations
IFRS 6 — Exploration for and Evaluation of Mineral Resources
(N/E)
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IFRS
1
First-time
Adoption
of
International
Financial Reporting Standards
Overview
IFRS 1 First-time Adoption of International Financial Reporting Standards sets out the procedures that an
entity must follow when it adopts IFRSs for the first time as the basis for preparing its general purpose
financial statements.
A restructured version of IFRS 1 was issued in November 2008 and applies if an entity's first IFRS
financial statements are for a period beginning on or after 1 July 2009.
Definition of first-time adoption
A first-time adopter is an entity that, for the first time, makes an explicit and unreserved statement that its
general purpose financial statements comply with IFRSs. [IFRS 1.3]
An entity may be a first-time adopter if, in the preceding year, it prepared IFRS financial statements for
internal management use, as long as those IFRS financial statements were not made available to owners
or external parties such as investors or creditors. If a set of IFRS financial statements was, for any
reason, made available to owners or external parties in the preceding year, then the entity will already be
considered to be on IFRSs, and IFRS 1 does not apply. [IFRS 1.3]
An entity can also be a first-time adopter if, in the preceding year, its financial statements: [IFRS 1.3]
asserted compliance with some but not all IFRSs, or
included only a reconciliation of selected figures from previous GAAP to IFRSs. (Previous GAAP
means the GAAP that an entity followed immediately before adopting to IFRSs.)
However, an entity is not a first-time adopter if, in the preceding year, its financial statements asserted:
Compliance with IFRSs even if the auditor's report contained a qualification with respect to
conformity with IFRSs.
Compliance with both previous GAAP and IFRSs.
An entity that applied IFRSs in a previous reporting period, but whose most recent previous annual
financial statements did not contain an explicit and unreserved statement of compliance with IFRSs can
choose to:
apply the requirements of IFRS 1 (including the various permitted exemptions to full retrospective
application), or
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retrospectively apply IFRSs in accordance with IAS 8 Accounting Policies, Changes in
Accounting Estimates and Errors, as if it never stopped applying IFRSs. [IFRS 1.4A]
Overview for an entity that adopts IFRSs for the first time in its annual financial statements for the
year ended 31 December 2014
Accounting policies
Select accounting policies based on IFRSs effective at 31 December 2014.
IFRS reporting periods
Prepare at least 2014 and 2013 financial statements and the opening balance sheet (as of 1 January
2012 or beginning of the first period for which full comparative financial statements are presented, if
earlier) by applying the IFRSs effective at 31 December 2014. [IFRS 1.7]
Since IAS 1 requires that at least one year of comparative prior period financial information be
presented, the opening balance sheet will be 1 January 2012 if not earlier. This would mean that
an entity's first financial statements should include at least: [IFRS 1.21]
o
three statements of financial position
o
two statements of profit or loss and other comprehensive income
o
two separate statements of profit or loss (if presented)
o
two statements of cash flows
o
two statements of changes in equity, and
o
related notes, including comparative information
If a 31 December 2014 adopter reports selected financial data (but not full financial statements)
on an IFRS basis for periods prior to 2013, in addition to full financial statements for 2014 and
2013, that does not change the fact that its opening IFRS balance sheet is as of 1 January 2012.
Adjustments required to move from previous GAAP to IFRSs at the time of first-time adoption
Derecognition of some previous GAAP assets and liabilities
The entity should eliminate previous-GAAP assets and liabilities from the opening balance sheet if they
do not qualify for recognition under IFRSs. [IFRS 1.10(b)] For example:
IAS 38 does not permit recognition of expenditure on any of the following as an intangible asset:
o
research
o
start-up, pre-operating, and pre-opening costs
o
training
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o
advertising and promotion
o
moving and relocation
If the entity's previous GAAP had recognised these as assets, they are eliminated in the opening IFRS
balance sheet
If the entity's previous GAAP had allowed accrual of liabilities for "general reserves",
restructurings, future operating losses, or major overhauls that do not meet the conditions for
recognition as a provision under IAS 37, these are eliminated in the opening IFRS balance sheet
If the entity's previous GAAP had allowed recognition of contingent assets as defined in IAS
37.10, these are eliminated in the opening IFRS balance sheet
Recognition of some assets and liabilities not recognised under previous GAAP
Conversely, the entity should recognise all assets and liabilities that are required to be recognised by
IFRS even if they were never recognised under previous GAAP. [IFRS 1.10(a)] For example:
IAS 39 requires recognition of all derivative financial assets and liabilities, including embedded
derivatives. These were not recognised under many local GAAPs.
IAS 19 requires an employer to recognise a liability when an employee has provided service in
exchange for benefits to be paid in the future. These are not just post-employment benefits (e.g.,
pension plans) but also obligations for medical and life insurance, vacations, termination benefits,
and deferred compensation. In the case of 'over-funded' defined benefit plans, this would be a
plan asset.
IAS 37 requires recognition of provisions as liabilities. Examples could include an entity's
obligations for restructurings, onerous contracts, decommissioning, remediation, site restoration,
warranties, guarantees, and litigation.
Deferred tax assets and liabilities would be recognised in conformity with IAS 12.
Reclassification
The entity should reclassify previous-GAAP opening balance sheet items into the appropriate IFRS
classification. [IFRS 1.10(c)] Examples:
IAS 10 does not permit classifying dividends declared or proposed after the balance sheet date
as a liability at the balance sheet date. If such liability was recognised under previous GAAP it
would be reversed in the opening IFRS balance sheet.
If the entity's previous GAAP had allowed treasury stock (an entity's own shares that it had
purchased) to be reported as an asset, it would be reclassified as a component of equity under
IFRS.
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Items classified as identifiable intangible assets in a business combination accounted for under
the previous GAAP may be required to be reclassified as goodwill under IFRS 3 because they do
not meet the definition of an intangible asset under IAS 38. The converse may also be true in
some cases.
IAS 32 has principles for classifying items as financial liabilities or equity. Thus mandatorily
redeemable preferred shares that may have been classified as equity under previous GAAP
would
be
reclassified
as
liabilities
in
the
opening
IFRS
balance
sheet.
Note that IFRS 1 makes an exception from the "split-accounting" provisions of IAS 32. If the
liability component of a compound financial instrument is no longer outstanding at the date of the
opening IFRS balance sheet, the entity is not required to reclassify out of retained earnings and
into other equity the original equity component of the compound instrument.
The reclassification principle would apply for the purpose of defining reportable segments under
IFRS 8.
Some offsetting (netting) of assets and liabilities or of income and expense items that had been
acceptable under previous GAAP may no longer be acceptable under IFRS.
Measurement
The general measurement principle – there are several significant exceptions noted below – is to apply
effective IFRSs in measuring all recognised assets and liabilities. [IFRS 1.10(d)]
How to recognise adjustments required to move from previous GAAP to IFRSs
Adjustments required to move from previous GAAP to IFRSs at the date of transition should be
recognised directly in retained earnings or, if appropriate, another category of equity at the date of
transition to IFRSs. [IFRS 1.11]
Estimates
In preparing IFRS estimates at the date of transition to IFRSs retrospectively, the entity must use the
inputs and assumptions that had been used to determine previous GAAP estimates as of that date (after
adjustments to reflect any differences in accounting policies). The entity is not permitted to use
information that became available only after the previous GAAP estimates were made except to correct
an error. [IFRS 1.14]
Changes to disclosures
For many entities, new areas of disclosure will be added that were not requirements under the previous
GAAP (perhaps segment information, earnings per share, discontinuing operations, contingencies and
fair values of all financial instruments) and disclosures that had been required under previous GAAP will
be broadened (perhaps related party disclosures).
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Disclosure of selected financial data for periods before the first IFRS statement of financial
position (balance sheet)
If a first-time adopter wants to disclose selected financial information for periods before the date of the
opening IFRS balance sheet, it is not required to conform that information to IFRS. Conforming that
earlier selected financial information to IFRSs is optional.[IFRS 1.22]
If the entity elects to present the earlier selected financial information based on its previous GAAP rather
than IFRS, it must prominently label that earlier information as not complying with IFRS and, further, it
must disclose the nature of the main adjustments that would make that information comply with IFRS.
This latter disclosure is narrative and not necessarily quantified.[IFRS 1.22]
Disclosures in the financial statements of a first-time adopter
IFRS 1 requires disclosures that explain how the transition from previous GAAP to IFRS affected the
entity's reported financial position, financial performance and cash flows. [IFRS 1.23] This includes:
1. reconciliations of equity reported under previous GAAP to equity under IFRS both (a) at the date
of transition to IFRSs and (b) the end of the last annual period reported under the previous GAAP.
(For an entity adopting IFRSs for the first time in its 31 December 2014 financial statements, the
reconciliations would be as of 1 January 2012 and 31 December 2013.)
2. reconciliations of total comprehensive income for the last annual period reported under the
previous GAAP to total comprehensive income under IFRSs for the same period [IFRS 1.24(b)]
3. explanation of material adjustments that were made, in adopting IFRSs for the first time, to the
statement of financial position, statement of comprehensive income and statement of cash flows
(the latter if presented under previous GAAP) [IFRS 1.25]
4. if errors in previous GAAP financial statements were discovered in the course of transition to
IFRSs, those must be separately disclosed [IFRS 1.26]
5. if the entity recognised or reversed any impairment losses in preparing its opening IFRS balance
sheet, these must be disclosed [IFRS 1.24(c)]
6. appropriate explanations if the entity has elected to apply any of the specific recognition and
measurement exemptions permitted under IFRS 1 – for instance, if it used fair values as deemed
cost
Disclosures in interim financial reports
If an entity is going to adopt IFRSs for the first time in its annual financial statements for the year ended
31 December 2014, certain disclosure are required in its interim financial statements prior to the 31
December 2014 statements, but only if those interim financial statements purport to comply with IAS 34
Interim Financial Reporting. Explanatory information and reconciliation are required in the interim report
Page 8 of 97
that immediately precedes the first set of IFRS annual financial statements. The information includes
reconciliations between IFRS and previous GAAP. [IFRS 1.32]
Exceptions to the retrospective application of other IFRSs
There are five exceptions to the general principle of retrospective application effective 1 January 2010.
The five exceptions are:
IAS 39 – Derecognition of financial instruments
A first-time adopter shall apply the derecognition requirements in IAS 39 prospectively for transactions
occurring on or after 1 January 2004. However, the entity may apply the derecognition requirements
retrospectively provided that the needed information was obtained at the time of initially accounting for
those transactions. [IFRS 1.B2-3]
IAS 39 – Hedge accounting
The general rule is that the entity shall not reflect in its opening IFRS balance sheet (statement of
financial position) a hedging relationship of a type that does not qualify for hedge accounting in
accordance with IAS 39. However, if an entity designated a net position as a hedged item in accordance
with previous GAAP, it may designate an individual item within that net position as a hedged item in
accordance with IFRS, provided that it does so no later than the date of transition to IFRSs. [IFRS 1.B5]
Note: Modified requirements apply when an entity applies IFRS 9 Financial Instruments (2013).
IAS 27 – Non-controlling interest
IFRS 1.B7 lists specific requirements of IFRS 10 Consolidated Financial Statements that shall be applied
prospectively.
Full-cost oil and gas assets
Entities using the full cost method may elect exemption from retrospective application of IFRSs for oil and
gas assets. Entities electing this exemption will use the carrying amount under its old GAAP as the
deemed cost of its oil and gas assets at the date of first-time adoption of IFRSs.
Determining whether an arrangement contains a lease
If a first-time adopter with a leasing contract made the same type of determination of whether an
arrangement contained a lease in accordance with previous GAAP as that required by IFRIC 4
Determining whether an Arrangement Contains a Lease, but at a date other than that required by IFRIC
4, the amendments exempt the entity from having to apply IFRIC 4 when it adopts IFRSs.
Optional exemptions from the basic measurement principle in IFRS 1
There are some further optional exemptions to the general restatement and measurement principles set
out above. The following exceptions are individually optional. They relate to:
Page 9 of 97
business combinations [IFRS 1.Appendix C]
and a number of others [IFRS 1.Appendix D]:
o
share-based payment transactions
o
insurance contracts
o
fair value, previous carrying amount, or revaluation as deemed cost
o
leases
o
cumulative translation differences
o
investments in subsidiaries, jointly controlled entities, associates and joint ventures
o
assets and liabilities of subsidiaries, associated and joint ventures
o
compound financial instruments
o
designation of previously recognised financial instruments
o
fair value measurement of financial assets or financial liabilities at initial recognition
o
decommissioning liabilities included in the cost of property, plant and equipment
o
financial assets or intangible assets accounted for in accordance with IFRIC 12 Service
Concession Arrangements
o
borrowing costs
o
transfers of assets from customers
o
extinguishing financial liabilities with equity instruments
o
severe hyperinflation
o
joint arrangements
o
stripping costs in the production phase of a surface mine
Some, but not all, of them are described below.
Business combinations that occurred before opening balance sheet date
IFRS 1 includes Appendix C explaining how a first-time adopter should account for business combinations
that occurred prior to transition to IFRS.
An entity may keep the original previous GAAP accounting, that is, not restate:
previous mergers or goodwill written-off from reserves
Page 10 of 97
the carrying amounts of assets and liabilities recognised at the date of acquisition or merger, or
how goodwill was initially determined (do not adjust the purchase price allocation on acquisition)
However, should it wish to do so, an entity can elect to restate all business combinations starting from a
date it selects prior to the opening balance sheet date.
In all cases, the entity must make an initial IAS 36 impairment test of any remaining goodwill in the
opening IFRS balance sheet, after reclassifying, as appropriate, previous GAAP intangibles to goodwill.
The exemption for business combinations also applies to acquisitions of investments in associates,
interests in joint ventures and interests in a joint operation when the operation constitutes a business.
Deemed cost
Assets carried at cost (e.g. property, plant and equipment) may be measured at their fair value at the date
of transition to IFRSs. Fair value becomes the 'deemed cost' going forward under the IFRS cost model.
Deemed cost is an amount used as a surrogate for cost or depreciated cost at a given date. [IFRS 1.D6]
If, before the date of its first IFRS balance sheet, the entity had revalued any of these assets under its
previous GAAP either to fair value or to a price-index-adjusted cost, that previous GAAP revalued amount
at the date of the revaluation can become the deemed cost of the asset under IFRS. [IFRS 1.D6]
If, before the date of its first IFRS balance sheet, the entity had made a one-time revaluation of assets or
liabilities to fair value because of a privatisation or initial public offering, and the revalued amount became
deemed cost under the previous GAAP, that amount would continue to be deemed cost after the initial
adoption of IFRS. [IFRS 1.D8]
This option applies to intangible assets only if an active market exists. [IFRS 1.D7]
If the carrying amount of property, plant and equipment or intangible assets that are used in rateregulated activities includes amounts under previous GAAP that do not qualify for capitalisation in
accordance with IFRSs, a first-time adopter may elect to use the previous GAAP carrying amount of such
items as deemed cost on the initial adoption of IFRSs. [IFRS 1.D8B]
Eligible entities subject to rate-regulation may also optionally apply IFRS 14 Regulatory Deferral Accounts
on transition to IFRSs, and in subsequent financial statements.
IAS 19 – Employee benefits: actuarial gains and losses
An entity may elect to recognise all cumulative actuarial gains and losses for all defined benefit plans at
the opening IFRS balance sheet date (that is, reset any corridor recognised under previous GAAP to
zero), even if it elects to use the IAS 19 corridor approach for actuarial gains and losses that arise after
first-time adoption of IFRS. If a first-time adopter uses this exemption, it shall apply it to all plans. [IFRS
1.D10]
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Note: This exemption is not available where IAS 19 Employee Benefits (2011) is applied. IAS 19 (2011) is
effective for annual reporting periods beginning on or after 1 January 2013.
IAS 21 – Accumulated translation reserves
An entity may elect to recognise all translation adjustments arising on the translation of the financial
statements of foreign entities in accumulated profits or losses at the opening IFRS balance sheet date
(that is, reset the translation reserve included in equity under previous GAAP to zero). If the entity elects
this exemption, the gain or loss on subsequent disposal of the foreign entity will be adjusted only by those
accumulated translation adjustments arising after the opening IFRS balance sheet date. [IFRS 1.D13]
IAS 27 – Investments in separate financial statements
In May 2008, the IASB amended the standard to change the way the cost of an investment in the
separate financial statements is measured on first-time adoption of IFRSs. The amendments to IFRS 1:
allow first-time adopters to use a 'deemed cost' of either fair value or the carrying amount under
previous accounting practice to measure the initial cost of investments in subsidiaries, jointly
controlled entities and associates in the separate financial statements
remove the definition of the cost method from IAS 27 and add a requirement to present dividends
as income in the separate financial statements of the investor
require that, when a new parent is formed in a reorganisation, the new parent must measure the
cost of its investment in the previous parent at the carrying amount of its share of the equity items
of the previous parent at the date of the reorganisation
Assets and liabilities of subsidiaries, associates and joint ventures: different IFRS adoption dates
of investor and investee
If a subsidiary becomes a first-time adopter later than its parent, IFRS 1 permits a choice between two
measurement bases in the subsidiary's separate financial statements. In this case, a subsidiary should
measure its assets and liabilities as either: [IFRS 1.D16]
the carrying amount that would be included in the parent's consolidated financial statements,
based on the parent's date of transition to IFRSs, if no adjustments were made for consolidation
procedures and for the effects of the business combination in which the parent acquired the
subsidiary or
the carrying amounts required by IFRS 1 based on the subsidiary's date of transition to IFRSs
A similar election is available to an associate or joint venture that becomes a first-time adopter later than
an entity that has significant influence or joint control over it. [IFRS 1.D16]
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If a parent becomes a first-time adopter later than its subsidiary, the parent should in its consolidated
financial statements, measure the assets and liabilities of the subsidiary at the same carrying amount as
in the separate financial statements of the subsidiary, after adjusting for consolidation adjustments and for
the effects of the business combination in which the parent acquired the subsidiary. The same approach
applies in the case of associates and joint ventures. [IFRS 1.D17]
July 2009: Two Amendments to IFRS 1
On 23 July 2009, the IASB amended IFRS 1 to:
exempt entities using the full cost method from retrospective application of IFRSs for oil and gas
assets.
exempt entities with existing leasing contracts from reassessing the classification of those
contracts in accordance with IFRIC 4 Determining whether an Arrangement contains a Lease
when the application of their national accounting requirements produced the same result.
November 2009: Proposed Limited Scope Exemption for IFRS 7 Disclosures
On 26 November 2009, the IASB issued an exposure draft (ED) proposing to amend IFRS 1 to state that
an entity need not provide the comparative prior-period information required by the March 2009
amendments to IFRS 7 Improving Disclosures about Financial Instruments for first-time adopters adopting
before 1 January 2010. As a result, IFRS 1, Appendix E, paragraph E1 will be amended as follows:
E1 A first-time adopter may apply the transitional provisions in paragraph 44G of IFRS 7 to the extent that
the entity's first IFRS reporting period starts earlier than 1 January 2010.
The proposed limited exemption from comparative IFRS 7 disclosures for first-time adopters is consistent
with the exemption permitted for early adopters of the March 2009 amendments to IFRS 7. Deadline for
comments on the ED is 29 December 2009. Click for IASB Press Release (PDF 101k).
January 2010: IASB amends IFRS 1 to provide IFRS 7 disclosure exemption
On 28 January 2010, the IASB amended IFRS 1 to exempt first-time adopters of IFRSs from providing the
additional disclosures introduced in March 2009 by Improving Disclosures about Financial Instruments
(Amendments to IFRS 7). The amendment gives first-time adopters the same transition provisions that
Amendments to IFRS 7 provides to current IFRS preparers. The amendment is effective on 1 July 2010,
with earlier application permitted. Click for IASB Press Release (PDF 100k).
December 2010: Two Amendments to IFRS 1
On 20 December, the IASB amended IFRS 1 to:
provide relief for first-time adopters of IFRSs from having to reconstruct transactions that
occurred before their date of transition to IFRSs.
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provide guidance for entities emerging from severe hyperinflation either to resume presenting
IFRS financial statements or to present IFRS financial statements for the first time.
Page 14 of 97
IFRS 2 Share-based Payment
Overview
IFRS 2 Share-based Payment requires an entity to recognise share-based payment transactions (such as
granted shares, share options, or share appreciation rights) in its financial statements, including
transactions with employees or other parties to be settled in cash, other assets, or equity instruments of
the entity. Specific requirements are included for equity-settled and cash-settled share-based payment
transactions, as well as those where the entity or supplier has a choice of cash or equity instruments.
Definition of share-based payment
A share-based payment is a transaction in which the entity receives goods or services either as
consideration for its equity instruments or by incurring liabilities for amounts based on the price of the
entity's shares or other equity instruments of the entity. The accounting requirements for the share-based
payment depend on how the transaction will be settled, that is, by the issuance of (a) equity, (b) cash, or
(c) equity or cash.
Scope
The concept of share-based payments is broader than employee share options. IFRS 2 encompasses the
issuance of shares, or rights to shares, in return for services and goods. Examples of items included in
the scope of IFRS 2 are share appreciation rights, employee share purchase plans, employee share
ownership plans, share option plans and plans where the issuance of shares (or rights to shares) may
depend on market or non-market related conditions.
IFRS 2 applies to all entities. There is no exemption for private or smaller entities. Furthermore,
subsidiaries using their parent's or fellow subsidiary's equity as consideration for goods or services are
within the scope of the Standard.
There are two exemptions to the general scope principle:
First, the issuance of shares in a business combination should be accounted for under IFRS 3
Business Combinations. However, care should be taken to distinguish share-based payments
related to the acquisition from those related to continuing employee services
Second, IFRS 2 does not address share-based payments within the scope of paragraphs 8-10 of
IAS 32 Financial Instruments: Presentation, or paragraphs 5-7 of IAS 39 Financial Instruments:
Recognition and Measurement. Therefore, IAS 32 and IAS 39 should be applied for commoditybased derivative contracts that may be settled in shares or rights to shares.
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IFRS 2 does not apply to share-based payment transactions other than for the acquisition of goods and
services. Share dividends, the purchase of treasury shares, and the issuance of additional shares are
therefore outside its scope.
Recognition and measurement
The issuance of shares or rights to shares requires an increase in a component of equity. IFRS 2 requires
the offsetting debit entry to be expensed when the payment for goods or services does not represent an
asset. The expense should be recognised as the goods or services are consumed. For example, the
issuance of shares or rights to shares to purchase inventory would be presented as an increase in
inventory and would be expensed only once the inventory is sold or impaired.
The issuance of fully vested shares, or rights to shares, is presumed to relate to past service, requiring
the full amount of the grant-date fair value to be expensed immediately. The issuance of shares to
employees with, say, a three-year vesting period is considered to relate to services over the vesting
period. Therefore, the fair value of the share-based payment, determined at the grant date, should be
expensed over the vesting period.
As a general principle, the total expense related to equity-settled share-based payments will equal the
multiple of the total instruments that vest and the grant-date fair value of those instruments. In short, there
is truing up to reflect what happens during the vesting period. However, if the equity-settled share-based
payment has a market related performance condition, the expense would still be recognised if all other
vesting conditions are met. The following example provides an illustration of a typical equity-settled sharebased payment.
Illustration – Recognition of employee share option grant
Company grants a total of 100 share options to 10 members of its executive management team (10
options each) on 1 January 20X5. These options vest at the end of a three-year period. The company has
determined that each option has a fair value at the date of grant equal to 15. The company expects that
all 100 options will vest and therefore records the following entry at 30 June 20X5 - the end of its first sixmonth interim reporting period.
Dr. Share option expense
Cr. Equity
250
250
[(100 × 15) ÷ 6 periods] = 250 per period
If all 100 shares vest, the above entry would be made at the end of each 6-month reporting period.
However, if one member of the executive management team leaves during the second half of 20X6,
therefore forfeiting the entire amount of 10 options, the following entry at 31 December 20X6 would be
made:
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Dr. Share option expense
150
Cr. Equity
150
[(90 × 15) ÷ 6 periods = 225 per period. [225 × 4] – [250+250+250] = 150
Measurement guidance
Depending on the type of share-based payment, fair value may be determined by the value of the shares
or rights to shares given up, or by the value of the goods or services received:
General fair value measurement principle. In principle, transactions in which goods or services
are received as consideration for equity instruments of the entity should be measured at the fair
value of the goods or services received. Only if the fair value of the goods or services cannot be
measured reliably would the fair value of the equity instruments granted be used.
Measuring employee share options. For transactions with employees and others providing
similar services, the entity is required to measure the fair value of the equity instruments granted,
because it is typically not possible to estimate reliably the fair value of employee services
received.
When to measure fair value - options. For transactions measured at the fair value of the equity
instruments granted (such as transactions with employees), fair value should be estimated at
grant date.
When to measure fair value - goods and services. For transactions measured at the fair value
of the goods or services received, fair value should be estimated at the date of receipt of those
goods or services.
Measurement guidance. For goods or services measured by reference to the fair value of the
equity instruments granted, IFRS 2 specifies that, in general, vesting conditions are not taken into
account when estimating the fair value of the shares or options at the relevant measurement date
(as specified above). Instead, vesting conditions are taken into account by adjusting the number
of equity instruments included in the measurement of the transaction amount so that, ultimately,
the amount recognised for goods or services received as consideration for the equity instruments
granted is based on the number of equity instruments that eventually vest.
More measurement guidance. IFRS 2 requires the fair value of equity instruments granted to be
based on market prices, if available, and to take into account the terms and conditions upon
which those equity instruments were granted. In the absence of market prices, fair value is
estimated using a valuation technique to estimate what the price of those equity instruments
would have been on the measurement date in an arm's length transaction between
knowledgeable, willing parties. The standard does not specify which particular model should be
used.
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If fair value cannot be reliably measured. IFRS 2 requires the share-based payment
transaction to be measured at fair value for both listed and unlisted entities. IFRS 2 permits the
use of intrinsic value (that is, fair value of the shares less exercise price) in those "rare cases" in
which the fair value of the equity instruments cannot be reliably measured. However this is not
simply measured at the date of grant. An entity would have to remeasure intrinsic value at each
reporting date until final settlement.
Performance conditions. IFRS 2 makes a distinction between the handling of market based
performance conditions from non-market performance conditions. Market conditions are those
related to the market price of an entity's equity, such as achieving a specified share price or a
specified target based on a comparison of the entity's share price with an index of share prices of
other entities. Market based performance conditions are included in the grant-date fair value
measurement (similarly, non-vesting conditions are taken into account in the measurement).
However, the fair value of the equity instruments is not adjusted to take into consideration nonmarket based performance features - these are instead taken into account by adjusting the
number of equity instruments included in the measurement of the share-based payment
transaction, and are adjusted each period until such time as the equity instruments vest.
Modifications, cancellations, and settlements
The determination of whether a change in terms and conditions has an effect on the amount recognised
depends on whether the fair value of the new instruments is greater than the fair value of the original
instruments (both determined at the modification date).
Modification of the terms on which equity instruments were granted may have an effect on the expense
that will be recorded. IFRS 2 clarifies that the guidance on modifications also applies to instruments
modified after their vesting date. If the fair value of the new instruments is more than the fair value of the
old instruments (e.g. by reduction of the exercise price or issuance of additional instruments), the
incremental amount is recognised over the remaining vesting period in a manner similar to the original
amount. If the modification occurs after the vesting period, the incremental amount is recognised
immediately. If the fair value of the new instruments is less than the fair value of the old instruments, the
original fair value of the equity instruments granted should be expensed as if the modification never
occurred.
The cancellation or settlement of equity instruments is accounted for as an acceleration of the vesting
period and therefore any amount unrecognised that would otherwise have been charged should be
recognised immediately. Any payments made with the cancellation or settlement (up to the fair value of
the equity instruments) should be accounted for as the repurchase of an equity interest. Any payment in
excess of the fair value of the equity instruments granted is recognised as an expense
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New equity instruments granted may be identified as a replacement of cancelled equity instruments. In
those cases, the replacement equity instruments are accounted for as a modification. The fair value of the
replacement equity instruments is determined at grant date, while the fair value of the cancelled
instruments is determined at the date of cancellation, less any cash payments on cancellation that is
accounted for as a deduction from equity.
Disclosure
Required disclosures include:
the nature and extent of share-based payment arrangements that existed during the period
how the fair value of the goods or services received, or the fair value of the equity instruments
granted, during the period was determined
the effect of share-based payment transactions on the entity's profit or loss for the period and on
its financial position.
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IFRS 3 Business Combinations
Overview
IFRS 3 Business Combinations outlines the accounting when an acquirer obtains control of a business
(e.g. an acquisition or merger). Such business combinations are accounted for using the 'acquisition
method', which generally requires assets acquired and liabilities assumed to be measured at their fair
values at the acquisition date. It sets out the principles on the recognition and measurement of acquired
assets and liabilities, the determination of goodwill and the necessary disclosures.
Key definitions
business combination
A transaction or other event in which an acquirer obtains control of one or more businesses. Transactions
sometimes referred to as 'true mergers' or 'mergers of equals' are also business combinations as that
term is used in [IFRS 3]
business
An integrated set of activities and assets that is capable of being conducted and managed for the purpose
of providing a return in the form of dividends, lower costs or other economic benefits directly to investors
or other owners, members or participants
acquisition date
The date on which the acquirer obtains control of the acquiree
acquirer
The entity that obtains control of the acquiree
acquiree
The business or businesses that the acquirer obtains control of in a business combination
Scope
IFRS 3 must be applied when accounting for business combinations, but does not apply to:
The formation of a joint venture* [IFRS 3.2(a)]
The acquisition of an asset or group of assets that is not a business, although general guidance is
provided on how such transactions should be accounted for [IFRS 3.2(b)]
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Combinations of entities or businesses under common control (the IASB has a separate agenda
project on common control transactions) [IFRS 3.2(c)]
Acquisitions by an investment entity of a subsidiary that is required to be measured at fair value
through profit or loss under IFRS 10 Consolidated Financial Statements. [IFRS 3.2A]
Determining whether a transaction is a business combination
IFRS 3 provides additional guidance on determining whether a transaction meets the definition of a
business combination, and so accounted for in accordance with its requirements. This guidance includes:
Business combinations can occur in various ways, such as by transferring cash, incurring
liabilities, issuing equity instruments (or any combination thereof), or by not issuing consideration
at all (i.e. by contract alone) [IFRS 3.B5]
Business combinations can be structured in various ways to satisfy legal, taxation or other
objectives, including one entity becoming a subsidiary of another, the transfer of net assets from
one entity to another or to a new entity [IFRS 3.B6]
The business combination must involve the acquisition of a business, which generally has three
elements: [IFRS 3.B7]
o
Inputs – an economic resource (e.g. non-current assets, intellectual property) that creates
outputs when one or more processes are applied to it
o
Process – a system, standard, protocol, convention or rule that when applied to an input
or inputs, creates outputs (e.g. strategic management, operational processes, resource
management)
o
Output – the result of inputs and processes applied to those inputs.
Method of accounting for business combinations
1. Acquisition method
The acquisition method (called the 'purchase method' in the 2004 version of IFRS 3) is used for all
business combinations. [IFRS 3.4]
Steps in applying the acquisition method are: [IFRS 3.5]
1. Identification of the 'acquirer'
2. Determination of the 'acquisition date'
3. Recognition and measurement of the identifiable assets acquired, the liabilities assumed and any
non-controlling interest (NCI, formerly called minority interest) in the acquiree
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4. Recognition and measurement of goodwill or a gain from a bargain purchase
Identifying an acquirer
The guidance in IFRS 10 Consolidated Financial Statements is used to identify an acquirer in a business
combination, i.e. the entity that obtains 'control' of the acquiree. [IFRS 3.7]
If the guidance in IFRS 10 does not clearly indicate which of the combining entities is an acquirer, IFRS 3
provides additional guidance which is then considered:
The acquirer is usually the entity that transfers cash or other assets where the business
combination is effected in this manner [IFRS 3.B14]
The acquirer is usually, but not always, the entity issuing equity interests where the transaction is
effected in this manner, however the entity also considers other pertinent facts and circumstances
including: [IFRS 3.B15]
o
relative voting rights in the combined entity after the business combination
o
the existence of any large minority interest if no other owner or group of owners has a
significant voting interest
o
the composition of the governing body and senior management of the combined entity
o
the terms on which equity interests are exchanged
The acquirer is usually the entity with the largest relative size (assets, revenues or profit) [IFRS
3.B16]
For business combinations involving multiple entities, consideration is given to the entity initiating
the combination, and the relative sizes of the combining entities. [IFRS 3.B17]
Acquisition date
An acquirer considers all pertinent facts and circumstances when determining the acquisition date, i.e. the
date on which it obtains control of the acquiree. The acquisition date may be a date that is earlier or later
than the closing date. [IFRS 3.8-9]
IFRS 3 does not provide detailed guidance on the determination of the acquisition date and the date
identified should reflect all relevant facts and circumstances. Considerations might include, among
others, the date a public offer becomes unconditional (with a controlling interest acquired), when the
acquirer can effect change in the board of directors of the acquiree, the date of acceptance of an
unconditional offer, when the acquirer starts directing the acquiree's operating and financing policies, or
the date competition or other authorities provide necessarily clearances.
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Acquired assets and liabilities
IFRS 3 establishes the following principles in relation to the recognition and measurement of items arising
in a business combination:
Recognition principle. Identifiable assets acquired, liabilities assumed, and non-controlling
interests in the acquiree, are recognised separately from goodwill [IFRS 3.10]
Measurement principle. All assets acquired and liabilities assumed in a business combination
are measured at acquisition-date fair value. [IFRS 3.18]
Exceptions to the recognition and measurement principles
The following exceptions to the above principles apply:
Contingent liabilities – the requirements of IAS 37 Provisions, Contingent Liabilities and
Contingent Assets do not apply to the recognition of contingent liabilities arising in a business
combination [IFRS 3.22-23]
Income taxes – the recognition and measurement of income taxes is in accordance with IAS 12
Income Taxes [IFRS 3.24-25]
Employee benefits – assets and liabilities arising from an acquiree's employee benefits
arrangements are recognised and measured in accordance with IAS 19 Employee Benefits
(2011) [IFRS 2.26]
Indemnification assets - an acquirer recognises indemnification assets at the same time and on
the same basis as the indemnified item [IFRS 3.27-28]
Reacquired rights – the measurement of reacquired rights is by reference to the remaining
contractual term without renewals [IFRS 3.29]
Share-based payment transactions - these are measured by reference to the method in IFRS
2 Share-based Payment
Assets held for sale – IFRS 5 Non-current Assets Held for Sale and Discontinued Operations is
applied in measuring acquired non-current assets and disposal groups classified as held for sale
at the acquisition date.
In applying the principles, an acquirer classifies and designates assets acquired and liabilities assumed
on the basis of the contractual terms, economic conditions, operating and accounting policies and other
pertinent conditions existing at the acquisition date. For example, this might include the identification of
derivative financial instruments as hedging instruments, or the separation of embedded derivatives from
host contracts.[IFRS 3.15] However, exceptions are made for lease classification (between operating and
finance leases) and the classification of contracts as insurance contracts, which are classified on the
basis of conditions in place at the inception of the contract. [IFRS 3.17]
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Acquired intangible assets must be recognised and measured at fair value in accordance with the
principles if it is separable or arises from other contractual rights, irrespective of whether the acquiree had
recognised the asset prior to the business combination occurring. This is because there is always
sufficient information to reliably measure the fair value of these assets. [IAS 38.33-37] There is no 'reliable
measurement' exception for such assets, as was present under IFRS 3 (2004).
Goodwill
Goodwill is measured as the difference between:
the aggregate of (i) the value of the consideration transferred (generally at fair value), (ii) the
amount of any non-controlling interest (NCI, see below), and (iii) in a business combination
achieved in stages (see below), the acquisition-date fair value of the acquirer's previously-held
equity interest in the acquiree, and
the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities
assumed (measured in accordance with IFRS 3). [IFRS 3.32]
This can be written in simplified equation form as follows:
Goodwill =
Consideration
transferred
+
Amount
of
non-
controlling interests
+
Fair value of previous
equity interests
-
Net
assets
recognised
If the difference above is negative, the resulting gain is a bargain purchase in profit or loss, which may
arise in circumstances such as a forced seller acting under compulsion. [IFRS 3.34-35] However, before
any bargain purchase gain is recognised in profit or loss, the acquirer is required to undertake a review to
ensure the identification of assets and liabilities is complete, and that measurements appropriately reflect
consideration of all available information. [IFRS 3.36]
Choice in the measurement of non-controlling interests (NCI)
IFRS 3 allows an accounting policy choice, available on a transaction by transaction basis, to measure
non-controlling interests (NCI) either at: [IFRS 3.19]
fair value (sometimes called the full goodwill method), or
the NCI's proportionate share of net assets of the acquiree.
The choice in accounting policy applies only to present ownership interests in the acquiree that entitle
holders to a proportionate share of the entity's net assets in the event of a liquidation (e.g. outside
holdings of an acquiree's ordinary shares). Other components of non-controlling interests at must be
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measured at acquisition date fair values or in accordance with other applicable IFRSs (e.g. share-based
payment transactions accounted for under IFRS 2 Share-based Payment). [IFRS 3.19]
Example
P pays 800 to acquire an 80% interest in the ordinary shares of S. The aggregated fair value of 100% of
S's identifiable assets and liabilities (determined in accordance with the requirements of IFRS 3) is 600,
and the fair value of the non-controlling interest (the remaining 20% holding of ordinary shares) is 185.
The measurement of the non-controlling interest, and its resultant impacts on the determination of
goodwill, under each option is illustrated below:
NCI based on
fair value
Consideration transferred
800
Non-controlling interest
185 (1)
985
Net assets
(600)
Goodwill
385
NCI based on
net assets
800
120 (2)
920
(600)
320
(1) The fair value of the 20% non-controlling interest in S will not necessarily be proportionate to the price
paid by P for its 80% interest, primarily due to any control premium or discount [IFRS 3.B45]
(2) Calculated as 20% of the fair value of the net assets of 600.
Business combination achieved in stages (step acquisitions)
Prior to control being obtained, an acquirer accounts for its investment in the equity interests of an
acquiree in accordance with the nature of the investment by applying the relevant standard, e.g. IAS 28
Investments in Associates and Joint Ventures (2011), IFRS 11 Joint Arrangements, IAS 39
Financial Instruments: Recognition and Measurement or IFRS 9 Financial Instruments. As part of
accounting for the business combination, the acquirer remeasures any previously held interest at fair
value and takes this amount into account in the determination of goodwill as noted above. Any resultant
gain or loss is recognised in profit or loss or other comprehensive income as appropriate.
The accounting treatment of an entity's pre-combination interest in an acquiree is consistent with the view
that the obtaining of control is a significant economic event that triggers a remeasurement. Consistent
with this view, all of the assets and liabilities of the acquiree are fully remeasured in accordance with the
requirements of IFRS 3 (generally at fair value). Accordingly, the determination of goodwill occurs only at
the acquisition date. This is different to the accounting for step acquisitions under IFRS 3 (2004).
Related transactions and subsequent accounting
General principles
In general:
Page 25 of 97
transactions that are not part of what the acquirer and acquiree (or its former owners) exchanged
in the business combination are identified and accounted for separately from business
combination
the recognition and measurement of assets and liabilities arising in a business combination after
the initial accounting for the business combination is dealt with under other relevant standards,
e.g. acquired inventory is subsequently accounted under IAS 2 Inventories. [IFRS 3.54]
When determining whether a particular item is part of the exchange for the acquiree or whether it is
separate from the business combination, an acquirer considers the reason for the transaction, who
initiated the transaction and the timing of the transaction. [IFRS 3.B50]
Contingent consideration
Contingent consideration must be measured at fair value at the time of the business combination and is
taken into account in the determination of goodwill. If the amount of contingent consideration changes as
a result of a post-acquisition event (such as meeting an earnings target), accounting for the change in
consideration depends on whether the additional consideration is classified as an equity instrument or an
asset or liability:
If the contingent consideration is classified as an equity instrument, the original amount is not
remeasured
If the additional consideration is classified as an asset or liability that is a financial instrument, the
contingent consideration is measured at fair value and gains and losses are recognised in either
profit or loss or other comprehensive income in accordance with IFRS 9 Financial Instruments or
IAS 39 Financial Instruments: Recognition and Measurement
If the additional consideration is not within the scope of IFRS 9 (or IAS 39), it is accounted for in
accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets or other IFRSs
as appropriate.
Where a change in the fair value of contingent consideration is the result of additional information about
facts and circumstances that existed at the acquisition date, these changes are accounted for as
measurement period adjustments if they arise during the measurement period.
Acquisition costs
Costs of issuing debt or equity instruments are accounted for under IAS 32 Financial Instruments:
Presentation and IAS 39 Financial Instruments: Recognition and Measurement, IFRS 9 Financial
Instruments. All other costs associated with an acquisition must be expensed, including reimbursements
to the acquiree for bearing some of the acquisition costs. Examples of costs to be expensed include
Page 26 of 97
finder's fees; advisory, legal, accounting, valuation and other professional or consulting fees; and general
administrative costs, including the costs of maintaining an internal acquisitions department. [IFRS 3.53]
Pre-existing relationships and reacquired rights
If the acquirer and acquiree were parties to a pre-existing relationship (for instance, the acquirer had
granted the acquiree a right to use its intellectual property), this must be accounted for separately from
the business combination. In most cases, this will lead to the recognition of a gain or loss for the amount
of the consideration transferred to the vendor which effectively represents a 'settlement' of the preexisting relationship. The amount of the gain or loss is measured as follows:
for pre-existing non-contractual relationships (for example, a lawsuit): by reference to fair value
for pre-existing contractual relationships: at the lesser of (a) the favourable/unfavourable contract
position and (b) any stated settlement provisions in the contract available to the counterparty to
whom the contract is unfavourable. [IFRS 3.B51-53]
However, where the transaction effectively represents a reacquired right, an intangible asset is
recognised and measured on the basis of the remaining contractual term of the related contract excluding
any renewals. The asset is then subsequently amortised over the remaining contractual term, again
excluding any renewals.
Contingent liabilities
Until a contingent liability is settled, cancelled or expired, a contingent liability that was recognised in the
initial accounting for a business combination is measured at the higher of the amount the liability would be
recognised under IAS 37 Provisions, Contingent Liabilities and Contingent Assets, and the amount less
accumulated amortisation under IAS 18 Revenue.
Contingent payments to employees and shareholders
As part of a business combination, an acquirer may enter into arrangements with selling shareholders or
employees. In determining whether such arrangements are part of the business combination or
accounted for separately, the acquirer considers a number of factors, including whether the arrangement
requires continuing employment (and if so, its term), the level or remuneration compared to other
employees, whether payments to shareholder employees are incremental to non-employee shareholders,
the relative number of shares owns, linkages to valuation of the acquiree, how the consideration is
calculated, and other agreements and issues.
Where share-based payment arrangements of the acquiree exist and are replaced, the value of such
awards must be apportioned between pre-combination and post-combination service and accounted for
accordingly.
Indemnification assets
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Indemnification assets recognised at the acquisition date (under the exceptions to the general recognition
and measurement principles noted above) are subsequently measured on the same basis of the
indemnified liability or asset, subject to contractual impacts and collectibility. Indemnification assets are
only derecognised when collected, sold or when rights to it are lost.
Other issues
In addition, IFRS 3 provides guidance on some specific aspects of business combinations including:
business combinations achieved without the transfer of consideration, e.g. 'dual listed' and
'stapled' arrangements [IFRS 3.43-44]
reverse acquisitions [IFRS 3.B19]
identifying intangible assets acquired [IFRS 3.B31-34]
Disclosure
Disclosure of information about current business combinations
An acquirer is required to disclose information that enables users of its financial statements to evaluate
the nature and financial effect of a business combination that occurs either during the current reporting
period or after the end of the period but before the financial statements are authorised for issue. [IFRS
3.59]
Among the disclosures required to meet the foregoing objective are the following: [IFRS 3.B64-B66]
name and a description of the acquiree
acquisition date
percentage of voting equity interests acquired
primary reasons for the business combination and a description of how the acquirer obtained
control of the acquiree
description of the factors that make up the goodwill recognised
qualitative description of the factors that make up the goodwill recognised, such as expected
synergies from combining operations, intangible assets that do not qualify for separate
recognition
acquisition-date fair value of the total consideration transferred and the acquisition-date fair value
of each major class of consideration
details of contingent consideration arrangements and indemnification assets
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details of acquired receivables
the amounts recognised as of the acquisition date for each major class of assets acquired and
liabilities assumed
details of contingent liabilities recognised
total amount of goodwill that is expected to be deductible for tax purposes
details about any transactions that are recognised separately from the acquisition of assets and
assumption of liabilities in the business combination
information about a bargain purchase
information about the measurement of non-controlling interests
details about a business combination achieved in stages
information about the acquiree's revenue and profit or loss
information about a business combination whose acquisition date is after the end of the reporting
period but before the financial statements are authorised for issue
Disclosure of information about adjustments of past business combinations
An acquirer is required to disclose information that enables users of its financial statements to evaluate
the financial effects of adjustments recognised in the current reporting period that relate to business
combinations that occurred in the period or previous reporting periods. [IFRS 3.61]
Among the disclosures required to meet the foregoing objective are the following: [IFRS 3.B67]
details when the initial accounting for a business combination is incomplete for particular assets,
liabilities, non-controlling interests or items of consideration (and the amounts recognised in the
financial statements for the business combination thus have been determined only provisionally)
follow-up information on contingent consideration
follow-up information about contingent liabilities recognised in a business combination
a reconciliation of the carrying amount of goodwill at the beginning and end of the reporting
period, with various details shown separately
the amount and an explanation of any gain or loss recognised in the current reporting period that
both:
o
relates to the identifiable assets acquired or liabilities assumed in a business combination
that was effected in the current or previous reporting period, and
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o
is of such a size, nature or incidence that disclosure is relevant to understanding the
combined entity's financial statements.
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IFRS 4 Insurance Contracts
Overview
IFRS 4 Insurance Contracts applies, with limited exceptions, to all insurance contracts (including
reinsurance contracts) that an entity issues and to reinsurance contracts that it holds. In light of the
IASB's comprehensive project on insurance contracts, the standard provides a temporary exemption from
the requirements of some other IFRSs, including the requirement to consider IAS 8 Accounting Policies,
Changes in Accounting Estimates and Errors when selecting accounting policies for insurance contracts.
Scope
IFRS 4 applies to virtually all insurance contracts (including reinsurance contracts) that an entity issues
and to reinsurance contracts that it holds. [IFRS 4.2] It does not apply to other assets and liabilities of an
insurer, such as financial assets and financial liabilities within the scope of IAS 39 Financial Instruments:
Recognition and Measurement. [IFRS 4.3] Furthermore, it does not address accounting by policyholders.
[IFRS 4.4(f)]
In 2005, the IASB amended the scope of IAS 39 to include financial guarantee contracts issued. However,
if an issuer of financial guarantee contracts has previously asserted explicitly that it regards such
contracts as insurance contracts and has used accounting applicable to insurance contracts, the issuer
may elect to apply either IAS 39 or IFRS 4 to such financial guarantee contracts. [IFRS 4.4(d)]
Definition of insurance contract
An insurance contract is a "contract under which one party (the insurer) accepts significant insurance risk
from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain
future event (the insured event) adversely affects the policyholder." [IFRS 4.Appendix A]
Accounting policies
The IFRS exempts an insurer temporarily (until completion of Phase II of the Insurance Project) from
some requirements of other IFRSs, including the requirement to consider IAS 8 Accounting Policies,
Changes in Accounting Estimates and Errors in selecting accounting policies for insurance contracts.
However, the standard: [IFRS 4.14]
prohibits provisions for possible claims under contracts that are not in existence at the reporting
date (such as catastrophe and equalisation provisions)
requires a test for the adequacy of recognised insurance liabilities and an impairment test for
reinsurance assets
Page 31 of 97
requires an insurer to keep insurance liabilities in its balance sheet until they are discharged or
cancelled, or expire, and prohibits offsetting insurance liabilities against related reinsurance
assets and income or expense from reinsurance contracts against the expense or income from
the related insurance contract.
Changes in accounting policies
IFRS 4 permits an insurer to change its accounting policies for insurance contracts only if, as a result, its
financial statements present information that is more relevant and no less reliable, or more reliable and no
less relevant. [IFRS 4.22] In particular, an insurer cannot introduce any of the following practices,
although it may continue using accounting policies that involve them: [IFRS 4.25]
measuring insurance liabilities on an undiscounted basis
measuring contractual rights to future investment management fees at an amount that exceeds
their fair value as implied by a comparison with current market-based fees for similar services
using non-uniform accounting policies for the insurance liabilities of subsidiaries.
Remeasuring insurance liabilities
The IFRS permits the introduction of an accounting policy that involves remeasuring designated
insurance liabilities consistently in each period to reflect current market interest rates (and, if the insurer
so elects, other current estimates and assumptions). Without this permission, an insurer would have been
required to apply the change in accounting policies consistently to all similar liabilities. [IFRS 4.24]
Prudence
An insurer need not change its accounting policies for insurance contracts to eliminate excessive
prudence. However, if an insurer already measures its insurance contracts with sufficient prudence, it
should not introduce additional prudence. [IFRS 4.26]
Future investment margins
There is a rebuttable presumption that an insurer's financial statements will become less relevant and
reliable if it introduces an accounting policy that reflects future investment margins in the measurement of
insurance contracts. [IFRS 4.27]
Asset classifications
When an insurer changes its accounting policies for insurance liabilities, it may reclassify some or all
financial assets as 'at fair value through profit or loss'. [IFRS 4.45]
Other issues
The standard:
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clarifies that an insurer need not account for an embedded derivative separately at fair value if the
embedded derivative meets the definition of an insurance contract [IFRS 4.7-8]
requires an insurer to unbundle (that is, to account separately for) deposit components of some
insurance contracts, to avoid the omission of assets and liabilities from its balance sheet [IFRS
4.10]
clarifies the applicability of the practice sometimes known as 'shadow accounting' [IFRS 4.30]
permits an expanded presentation for insurance contracts acquired in a business combination or
portfolio transfer [IFRS 4.31-33]
addresses limited aspects of discretionary participation features contained in insurance contracts
or financial instruments. [IFRS 4.34-35]
Disclosures
The standard requires disclosure of:
information that helps users understand the amounts in the insurer's financial statements that
arise from insurance contracts: [IFRS 4.36-37]
o
accounting policies for insurance contracts and related assets, liabilities, income, and
expense
o
the recognised assets, liabilities, income, expense, and cash flows arising from insurance
contracts
o
if the insurer is a cedant, certain additional disclosures are required
o
information about the assumptions that have the greatest effect on the measurement of
assets, liabilities, income, and expense including, if practicable, quantified disclosure of
those assumptions
o
the effect of changes in assumptions
o
reconciliations of changes in insurance liabilities, reinsurance assets, and, if any, related
deferred acquisition costs
Information that helps users to evaluate the nature and extent of risks arising from insurance
contracts: [IFRS 4.38-39]
o
risk management objectives and policies
o
those terms and conditions of insurance contracts that have a material effect on the
amount, timing, and uncertainty of the insurer's future cash flows
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o
information about insurance risk (both before and after risk mitigation by reinsurance),
including information about:
o
the sensitivity to insurance risk
concentrations of insurance risk
actual claims compared with previous estimates
the information about credit risk, liquidity risk and market risk that IFRS 7 would require if
the insurance contracts were within the scope of IFRS 7
o
information about exposures to market risk arising from embedded derivatives contained
in a host insurance contract if the insurer is not required to, and does not, measure the
embedded derivatives at fair value.
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IFRS 5 Non-current Assets Held for Sale and
Discontinued Operations
Overview
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations outlines how to account for noncurrent assets held for sale (or for distribution to owners). In general terms, assets (or disposal groups)
held for sale are not depreciated, are measured at the lower of carrying amount and fair value less costs
to sell, and are presented separately in the statement of financial position. Specific disclosures are also
required for discontinued operations and disposals of non-current assets.
Held-for-sale classification
In general, the following conditions must be met for an asset (or 'disposal group') to be classified as held
for sale: [IFRS 5.6-8]
management is committed to a plan to sell
the asset is available for immediate sale
an active programme to locate a buyer is initiated
the sale is highly probable, within 12 months of classification as held for sale (subject to limited
exceptions)
the asset is being actively marketed for sale at a sales price reasonable in relation to its fair value
actions required to complete the plan indicate that it is unlikely that plan will be significantly
changed or withdrawn
The assets need to be disposed of through sale. Therefore, operations that are expected to be wound
down or abandoned would not meet the definition (but may be classified as discontinued once
abandoned). [IFRS 5.13]
An entity that is committed to a sale involving loss of control of a subsidiary that qualifies for held-for-sale
classification under IFRS 5 classifies all of the assets and liabilities of that subsidiary as held for sale,
even if the entity will retain a non-controlling interest in its former subsidiary after the sale. [IFRS 5.8A]
Held for distribution to owners classification
The classification, presentation and measurement requirements of IFRS 5 also apply to a non-current
asset (or disposal group) that is classified as held for distribution to owners. The entity must be committed
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to the distribution, the assets must be available for immediate distribution and the distribution must be
highly probable.
Disposal group concept
A 'disposal group' is a group of assets, possibly with some associated liabilities, which an entity intends to
dispose of in a single transaction. The measurement basis required for non-current assets classified as
held for sale is applied to the group as a whole, and any resulting impairment loss reduces the carrying
amount of the non-current assets in the disposal group in the order of allocation required by IAS 36.
[IFRS 5.4]
Measurement
The following principles apply:
At the time of classification as held for sale. Immediately before the initial classification of the
asset as held for sale, the carrying amount of the asset will be measured in accordance with
applicable IFRSs. Resulting adjustments are also recognised in accordance with applicable
IFRSs.
After classification as held for sale. Non-current assets or disposal groups that are classified as
held for sale are measured at the lower of carrying amount and fair value less costs to sell (fair
value less costs to distribute in the case of assets classified as held for distribution to owners).
Impairment. Impairment must be considered both at the time of classification as held for sale and
subsequently:
o
At the time of classification as held for sale. Immediately prior to classifying an asset or
disposal group as held for sale, impairment is measured and recognised in accordance
with the applicable IFRSs (generally IAS 16 Property, Plant and Equipment, IAS 36
Impairment of Assets, IAS 38 Intangible Assets, and IAS 39 Financial Instruments:
Recognition and Measurement / IFRS 9 Financial Instruments). Any impairment loss is
recognised in profit or loss unless the asset had been measured at revalued amount
under IAS 16 or IAS 38, in which case the impairment is treated as a revaluation
decrease.
o
After classification as held for sale. Calculate any impairment loss based on the
difference between the adjusted carrying amounts of the asset/disposal group and fair
value less costs to sell. Any impairment loss that arises by using the measurement
principles in IFRS 5 must be recognised in profit or loss [IFRS 5.20], even for assets
previously carried at revalued amounts. This is supported by IFRS 5 BC.47 and BC.48,
which indicate the inconsistency with IAS 36.
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Assets carried at fair value prior to initial classification. For such assets, the requirement to
deduct costs to sell from fair value may result in an immediate charge to profit or loss.
Subsequent increases in fair value. A gain for any subsequent increase in fair value less costs to
sell of an asset can be recognised in the profit or loss to the extent that it is not in excess of the
cumulative impairment loss that has been recognised in accordance with IFRS 5 or previously in
accordance with IAS 36.
No depreciation. Non-current assets or disposal groups that are classified as held for sale are not
depreciated.
The measurement provisions of IFRS 5 do not apply to deferred tax assets, assets arising from employee
benefits, financial assets within the scope of IFRS 9 Financial Instruments, non-current assets measured
at fair value in accordance with IAS 41 Agriculture, and contractual rights under insurance contracts.
Presentation
Assets classified as held for sale, and the assets and liabilities included within a disposal group classified
as held for sale, must be presented separately on the face of the statement of financial position.
Disclosures
IFRS 5 requires the following disclosures about assets (or disposal groups) that are held for sale:
description of the non-current asset or disposal group
description of facts and circumstances of the sale (disposal) and the expected timing
impairment losses and reversals, if any, and where in the statement of comprehensive income
they are recognised
if applicable, the reportable segment in which the non-current asset (or disposal group) is
presented in accordance with IFRS 8 Operating Segments
Disclosures in other IFRSs do not apply to assets held for sale (or discontinued operations, discussed
below) unless those other IFRSs require specific disclosures in respect of such assets, or in respect of
certain measurement disclosures where assets and liabilities are outside the scope of the measurement
requirements of IFRS 5.
Classification as discontinuing
A discontinued operation is a component of an entity that either has been disposed of or is classified as
held for sale, and:
represents either a separate major line of business or a geographical area of operations
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is part of a single co-ordinated plan to dispose of a separate major line of business or
geographical area of operations, or
is a subsidiary acquired exclusively with a view to resale and the disposal involves loss of control.
IFRS 5 prohibits the retroactive classification as a discontinued operation, when the discontinued criteria
are met after the end of the reporting period. [IFRS 5.12]
Disclosure in the statement of comprehensive income
The sum of the post-tax profit or loss of the discontinued operation and the post-tax gain or loss
recognised on the measurement to fair value less cost to sell or fair value adjustments on the disposal of
the assets (or disposal group) is presented as a single amount on the face of the statement of
comprehensive income. If the entity presents profit or loss in a separate statement, a section identified as
relating to discontinued operations is presented in that separate statement. [IFRS 5.33-33A].
Detailed disclosure of revenue, expenses, pre-tax profit or loss and related income taxes is required
either in the notes or in the statement of comprehensive income in a section distinct from continuing
operations. [IFRS 5.33] Such detailed disclosures must cover both the current and all prior periods
presented in the financial statements. [IFRS 5.34]
Cash flow information
The net cash flows attributable to the operating, investing, and financing activities of a discontinued
operation is separately presented on the face of the cash flow statement or disclosed in the notes.
[IFRS 5.33]
Disclosures
The following additional disclosures are required:
adjustments made in the current period to amounts disclosed as a discontinued operation in prior
periods must be separately disclosed [IFRS 5.35]
if an entity ceases to classify a component as held for sale, the results of that component
previously presented in discontinued operations must be reclassified and included in income from
continuing operations for all periods presented [IFRS 5.36]
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IFRS 6 Exploration for and Evaluation of Mineral
Resources
Overview
IFRS 6 Exploration for and Evaluation of Mineral Resources has the effect of allowing entities adopting
the standard for the first time to use accounting policies for exploration and evaluation assets that were
applied before adopting IFRSs. It also modifies impairment testing of exploration and evaluation assets by
introducing different impairment indicators and allowing the carrying amount to be tested at an aggregate
level (not greater than a segment).
Definitions
Exploration for and evaluation of mineral resources means the search for mineral resources, including
minerals, oil, natural gas and similar non-regenerative resources after the entity has obtained legal rights
to explore in a specific area, as well as the determination of the technical feasibility and commercial
viability of extracting the mineral resource.
Exploration and evaluation expenditures are expenditures incurred in connection with the exploration and
evaluation of mineral resources before the technical feasibility and commercial viability of extracting a
mineral resource is demonstrable.
Accounting policies for exploration and evaluation
IFRS 6 permits an entity to develop an accounting policy for recognition of exploration and evaluation
expenditures as assets without specifically considering the requirements of paragraphs 11 and 12 of
IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. [IFRS 6.9] Thus, an entity
adopting IFRS 6 may continue to use the accounting policies applied immediately before adopting the
IFRS. This includes continuing to use recognition and measurement practices that are part of those
accounting policies.
Impairment
IFRS 6 effectively modifies the application of IAS 36 Impairment of Assets to exploration and evaluation
assets recognised by an entity under its accounting policy. Specifically:
Entities recognising exploration and evaluation assets are required to perform an impairment test
on those assets when specific facts and circumstances outlined in the standard indicate an
impairment test is required. The facts and circumstances outlined in IFRS 6 are non-exhaustive,
and are applied instead of the 'indicators of impairment' in IAS 36 [IFRS 6.19-20]
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Entities are permitted to determine an accounting policy for allocating exploration and evaluation
assets to cash-generating units or groups of CGUs. [IFRS 6.21] This accounting policy may result
in a different allocation than might otherwise arise on applying the requirements of IAS 36
If an impairment test is required, any impairment loss is measured, presented and disclosed in
accordance with IAS 36.
Presentation and disclosure
An entity treats exploration and evaluation assets as a separate class of assets and make the disclosures
required by either IAS 16 Property, Plant and Equipment or IAS 38 Intangible Assets consistent with how
the assets are classified.
IFRS 6 requires disclosure of information that identifies and explains the amounts recognised in its
financial statements arising from the exploration for and evaluation of mineral resources, including:
1. its accounting policies for exploration and evaluation expenditures including the recognition of
exploration and evaluation assets
2. the amounts of assets, liabilities, income and expense and operating and investing cash flows
arising from the exploration for and evaluation of mineral resources.
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IFRS 7 Financial Instruments: Disclosures
Overview
IFRS 7 Financial Instruments: Disclosures requires disclosure of information about the significance of
financial instruments to an entity, and the nature and extent of risks arising from those financial
instruments, both in qualitative and quantitative terms. Specific disclosures are required in relation to
transferred financial assets and a number of other matters. This standard puts all of those financial
instruments disclosures together in a new standard on Financial Instruments: Disclosures. The remaining
parts of IAS 32 deal only with financial instruments presentation matters.
Disclosure requirements of IFRS 7
IFRS requires certain disclosures to be presented by category of instrument based on the IAS 39
measurement categories. Certain other disclosures are required by class of financial instrument. For
those disclosures an entity must group its financial instruments into classes of similar instruments as
appropriate to the nature of the information presented.
The two main categories of disclosures required by IFRS 7 are:
1. information about the significance of financial instruments.
2. information about the nature and extent of risks arising from financial instruments
Information about the significance of financial instruments
Statement of financial position
Disclose the significance of financial instruments for an entity's financial position and
performance. This includes disclosures for each of the following categories:
o
financial assets measured at fair value through profit and loss, showing separately those
held for trading and those designated at initial recognition
o
held-to-maturity investments
o
loans and receivables
o
available-for-sale assets
o
financial liabilities at fair value through profit and loss, showing separately those held for
trading and those designated at initial recognition
o
financial liabilities measured at amortised cost
Other balance sheet-related disclosures:
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o
special disclosures about financial assets and financial liabilities designated to be
measured at fair value through profit and loss, including disclosures about credit risk and
market risk, changes in fair values attributable to these risks and the methods of
measurement.
o
reclassifications of financial instruments from one category to another (e.g. from fair value
to amortised cost or vice versa)
o
information about financial assets pledged as collateral and about financial or nonfinancial assets held as collateral
o
reconciliation of the allowance account for credit losses (bad debts) by class of financial
assets
o
information about compound financial instruments with multiple embedded derivatives
o
breaches of terms of loan agreements
Statement of comprehensive income
Items of income, expense, gains, and losses, with separate disclosure of gains and losses from:
o
financial assets measured at fair value through profit and loss, showing separately those
held for trading and those designated at initial recognition.
o
held-to-maturity investments.
o
loans and receivables.
o
available-for-sale assets.
o
financial liabilities measured at fair value through profit and loss, showing separately
those held for trading and those designated at initial recognition.
o
financial liabilities measured at amortised cost.
Other income statement-related disclosures:
o
total interest income and total interest expense for those financial instruments that are not
measured at fair value through profit and loss
o
fee income and expense
o
amount of impairment losses by class of financial assets
o
interest income on impaired financial assets
Other disclosures
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Accounting policies for financial instruments
Information about hedge accounting, including:
o
description of each hedge, hedging instrument, and fair values of those instruments, and
nature of risks being hedged
o
for cash flow hedges, the periods in which the cash flows are expected to occur, when
they are expected to enter into the determination of profit or loss, and a description of any
forecast transaction for which hedge accounting had previously been used but which is
no longer expected to occur
o
if a gain or loss on a hedging instrument in a cash flow hedge has been recognised in
other comprehensive income, an entity should disclose the following:
o
the amount that was so recognised in other comprehensive income during the period
o
the amount that was removed from equity and included in profit or loss for the period
o
the amount that was removed from equity during the period and included in the initial
measurement of the acquisition cost or other carrying amount of a non-financial asset or
non-
financial
liability
in
a
hedged
highly
probable
forecast
transaction
Note: Where IFRS 9 Financial Instruments (2013) is applied, revised disclosure
requirements apply. The required hedge accounting disclosures apply where the entity
elects to adopt hedge accounting and require information to be provided in three broad
categories: (1) the entity’s risk management strategy and how it is applied to manage risk
(2) how the entity’s hedging activities may affect the amount, timing and uncertainty of its
future cash flows, and (3) the effect that hedge accounting has had on the entity’s
statement of financial position, statement of comprehensive income and statement of
changes in equity. The disclosures are required to be presented in a single note or
separate section in its financial statements, although some information can be
incorporated by reference.
For fair value hedges, information about the fair value changes of the hedging instrument and the
hedged item
Hedge ineffectiveness recognised in profit and loss (separately for cash flow hedges and hedges
of a net investment in a foreign operation)
Information about the fair values of each class of financial asset and financial liability, along with:
o
comparable carrying amounts
o
description of how fair value was determined
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o
the level of inputs used in determining fair value
o
reconciliations of movements between levels of fair value measurement hierarchy
additional disclosures for financial instruments whose fair value is determined using level
3 inputs including impacts on profit and loss, other comprehensive income and sensitivity
analysis
o
information if fair value cannot be reliably measured
The fair value hierarchy introduces 3 levels of inputs based on the lowest level of input significant to the
overall fair value:
Level 1 – quoted prices for similar instruments
Level 2 – directly observable market inputs other than Level 1 inputs
Level 3 – inputs not based on observable market data
Note that disclosure of fair values is not required when the carrying amount is a reasonable
approximation of fair value, such as short-term trade receivables and payables, or for instruments whose
fair value cannot be measured reliably.
Nature and extent of exposure to risks arising from financial
instruments
Qualitative disclosures
The qualitative disclosures describe:
o
risk exposures for each type of financial instrument
o
management's objectives, policies, and processes for managing those risks
o
changes from the prior period
Quantitative disclosures
The quantitative disclosures provide information about the extent to which the entity is exposed to
risk, based on information provided internally to the entity's key management personnel. These
disclosures include:
o
summary quantitative data about exposure to each risk at the reporting date
o
disclosures about credit risk, liquidity risk, and market risk and how these risks are
managed as further described below
o
concentrations of risk
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Credit risk
Credit risk is the risk that one party to a financial instrument will cause a loss for the other party
by failing to pay for its obligation.
Disclosures about credit risk include:
o
maximum amount of exposure (before deducting the value of collateral), description of
collateral, information about credit quality of financial assets that are neither past due nor
impaired, and information about credit quality of financial assets whose terms have been
renegotiated
o
for financial assets that are past due or impaired, analytical disclosures are required
o
information about collateral or other credit enhancements obtained or called
Liquidity risk
Liquidity risk is the risk that an entity will have difficulties in paying its financial liabilities.
Disclosures about liquidity risk include:
o
a maturity analysis of financial liabilities
o
description of approach to risk management
Market risk
Market risk is the risk that the fair value or cash flows of a financial instrument will fluctuate due to
changes in market prices. Market risk reflects interest rate risk, currency risk and other price
risks.
Disclosures about market risk include:
o
a sensitivity analysis of each type of market risk to which the entity is exposed
o
additional information if the sensitivity analysis is not representative of the entity's risk
exposure (for example because exposures during the year were different to exposures at
year-end).
o
IFRS 7 provides that if an entity prepares a sensitivity analysis such as value-at-risk for
management purposes that reflects interdependencies of more than one component of
market risk (for instance, interest risk and foreign currency risk combined), it may
disclose that analysis instead of a separate sensitivity analysis for each type of market
risk
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Transfers of financial assets
An entity shall disclose information that enables users of its financial statements:
1. to understand the relationship between transferred financial assets that are not derecognised in
their entirety and the associated liabilities; and
2. to evaluate the nature of, and risks associated with, the entity's continuing involvement in
derecognised financial assets.
Transferred financial assets that are not derecognised in their entirety
Required disclosures include description of the nature of the transferred assets, nature of risk and
rewards as well as description of the nature and quantitative disclosure depicting relationship
between transferred financial assets and the associated liabilities.
Transferred financial assets that are derecognised in their entirety
Required disclosures include the carrying amount of the assets and liabilities recognised, fair
value of the assets and liabilities that represent continuing involvement, maximum exposure to
loss from the continuing involvement as well as maturity analysis of the undiscounted cash flows
to repurchase the derecognised financial assets.
Additional disclosures are required for any gain or loss recognised at the date of transfer of the
assets, income or expenses recognise from the entity's continuing involvement in the
derecognised financial assets as well as details of uneven distribution of proceed from transfer
activity throughout the reporting period.
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IFRS 8 Operating Segments
Overview
IFRS 8 Operating Segments requires particular classes of entities (essentially those with publicly traded
securities) to disclose information about their operating segments, products and services, the
geographical areas in which they operate, and their major customers. Information is based on internal
management reports, both in the identification of operating segments and measurement of disclosed
segment information.
Scope
IFRS 8 applies to the separate or individual financial statements of an entity (and to the consolidated
financial statements of a group with a parent):
whose debt or equity instruments are traded in a public market or
that files, or is in the process of filing, its (consolidated) financial statements with a securities
commission or other regulatory organisation for the purpose of issuing any class of instruments in
a public market
However, when both separate and consolidated financial statements for the parent are presented in a
single financial report, segment information need be presented only on the basis of the consolidated
financial statements.
Operating segments
IFRS 8 defines an operating segment as follows. An operating segment is a component of an entity:
that engages in business activities from which it may earn revenues and incur expenses
(including revenues and expenses relating to transactions with other components of the same
entity)
whose operating results are reviewed regularly by the entity's chief operating decision maker to
make decisions about resources to be allocated to the segment and assess its performance and
for which discrete financial information is available
Reportable segments
IFRS 8 requires an entity to report financial and descriptive information about its reportable segments.
Reportable segments are operating segments or aggregations of operating segments that meet specified
criteria:
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its reported revenue, from both external customers and intersegment sales or transfers, is 10 per
cent or more of the combined revenue, internal and external, of all operating segments, or
the absolute measure of its reported profit or loss is 10 per cent or more of the greater, in
absolute amount, of (i) the combined reported profit of all operating segments that did not report a
loss and (ii) the combined reported loss of all operating segments that reported a loss, or
its assets are 10 per cent or more of the combined assets of all operating segments.
Two or more operating segments may be aggregated into a single operating segment if aggregation is
consistent with the core principles of the the standard, the segments have similar economic
characteristics and are similar in various prescribed respects.
If the total external revenue reported by operating segments constitutes less than 75 per cent of the
entity's revenue, additional operating segments must be identified as reportable segments (even if they
do not meet the quantitative thresholds set out above) until at least 75 per cent of the entity's revenue is
included in reportable segments.
Disclosure requirements
Required disclosures include:
general information about how the entity identified its operating segments and the types of
products and services from which each operating segment derives its revenues
judgements made by management in applying the aggregation criteria to allow two or more
operating segments to be aggregated
information about the profit or loss for each reportable segment, including certain specified
revenues* and expenses* such as revenue from external customers and from transactions with
other segments, interest revenue and expense, depreciation and amortisation, income tax
expense or income and material non-cash items
a measure of total assets* and total liabilities* for each reportable segment, and the amount of
investments in associates and joint ventures and the amounts of additions to certain non-current
assets ('capital expenditure')
an explanation of the measurements of segment profit or loss, segment assets and segment
liabilities, including certain minimum disclosures, e.g. how transactions between segments are
measured, the nature of measurement differences between segment information and other
information included in the financial statements, and asymmetrical allocations to reportable
segments
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reconciliations of the totals of segment revenues, reported segment profit or loss, segment
assets*, segment liabilities* and other material items to corresponding items in the entity's
financial statements
some entity-wide disclosures that are required even when an entity has only one reportable
segment, including information about each product and service or groups of products and
services
analyses of revenues and certain non-current assets by geographical area – with an expanded
requirement to disclose revenues/assets by individual foreign country (if material), irrespective of
the identification of operating segments
information about transactions with major customers
* This disclosure is required only if such amounts are regularly provided to the chief operating decision
maker, or in the case of specific items of revenue and expense or asset-related items, if those specified
amounts are included in the relevant measure (segment profit or loss or segment assets).
Considerable segment information is required at interim reporting dates by IAS 34.
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IFRS 9 Financial Instruments
Overview
IFRS 9 Financial Instruments issued on 24 July 2014 is the IASB's replacement of IAS 39 Financial
Instruments: Recognition and Measurement. The Standard includes requirements for recognition and
measurement, impairment, derecognition and general hedge accounting.
The version of IFRS 9 issued in 2014 supersedes all previous versions and is mandatorily effective for
periods beginning on or after 1 January 2018 with early adoption permitted (subject to local endorsement
requirements). For a limited period, previous versions of IFRS 9 may be adopted early if not already done
so provided the relevant date of initial application is before 1 February 2015.
IFRS 9 does not replace the requirements for portfolio fair value hedge accounting for interest rate risk
(often referred to as the ‘macro hedge accounting’ requirements) since this phase of the project was
separated from the IFRS 9 project due to the longer term nature of the macro hedging project which is
currently at the discussion paper phase of the due process. In April 2014, the IASB published a
Discussion Paper Accounting for Dynamic Risk management: a Portfolio Revaluation Approach to Macro
Hedging. Consequently, the exception in IAS 39 for a fair value hedge of an interest rate exposure of a
portfolio of financial assets or financial liabilities continues to apply.
Initial measurement of financial instruments
All financial instruments are initially measured at fair value plus or minus, in the case of a financial asset
or financial liability not at fair value through profit or loss, transaction costs.
Subsequent measurement of financial assets
IFRS 9 divides all financial assets that are currently in the scope of IAS 39 into two classifications - those
measured at amortised cost and those measured at fair value.
Where assets are measured at fair value, gains and losses are either recognised entirely in profit or loss
(fair value through profit or loss, FVTPL), or recognised in other comprehensive income (fair value
through other comprehensive income, FVTOCI).
For debt instruments the FVTOCI classification is mandatory for certain assets unless the fair value option
is elected. Whilst for equity investments, the FVTOCI classification is an election. Furthermore, the
requirements for reclassifying gains or losses recognised in other comprehensive income are different for
debt instruments and equity investments.
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The classification of a financial asset is made at the time it is initially recognised, namely when the entity
becomes a party to the contractual provisions of the instrument. [IFRS 9, paragraph 4.1.1] If certain
conditions are met, the classification of an asset may subsequently need to be reclassified.
Debt instruments
A debt instrument that meets the following two conditions must be measured at amortised cost (net of any
write down for impairment) unless the asset is designated at FVTPL under the fair value option (see
below):
Business model test: The objective of the entity's business model is to hold the financial asset
to collect the contractual cash flows (rather than to sell the instrument prior to its contractual
maturity to realise its fair value changes).
Cash flow characteristics test: The contractual terms of the financial asset give rise on
specified dates to cash flows that are solely payments of principal and interest on the principal
amount outstanding.
A debt instrument that meets the following two conditions must be measured at FVTOCI unless the asset
is designated at FVTPL under the fair value option (see below):
Business model test: The financial asset is held within a business model whose objective is
achieved by both collecting contractual cash flows and selling financial assets.
Cash flow characteristics test: The contractual terms of the financial asset give rise on
specified dates to cash flows that are solely payments of principal and interest on the principal
amount outstanding.
All other debt instruments must be measured at fair value through profit or loss (FVTPL). [IFRS 9,
paragraph 4.1.4]
Fair value option
Even if an instrument meets the two requirements to be measured at amortised cost or FVTOCI, IFRS 9
contains an option to designate, at initial recognition, a financial asset as measured at FVTPL if doing so
eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as
an 'accounting mismatch') that would otherwise arise from measuring assets or liabilities or recognising
the gains and losses on them on different bases. [IFRS 9, paragraph 4.1.5]
Equity instruments
All equity investments in scope of IFRS 9 are to be measured at fair value in the statement of financial
position, with value changes recognised in profit or loss, except for those equity investments for which the
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entity has elected to present value changes in 'other comprehensive income'. There is no 'cost exception'
for unquoted equities.
'Other comprehensive income' option
If an equity investment is not held for trading, an entity can make an irrevocable election at initial
recognition to measure it at FVTOCI with only dividend income recognised in profit or loss. [IFRS 9,
paragraph 5.7.5]
Measurement guidance
Despite the fair value requirement for all equity investments, IFRS 9 contains guidance on when cost may
be the best estimate of fair value and also when it might not be representative of fair value.
Subsequent measurement of financial liabilities
IFRS 9 doesn't change the basic accounting model for financial liabilities under IAS 39. Two
measurement categories continue to exist: FVTPL and amortised cost. Financial liabilities held for trading
are measured at FVTPL, and all other financial liabilities are measured at amortised cost unless the fair
value option is applied. [IFRS 9, paragraph 4.2.1]
Fair value option
IFRS 9 contains an option to designate a financial liability as measured at FVTPL if:
doing so eliminates or significantly reduces a measurement or recognition inconsistency
(sometimes referred to as an 'accounting mismatch') that would otherwise arise from measuring
assets or liabilities or recognising the gains and losses on them on different bases, or
the liability is part or a group of financial liabilities or financial assets and financial liabilities that is
managed and its performance is evaluated on a fair value basis, in accordance with a
documented risk management or investment strategy, and information about the group is
provided internally on that basis to the entity's key management personnel.
A financial liability which does not meet any of these criteria may still be designated as measured at
FVTPL when it contains one or more embedded derivatives that sufficiently modify the cash flows of the
liability and are not clearly closely related.
IFRS 9 requires gains and losses on financial liabilities designated as at FVTPL to be split into the
amount of change in fair value attributable to changes in credit risk of the liability, presented in other
comprehensive income, and the remaining amount presented in profit or loss. The new guidance allows
the recognition of the full amount of change in the fair value in profit or loss only if the presentation of
changes in the liability's credit risk in other comprehensive income would create or enlarge an accounting
mismatch in profit or loss. That determination is made at initial recognition and is not reassessed.
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Amounts presented in other comprehensive income shall not be subsequently transferred to profit or loss,
the entity may only transfer the cumulative gain or loss within equity.
Derecognition of financial assets
The basic premise for the derecognition model in IFRS 9 (carried over from IAS 39) is to determine
whether the asset under consideration for derecognition is:
an asset in its entirety or
specifically identified cash flows from an asset (or a group of similar financial assets) or
a fully proportionate (pro rata) share of the cash flows from an asset (or a group of similar
financial assets). or
a fully proportionate (pro rata) share of specifically identified cash flows from a financial asset (or
a group of similar financial assets)
Once the asset under consideration for derecognition has been determined, an assessment is made as to
whether the asset has been transferred, and if so, whether the transfer of that asset is subsequently
eligible for derecognition.
An asset is transferred if either the entity has transferred the contractual rights to receive the cash flows,
or the entity has retained the contractual rights to receive the cash flows from the asset, but has assumed
a contractual obligation to pass those cash flows on under an arrangement that meets the following three
conditions:
the entity has no obligation to pay amounts to the eventual recipient unless it collects equivalent
amounts on the original asset
the entity is prohibited from selling or pledging the original asset (other than as security to the
eventual recipient),
the entity has an obligation to remit those cash flows without material delay
Once an entity has determined that the asset has been transferred, it then determines whether or not it
has transferred substantially all of the risks and rewards of ownership of the asset. If substantially all the
risks and rewards have been transferred, the asset is derecognised. If substantially all the risks and
rewards have been retained, derecognition of the asset is precluded.
If the entity has neither retained nor transferred substantially all of the risks and rewards of the asset, then
the entity must assess whether it has relinquished control of the asset or not. If the entity does not control
the asset then derecognition is appropriate; however if the entity has retained control of the asset, then
the entity continues to recognise the asset to the extent to which it has a continuing involvement in the
asset.
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These various derecognition steps are summarised in the decision tree in paragraph B3.2.1.
Derecognition of financial liabilities
A financial liability should be removed from the balance sheet when, and only when, it is extinguished,
that is, when the obligation specified in the contract is either discharged or cancelled or expires. [IFRS 9,
paragraph 3.3.1] Where there has been an exchange between an existing borrower and lender of debt
instruments with substantially different terms, or there has been a substantial modification of the terms of
an existing financial liability, this transaction is accounted for as an extinguishment of the original financial
liability and the recognition of a new financial liability. A gain or loss from extinguishment of the original
financial liability is recognised in profit or loss.
Derivatives
All derivatives in scope of IFRS 9, including those linked to unquoted equity investments, are measured at
fair value. Value changes are recognised in profit or loss unless the entity has elected to apply hedge
accounting by designating the derivative as a hedging instrument in an eligible hedging relationship.
Embedded derivatives
An embedded derivative is a component of a hybrid contract that also includes a non-derivative host, with
the effect that some of the cash flows of the combined instrument vary in a way similar to a stand-alone
derivative. A derivative that is attached to a financial instrument but is contractually transferable
independently of that instrument, or has a different counterparty, is not an embedded derivative, but a
separate financial instrument. [IFRS 9, paragraph 4.3.1]
The embedded derivative concept that existed in IAS 39 has been included in IFRS 9 to apply only to
hosts that are not financial assets within the scope of the Standard. Consequently, embedded derivatives
that under IAS 39 would have been separately accounted for at FVTPL because they were not closely
related to the host financial asset will no longer be separated. Instead, the contractual cash flows of the
financial asset are assessed in their entirety, and the asset as a whole is measured at FVTPL if the
contractual cash flow characteristics test is not passed (see above).
The embedded derivative guidance that existed in IAS 39 is included in IFRS 9 to help preparers identify
when an embedded derivative is closely related to a financial liability host contract or a host contract not
within the scope of the Standard (e.g. leasing contracts, insurance contracts, contracts for the purchase
or sale of a non-financial items).
Reclassification
For financial assets, reclassification is required between FVTPL, FVTOCI and amortised cost, if and only
if the entity's business model objective for its financial assets changes so its previous model assessment
would no longer apply.
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If reclassification is appropriate, it must be done prospectively from the reclassification date which is
defined as the first day of the first reporting period following the change in business model. An entity does
not restate any previously recognised gains, losses, or interest.
IFRS 9 does not allow reclassification:
for equity investments measured at FVTOCI, or
where the fair value option has been exercised in any circumstance for a financial assets or
financial liability.
Hedge accounting
The hedge accounting requirements in IFRS 9 are optional. If certain eligibility and qualification criteria
are met, hedge accounting allows an entity to reflect risk management activities in the financial
statements by matching gains or losses on financial hedging instruments with losses or gains on the risk
exposures they hedge.
The hedge accounting model in IFRS 9 is not designed to accommodate hedging of open, dynamic
portfolios. As a result, for a fair value hedge of interest rate risk of a portfolio of financial assets or
liabilities an entity can apply the hedge accounting requirements in IAS 39 instead of those in IFRS 9.
In addition when an entity first applies IFRS 9, it may choose as its accounting policy choice to continue to
apply the hedge accounting requirements of IAS 39.
Qualifying criteria for hedge accounting
A hedging relationship qualifies for hedge accounting only if all of the following criteria are met:
1. the hedging relationship consists only of eligible hedging instruments and eligible hedged items.
2. at the inception of the hedging relationship there is formal designation and documentation of the
hedging relationship and the entity’s risk management objective and strategy for undertaking the
hedge.
3. the hedging relationship meets all of the hedge effectiveness requirements
Hedging instruments
Only contracts with a party external to the reporting entity may be designated as hedging instruments.
A hedging instrument may be a derivative (except for some written options) or non-derivative financial
instrument measured at FVTPL unless it is a financial liability designated as at FVTPL for which changes
due to credit risk are presented in OCI. For a hedge of foreign currency risk, the foreign currency risk
component of a non-derivative financial instrument, except equity investments designated as FVTOCI,
may be designated as the hedging instrument.
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IFRS 9 allows a proportion (e.g. 60%) but not a time portion (eg the first 6 years of cash flows of a 10 year
instrument) of a hedging instrument to be designated as the hedging instrument. IFRS 9 also allows only
the intrinsic value of an option, or the spot element of a forward to be designated as the hedging
instrument. An entity may also exclude the foreign currency basis spread from a designated hedging
instrument.
IFRS 9 allows combinations of derivatives and non-derivatives to be designated as the hedging
instrument.
Combinations of purchased and written options do not qualify if they amount to a net written option at the
date of designation.
Hedged items
A hedged item can be a recognised asset or liability, an unrecognised firm commitment, a highly probable
forecast transaction or a net investment in a foreign operation and must be reliably measurable.
An aggregated exposure that is a combination of an eligible hedged item as described above and a
derivative may be designated as a hedged item.
The hedged item must generally be with a party external to the reporting entity, however, as an exception
the foreign currency risk of an intragroup monetary item may qualify as a hedged item in the consolidated
financial statements if it results in an exposure to foreign exchange rate gains or losses that are not fully
eliminated on consolidation. In addition, the foreign currency risk of a highly probable forecast intragroup
transaction may qualify as a hedged item in consolidated financial statements provided that the
transaction is denominated in a currency other than the functional currency of the entity entering into that
transaction and the foreign currency risk will affect consolidated profit or loss.
An entity may designate an item in its entirety or a component of an item as the hedged item. The
component may be a risk component that is separately identifiable and reliably measurable; one or more
selected contractual cash flows; or components of a nominal amount.
A group of items (including net positions is an eligible hedged item only if:
1. it consists of items individually, eligible hedged items;
2. the items in the group are managed together on a group basis for risk management purposes;
and
3. in the case of a cash flow hedge of a group of items whose variabilities in cash flows are not
expected to be approximately proportional to the overall variability in cash flows of the group:
1. it is a hedge of foreign currency risk; and
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2. the designation of that net position specifies the reporting period in which the forecast
transactions are expected to affect profit or loss, as well as their nature and volume [IFRS
9 paragraph 6.6.1]
For a hedge of a net position whose hedged risk affects different line items in the statement of profit or
loss and other comprehensive income, any hedging gains or losses in that statement are presented in a
separate line from those affected by the hedged items.
Accounting for qualifying hedging relationships
There are three types of hedging relationships:
Fair value hedge: a hedge of the exposure to changes in fair value of a recognised asset or liability or an
unrecognised firm commitment, or a component of any such item, that is attributable to a particular risk
and could affect profit or loss (or OCI in the case of an equity instrument designated as at FVTOCI). [IFRS
9 paragraphs 6.5.2(a) and 6.5.3]
For a fair value hedge, the gain or loss on the hedging instrument is recognised in profit or loss (or OCI, if
hedging an equity instrument at FVTOCI and the hedging gain or loss on the hedged item adjusts the
carrying amount of the hedged item and is recognised in profit or loss. However, if the hedged item is an
equity instrument at FVTOCI, those amounts remain in OCI. When a hedged item is an unrecognised firm
commitment the cumulative hedging gain or loss is recognised as an asset or a liability with a
corresponding gain or loss recognised in profit or loss.
If the hedged item is a debt instrument measured at amortised cost or FVTOCI any hedge adjustment is
amortised to profit or loss based on a recalculated effective interest rate. Amortisation may begin as soon
as an adjustment exists and shall begin no later than when the hedged item ceases to be adjusted for
hedging gains and losses.
Cash flow hedge: a hedge of the exposure to variability in cash flows that is attributable to a particular
risk associated with all, or a component of, a recognised asset or liability (such as all or some future
interest payments on variable-rate debt) or a highly probable forecast transaction, and could affect profit
or loss.
For a cash flow hedge the cash flow hedge reserve in equity is adjusted to the lower of the following (in
absolute amounts):
the cumulative gain or loss on the hedging instrument from inception of the hedge; and
the cumulative change in fair value of the hedged item from inception of the hedge.
The portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is
recognised in OCI and any remaining gain or loss is hedge ineffectiveness that is recognised in profit or
loss.
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If a hedged forecast transaction subsequently results in the recognition of a non-financial item or
becomes a firm commitment for which fair value hedge accounting is applied, the amount that has been
accumulated in the cash flow hedge reserve is removed and included directly in the initial cost or other
carrying amount of the asset or the liability. In other cases the amount that has been accumulated in the
cash flow hedge reserve is reclassified to profit or loss in the same period(s) as the hedged cash flows
affect profit or loss.
When an entity discontinues hedge accounting for a cash flow hedge, if the hedged future cash flows are
still expected to occur, the amount that has been accumulated in the cash flow hedge reserve remains
there until the future cash flows occur; if the hedged future cash flows are no longer expected to occur,
that amount is immediately reclassified to profit or loss.
A hedge of the foreign currency risk of a firm commitment may be accounted for as a fair value hedge or a
cash flow hedge.
Hedge of a net investment in a foreign operation (as defined in IAS 21), including a hedge of a
monetary item that is accounted for as part of the net investment, is accounted for similarly to cash flow
hedges:
the portion of the gain or loss on the hedging instrument that is determined to be an effective
hedge is recognised in OCI; and
the ineffective portion is recognised in profit or loss.
The cumulative gain or loss on the hedging instrument relating to the effective portion of the hedge is
reclassified to profit or loss on the disposal or partial disposal of the foreign operation.
Hedge effectiveness requirements
In order to qualify for hedge accounting, the hedge relationship must meet the following effectiveness
criteria at the beginning of each hedged period:
there is an economic relationship between the hedged item and the hedging instrument;
the effect of credit risk does not dominate the value changes that result from that economic
relationship; and
the hedge ratio of the hedging relationship is the same as that actually used in the economic
hedge
Rebalancing and discontinuation
If a hedging relationship ceases to meet the hedge effectiveness requirement relating to the hedge ratio
but the risk management objective for that designated hedging relationship remains the same, an entity
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adjusts the hedge ratio of the hedging relationship (i.e. rebalances the hedge) so that it meets the
qualifying criteria again.
An entity discontinues hedge accounting prospectively only when the hedging relationship (or a part of a
hedging relationship) ceases to meet the qualifying criteria (after any rebalancing). This includes
instances when the hedging instrument expires or is sold, terminated or exercised. Discontinuing hedge
accounting can either affect a hedging relationship in its entirety or only a part of it (in which case hedge
accounting continues for the remainder of the hedging relationship).
Time value of options
When an entity separates the intrinsic value and time value of an option contract and designates as the
hedging instrument only the change in intrinsic value of the option, it recognises some or all of the change
in the time value in OCI which is later removed or reclassified from equity as a single amount or on an
amortised basis (depending on the nature of the hedged item) and ultimately recognised in profit or loss.
This reduces profit or loss volatility compared to recognising the change in value of time value directly in
profit or loss.
Forward points and foreign currency basis spreads
When an entity separates the forward points and the spot element of a forward contract and designates
as the hedging instrument only the change in the value of the spot element, or when an entity excludes
the foreign currency basis spread from a hedge the entity may recognise the change in value of the
excluded portion in OCI to be later removed or reclassified from equity as a single amount or on an
amortised basis (depending on the nature of the hedged item) and ultimately recognised in profit or loss.
This reduces profit or loss volatility compared to recognising the change in value of forward points or
currency basis spreads directly in profit or loss.
Credit exposures designated at FVTPL
If an entity uses a credit derivative measured at FVTPL to manage the credit risk of a financial instrument
(credit exposure) it may designate all or a proportion of that financial instrument as measured at FVTPL if:
the name of the credit exposure matches the reference entity of the credit derivative (‘name
matching’); and
the seniority of the financial instrument matches that of the instruments that can be delivered in
accordance with the credit derivative.
An entity may make this designation irrespective of whether the financial instrument that is managed for
credit risk is within the scope of IFRS 9 (for example, it can apply to loan commitments that are outside
the scope of IFRS 9). The entity may designate that financial instrument at, or subsequent to, initial
recognition, or while it is unrecognised and shall document the designation concurrently.
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If designated after initial recognition, any difference in the previous carrying amount and fair value is
recognised immediately in profit or loss
An entity discontinues measuring the financial instrument that gave rise to the credit risk at FVTPL if the
qualifying criteria are no longer met and the instrument is not otherwise required to be measured at
FVTPL. The fair value at discontinuation becomes its new carrying amount.
Impairment
The impairment model in IFRS 9 is based on the premise of providing for expected losses.
Scope of Impairment model
IFRS 9 requires that the same impairment model apply to all of the following:
Financial assets measured at amortised cost;
Financial assets mandatorily measured at FVTOCI;
Loan commitments when there is a present obligation to extend credit (except where these are
measured at FVTPL);
o
Financial guarantee contracts to which IFRS 9 is applied (except those measured at
FVTPL);
o
Lease receivables within the scope of IAS 17 Leases; and
o
Contract assets within the scope of IFRS 15 Revenue from Contracts with Customers
(i.e. rights to consideration following transfer of goods or services).
General approach
With the exception of purchased or originated credit impaired financial assets (see below), expected
credit losses are required to be measured through a loss allowance at an amount equal to:
the 12-month expected credit losses (expected credit losses that result from those default events
on the financial instrument that are possible within 12 months after the reporting date); or
full lifetime expected credit losses (expected credit losses that result from all possible default
events over the life of the financial instrument).
A loss allowance for full lifetime expected credit losses is required for a financial instrument if the credit
risk of that financial instrument has increased significantly since initial recognition, as well as to contract
assets or trade receivables that do not constitute a financing transaction in accordance with IFRS 15.
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Additionally, entities can elect an accounting policy to recognise full lifetime expected losses for all
contract assets and/or all trade receivables that do constitute a financing transaction in accordance with
IFRS 15. The same election is also separately permitted for lease receivables.
For all other financial instruments, expected credit losses are measured at an amount equal to the 12month expected credit losses.
Significant increase in credit risk
With the exception of purchased or originated credit-impaired financial assets (see below), the loss
allowance for financial instruments is measured at an amount equal to lifetime expected losses if the
credit risk of a financial instrument has increased significantly since initial recognition, unless the credit
risk of the financial instrument is low at the reporting date in which case it can be assumed that credit risk
on the financial instrument has not increased significantly since initial recognition.
The Standard considers credit risk low if there is a low risk of default, the borrower has a strong capacity
to meet its contractual cash flow obligations in the near term and adverse changes in economic and
business conditions in the longer term may, but will not necessarily, reduce the ability of the borrower to
fulfil its contractual cash flow obligations. The Standard suggests that ‘investment grade’ rating might be
an indicator for a low credit risk.
The assessment of whether there has been a significant increase in credit risk is based on an increase in
the probability of a default occurring since initial recognition. Under the Standard, an entity may use
various approaches to assess whether credit risk has increased significantly (provided that the approach
is consistent with the requirements). An approach can be consistent with the requirements even if it does
not include an explicit probability of default occurring as an input. The application guidance provides a list
of factors that may assist an entity in making the assessment. Also, whilst in principle the assessment of
whether a loss allowance should be based on lifetime expected credit losses is to be made on an
individual basis, some factors or indicators might not be available at an instrument level. In this case, the
entity should perform the assessment on appropriate groups or portions of a portfolio of financial
instruments.
The requirements also contain a rebuttable presumption that the credit risk has increased significantly
when contractual payments are more than 30 days past due. IFRS 9 also requires that (other than for
purchased or originated credit impaired financial instruments) if a significant increase in credit risk that
had taken place since initial recognition and has reversed by a subsequent reporting period (i.e.,
cumulatively credit risk is not significantly higher than at initial recognition) then the expected credit losses
on the financial instrument revert to being measured based on an amount equal to the 12-month expected
credit losses.
Purchased or originated credit-impaired financial assets
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Purchased or originated credit-impaired financial assets are treated differently because the asset is creditimpaired at initial recognition. For these assets, an entity would recognise changes in lifetime expected
losses since initial recognition as a loss allowance with any changes recognised in profit or loss. Under
the requirements, any favourable changes for such assets are an impairment gain even if the resulting
expected cash flows of a financial asset exceed the estimated cash flows on initial recognition.
Credit-impaired financial asset
Under IFRS 9 a financial asset is credit-impaired when one or more events that have occurred and have a
significant impact on the expected future cash flows of the financial asset. It includes observable data that
has come to the attention of the holder of a financial asset about the following events:
significant financial difficulty of the issuer or borrower;
a breach of contract, such as a default or past-due event;
the lenders for economic or contractual reasons relating to the borrower’s financial difficulty
granted the borrower a concession that would not otherwise be considered;
it becoming probable that the borrower will enter bankruptcy or other financial reorganisation;
the disappearance of an active market for the financial asset because of financial difficulties; or
the purchase or origination of a financial asset at a deep discount that reflects incurred credit
losses.
Basis for estimating expected credit losses
Any measurement of expected credit losses under IFRS 9 shall reflect an unbiased and probabilityweighted amount that is determined by evaluating the range of possible outcomes as well as
incorporating the time value of money. Also, the entity should consider reasonable and supportable
information about past events, current conditions and reasonable and supportable forecasts of future
economic conditions when measuring expected credit losses.
The Standard defines expected credit losses as the weighted average of credit losses with the respective
risks of a default occurring as the weightings. [IFRS 9 Appendix A] Whilst an entity does not need to
consider every possible scenario, it must consider the risk or probability that a credit loss occurs by
considering the possibility that a credit loss occurs and the possibility that no credit loss occurs, even if
the probability of a credit loss occurring is low.
In particular, for lifetime expected losses, an entity is required to estimate the risk of a default occurring on
the financial instrument during its expected life. 12-month expected credit losses represent the lifetime
cash shortfalls that will result if a default occurs in the 12 months after the reporting date, weighted by the
probability of that default occurring.
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An entity is required to incorporate reasonable and supportable information (i.e., that which is reasonably
available at the reporting date). Information is reasonably available if obtaining it does not involve undue
cost or effort (with information available for financial reporting purposes qualifying as such).
For applying the model to a loan commitment an entity will consider the risk of a default occurring under
the loan to be advanced, whilst application of the model for financial guarantee contracts an entity
considers the risk of a default occurring of the specified debtor.
An entity may use practical expedients when estimating expected credit losses if they are consistent with
the principles in the Standard (for example, expected credit losses on trade receivables may be
calculated using a provision matrix where a fixed provision rate applies depending on the number of days
that a trade receivable is outstanding).
To reflect time value, expected losses should be discounted to the reporting date using the effective
interest rate of the asset (or an approximation thereof) that was determined at initial recognition. A “creditadjusted effective interest” rate should be used for expected credit losses of purchased or originated
credit-impaired financial assets. In contrast to the “effective interest rate” (calculated using expected cash
flows that ignore expected credit losses), the credit-adjusted effective interest rate reflects expected credit
losses of the financial asset.
Expected credit losses of undrawn loan commitments should be discounted by using the effective interest
rate (or an approximation thereof) that will be applied when recognising the financial asset resulting from
the commitment. If the effective interest rate of a loan commitment cannot be determined, the discount
rate should reflect the current market assessment of time value of money and the risks that are specific to
the cash flows but only if, and to the extent that, such risks are not taken into account by adjusting the
discount rate. This approach shall also be used to discount expected credit losses of financial guarantee
contracts.
Presentation
Whilst interest revenue is always required to be presented as a separate line item, it is calculated
differently according to the status of the asset with regard to credit impairment. In the case of a financial
asset that is not a purchased or originated credit-impaired financial asset and for which there is no
objective evidence of impairment at the reporting date, interest revenue is calculated by applying the
effective interest rate method to the gross carrying amount.
In the case of a financial asset that is not a purchased or originated credit-impaired financial asset but
subsequently has become credit-impaired, interest revenue is calculated by applying the effective interest
rate to the amortised cost balance, which comprises the gross carrying amount adjusted for any loss
allowance.
In the case of purchased or originated credit-impaired financial assets, interest revenue is always
recognised by applying the credit-adjusted effective interest rate to the amortised cost carrying amount.
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[IFRS 9 paragraph 5.4.1] The credit-adjusted effective interest rate is the rate that discounts the cash
flows expected on initial recognition (explicitly taking account of expected credit losses as well as
contractual terms of the instrument) back to the amortised cost at initial recognition.
Consequential amendments of IFRS 9 to IAS 1 require that impairment losses, including reversals of
impairment losses and impairment gains (in the case of purchased or originated credit-impaired financial
assets), are presented in a separate line item in the statement of profit or loss and other comprehensive
income.
Disclosures
IFRS 9 amends some of the requirements of IFRS 7 Financial Instruments: Disclosures including adding
disclosures about investments in equity instruments designated as at FVTOCI, disclosures on risk
management activities and hedge accounting and disclosures on credit risk management and impairment.
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IFRS 10 Consolidated Financial Statements
Overview
IFRS 10 Consolidated Financial Statements outlines the requirements for the preparation and
presentation of consolidated financial statements, requiring entities to consolidate entities it controls.
Control requires exposure or rights to variable returns and the ability to affect those returns through power
over an investee.
The Standard:
requires a parent entity (an entity that controls one or more other entities) to present consolidated
financial statements
defines the principle of control, and establishes control as the basis for consolidation
set out how to apply the principle of control to identify whether an investor controls an investee
and therefore must consolidate the investee
sets out the accounting requirements for the preparation of consolidated financial statements
defines an investment entity and sets out an exception to consolidating particular subsidiaries of
an investment entity.
Key definitions
Consolidated financial statements
The financial statements of a group in which the assets, liabilities, equity, income, expenses and cash
flows of the parent and its subsidiaries are presented as those of a single economic entity
Control of an investee
An investor controls an investee when the investor is exposed, or has rights, to variable returns from its
involvement with the investee and has the ability to affect those returns through its power over the
investee
Investment entity
An entity that:
1. obtains funds from one or more investors for the purpose of providing those investor(s) with
investment management services
2. commits to its investor(s) that its business purpose is to invest funds solely for returns from
capital appreciation, investment income, or both, and
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3. measures and evaluates the performance of substantially all of its investments on a fair value
basis.
Parent
An entity that controls one or more entities
Power
Existing rights that give the current ability to direct the relevant activities
Protective rights
Rights designed to protect the interest of the party holding those rights without giving that party power
over the entity to which those rights relate
Relevant activities
Activities of the investee that significantly affect the investee's returns
Control
An investor determines whether it is a parent by assessing whether it controls one or more investees. An
investor considers all relevant facts and circumstances when assessing whether it controls an investee.
An investor controls an investee when it is exposed, or has rights, to variable returns from its involvement
with the investee and has the ability to affect those returns through its power over the investee.
An investor controls an investee if and only if the investor has all of the following elements:
power over the investee, i.e. the investor has existing rights that give it the ability to direct the
relevant activities (the activities that significantly affect the investee's returns)
exposure, or rights, to variable returns from its involvement with the investee
the ability to use its power over the investee to affect the amount of the investor's returns.
Power arises from rights. Such rights can be straightforward (e.g. through voting rights) or be complex
(e.g. embedded in contractual arrangements). An investor that holds only protective rights cannot have
power over an investee and so cannot control an investee.
An investor must be exposed, or have rights, to variable returns from its involvement with an investee to
control the investee. Such returns must have the potential to vary as a result of the investee's
performance and can be positive, negative, or both.
A parent must not only have power over an investee and exposure or rights to variable returns from its
involvement with the investee, a parent must also have the ability to use its power over the investee to
affect its returns from its involvement with the investee.
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When assessing whether an investor controls an investee an investor with decision-making rights
determines whether it acts as principal or as an agent of other parties. A number of factors are considered
in making this assessment. For instance, the remuneration of the decision-maker is considered in
determining whether it is an agent.
Accounting requirements
Preparation of consolidated financial statements
A parent prepares consolidated financial statements using uniform accounting policies for like
transactions and other events in similar circumstances.
However, a parent need not present consolidated financial statements if it meets all of the following
conditions:
it is a wholly-owned subsidiary or is a partially-owned subsidiary of another entity and its other
owners, including those not otherwise entitled to vote, have been informed about, and do not
object to, the parent not presenting consolidated financial statements
its debt or equity instruments are not traded in a public market (a domestic or foreign stock
exchange or an over-the-counter market, including local and regional markets)
it did not file, nor is it in the process of filing, its financial statements with a securities commission
or other regulatory organisation for the purpose of issuing any class of instruments in a public
market, and
its ultimate or any intermediate parent of the parent produces financial statements available for
public use that comply with IFRSs, in which subsidiaries are consolidated or are measured at fair
value through profit or loss in accordance with IFRS 10.
Investment entities are prohibited from consolidating particular subsidiaries (see further information
below).
Furthermore, post-employment benefit plans or other long-term employee benefit plans to which IAS 19
Employee Benefits applies are not required to apply the requirements of IFRS 10.
Consolidation procedures
Consolidated financial statements:
combine like items of assets, liabilities, equity, income, expenses and cash flows of the parent
with those of its subsidiaries
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offset (eliminate) the carrying amount of the parent's investment in each subsidiary and the
parent's portion of equity of each subsidiary (IFRS 3 Business Combinations explains how to
account for any related goodwill)
eliminate in full intragroup assets and liabilities, equity, income, expenses and cash flows relating
to transactions between entities of the group (profits or losses resulting from intragroup
transactions that are recognised in assets, such as inventory and fixed assets, are eliminated in
full).
A reporting entity includes the income and expenses of a subsidiary in the consolidated financial
statements from the date it gains control until the date when the reporting entity ceases to control the
subsidiary. Income and expenses of the subsidiary are based on the amounts of the assets and liabilities
recognised in the consolidated financial statements at the acquisition date.
The parent and subsidiaries are required to have the same reporting dates, or consolidation based on
additional financial information prepared by subsidiary, unless impracticable. Where impracticable, the
most recent financial statements of the subsidiary are used, adjusted for the effects of significant
transactions or events between the reporting dates of the subsidiary and consolidated financial
statements. The difference between the date of the subsidiary's financial statements and that of the
consolidated financial statements shall be no more than three months.
Non-controlling interests (NCIs)
A parent presents non-controlling interests in its consolidated statement of financial position within equity,
separately from the equity of the owners of the parent.
A reporting entity attributes the profit or loss and each component of other comprehensive income to the
owners of the parent and to the non-controlling interests. The proportion allocated to the parent and noncontrolling interests are determined on the basis of present ownership interests.
The reporting entity also attributes total comprehensive income to the owners of the parent and to the
non-controlling interests even if this results in the non-controlling interests having a deficit balance.
Changes in ownership interests
Changes in a parent's ownership interest in a subsidiary that do not result in the parent losing control of
the subsidiary are equity transactions (i.e. transactions with owners in their capacity as owners). When
the proportion of the equity held by non-controlling interests changes, the carrying amounts of the
controlling and non-controlling interests area adjusted to reflect the changes in their relative interests in
the subsidiary. Any difference between the amount by which the non-controlling interests are adjusted and
the fair value of the consideration paid or received is recognised directly in equity and attributed to the
owners of the parent.
If a parent loses control of a subsidiary, the parent :
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derecognises the assets and liabilities of the former subsidiary from the consolidated statement of
financial position
recognises any investment retained in the former subsidiary when control is lost and
subsequently accounts for it and for any amounts owed by or to the former subsidiary in
accordance with relevant IFRSs. That retained interest is remeasured and the remeasured value
is regarded as the fair value on initial recognition of a financial asset in accordance with IFRS 9
Financial Instruments or, when appropriate, the cost on initial recognition of an investment in an
associate or joint venture
recognises the gain or loss associated with the loss of control attributable to the former controlling
interest.
If a parent loses control of a subsidiary that does not contain a business in a transaction with an associate
or a joint venture gains or losses resulting from those transactions are recognised in the parent's profit or
loss only to the extent of the unrelated investors' interests in that associate or joint venture.
Investment entities consolidation exemption
IFRS 10 contains special accounting requirements for investment entities. Where an entity meets the
definition of an 'investment entity', it does not consolidate its subsidiaries, or apply IFRS 3 Business
Combinations when it obtains control of another entity.
An entity is required to consider all facts and circumstances when assessing whether it is an investment
entity, including its purpose and design. IFRS 10 provides that an investment entity should have the
following typical characteristics:
it has more than one investment
it has more than one investor
it has investors that are not related parties of the entity
it has ownership interests in the form of equity or similar interests.
The absence of any of these typical characteristics does not necessarily disqualify an entity from being
classified as an investment entity.
An investment entity is required to measure an investment in a subsidiary at fair value through profit or
loss in accordance with IFRS 9 Financial Instruments or IAS 39 Financial Instruments: Recognition and
Measurement.
However, an investment entity is still required to consolidate a subsidiary where that subsidiary provides
services that relate to the investment entity’s investment activities.*
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* Investment Entities: Applying the Consolidation Exception (Amendments to IFRS 10, IFRS 12 and IAS
28) clarifies, effective 1 January 2016, that this relates to a subsidiary that is not itself an investment entity
and whose main purpose and activities are providing services that relate to the investment entity's
investment activities.
Because an investment entity is not required to consolidate its subsidiaries, intragroup related party
transactions and outstanding balances are not eliminated.
Special requirements apply where an entity becomes, or ceases to be, an investment entity.
The exemption from consolidation only applies to the investment entity itself. Accordingly, a parent of an
investment entity is required to consolidate all entities that it controls, including those controlled through
an investment entity subsidiary, unless the parent itself is an investment entity.
Disclosure
There are no disclosures specified in IFRS 10. Instead, IFRS 12 Disclosure of Interests in Other Entities
outlines the disclosures required.
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IFRS 11 Joint Arrangements
Overview
IFRS 11 Joint Arrangements outlines the accounting by entities that jointly control an arrangement. Joint
control involves the contractually agreed sharing of control and arrangements subject to joint control are
classified as either a joint venture (representing a share of net assets and equity accounted) or a joint
operation (representing rights to assets and obligations for liabilities, accounted for accordingly).
Key definitions
Joint operation
A joint arrangement whereby the parties that have joint control of the arrangement have rights to the
assets, and obligations for the liabilities, relating to the arrangement
Joint venture
A joint arrangement whereby the parties that have joint control of the arrangement have rights to the net
assets of the arrangement
Joint venturer
A party to a joint venture that has joint control of that joint venture
Party to a joint arrangement
An entity that participates in a joint arrangement, regardless of whether that entity has joint control of the
arrangement
Separate vehicle
A separately identifiable financial structure, including separate legal entities or entities recognised by
statute, regardless of whether those entities have a legal personality
Joint arrangements
A joint arrangement is an arrangement of which two or more parties have joint control.
A joint arrangement has the following characteristics:
the parties are bound by a contractual arrangement, and
the contractual arrangement gives two or more of those parties joint control of the arrangement.
A joint arrangement is either a joint operation or a joint venture.
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Joint control
Joint control is the contractually agreed sharing of control of an arrangement, which exists only when
decisions about the relevant activities require the unanimous consent of the parties sharing control.
Before assessing whether an entity has joint control over an arrangement, an entity first assesses
whether the parties, or a group of the parties, control the arrangement (in accordance with the definition of
control in IFRS 10 Consolidated Financial Statements).
After concluding that all the parties, or a group of the parties, control the arrangement collectively, an
entity shall assess whether it has joint control of the arrangement. Joint control exists only when decisions
about the relevant activities require the unanimous consent of the parties that collectively control the
arrangement.
The requirement for unanimous consent means that any party with joint control of the arrangement can
prevent any of the other parties, or a group of the parties, from making unilateral decisions (about the
relevant activities) without its consent.
Types of joint arrangements
Joint arrangements are either joint operations or joint ventures:
A joint operation is a joint arrangement whereby the parties that have joint control of the
arrangement have rights to the assets, and obligations for the liabilities, relating to the
arrangement. Those parties are called joint operators.
A joint venture is a joint arrangement whereby the parties that have joint control of the
arrangement have rights to the net assets of the arrangement. Those parties are called joint
venturers.
Classifying joint arrangements
The classification of a joint arrangement as a joint operation or a joint venture depends upon the rights
and obligations of the parties to the arrangement. An entity determines the type of joint arrangement in
which it is involved by considering the structure and form of the arrangement, the terms agreed by the
parties in the contractual arrangement and other facts and circumstances.
Regardless of the purpose, structure or form of the arrangement, the classification of joint arrangements
depends upon the parties' rights and obligations arising from the arrangement.
A joint arrangement in which the assets and liabilities relating to the arrangement are held in a separate
vehicle can be either a joint venture or a joint operation.
A joint arrangement that is not structured through a separate vehicle is a joint operation. In such cases,
the contractual arrangement establishes the parties' rights to the assets, and obligations for the liabilities,
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relating to the arrangement, and the parties' rights to the corresponding revenues and obligations for the
corresponding expenses.
Financial statements of parties to a joint arrangement
Joint operations
A joint operator recognises in relation to its interest in a joint operation:
its assets, including its share of any assets held jointly;
its liabilities, including its share of any liabilities incurred jointly;
its revenue from the sale of its share of the output of the joint operation;
its share of the revenue from the sale of the output by the joint operation; and
its expenses, including its share of any expenses incurred jointly.
A joint operator accounts for the assets, liabilities, revenues and expenses relating to its involvement in a
joint operation in accordance with the relevant IFRSs.
The acquirer of an interest in a joint operation in which the activity constitutes a business, as defined in
IFRS 3 Business Combinations, is required to apply all of the principles on business combinations
accounting in IFRS 3 and other IFRSs with the exception of those principles that conflict with the
guidance in IFRS 11. These requirements apply both to the initial acquisition of an interest in a joint
operation, and the acquisition of an additional interest in a joint operation (in the latter case, previously
held interests are not remeasured).
Note: The requirements above were introduced by Accounting for Acquisitions of Interests in Joint
Operations, which applies to annual periods beginning on or after 1 January 2016 on a prospective basis
to acquisitions of interests in joint operations occurring from the beginning of the first period in which the
amendments are applied.
A party that participates in, but does not have joint control of, a joint operation shall also account for its
interest in the arrangement in accordance with the above if that party has rights to the assets, and
obligations for the liabilities, relating to the joint operation.
Joint ventures
A joint venturer recognises its interest in a joint venture as an investment and shall account for that
investment using the equity method in accordance with IAS 28 Investments in Associates and Joint
Ventures unless the entity is exempted from applying the equity method as specified in that standard.
A party that participates in, but does not have joint control of, a joint venture accounts for its interest in the
arrangement in accordance with IFRS 9 Financial Instruments unless it has significant influence over the
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joint venture, in which case it accounts for it in accordance with IAS 28 (as amended in 2011).
[IFRS 11:25]
Separate Financial Statements
The accounting for joint arrangements in an entity's separate financial statements depends on the
involvement of the entity in that joint arrangement and the type of the joint arrangement:
If the entity is a joint operator or joint venturer it shall account for its interest in
o
a joint operation in accordance with paragraphs 20-22;
o
a joint venture in accordance with paragraph 10 of IAS 27 Separate Financial
Statements. [IFRS 11:26]
If the entity is a party that participates in, but does not have joint control of, a joint arrangement
shall account for its interest in:
o
a joint operation in accordance with paragraphs 23;
o
a joint venture in accordance with IFRS 9, unless the entity has significant influence over
the joint venture, in which case it shall apply paragraph 10 of IAS 27 (as amended in
2011). [IFRS 11:27]
Disclosure
There are no disclosures specified in IFRS 11. Instead, IFRS 12 Disclosure of Interests in Other Entities
outlines the disclosures required.
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IFRS 12 Disclosure of Interests in Other Entities
Overview
IFRS 12 Disclosure of Interests in Other Entities is a consolidated disclosure standard requiring a wide
range of disclosures about an entity's interests in subsidiaries, joint arrangements, associates and
unconsolidated 'structured entities'. Disclosures are presented as a series of objectives, with detailed
guidance on satisfying those objectives.
Objective and scope
The objective of IFRS 12 is to require the disclosure of information that enables users of financial
statements to evaluate:
the nature of, and risks associated with, its interests in other entities
the effects of those interests on its financial position, financial performance and cash flows.
Where the disclosures required by IFRS 12, together with the disclosures required by other IFRSs, do not
meet the above objective, an entity is required to disclose whatever additional information is necessary to
meet the objective.
IFRS 12 is required to be applied by an entity that has an interest in any of the following: [IFRS 12:5]
subsidiaries
joint arrangements (joint operations or joint ventures)
associates
unconsolidated structured entities
IFRS 12 does not apply to certain employee benefit plans, separate financial statements to which IAS 27
Separate Financial Statements applies (except in relation to unconsolidated structured entities and
investment entities in some cases), certain interests in joint ventures held by an entity that does not share
in joint control, and the majority of interests in another entity accounted for in accordance with IFRS 9
Financial Instruments.
An investment entity that prepares financial statements in which all of its subsidiaries are measured at fair
value through profit or loss presents the disclosures relating to investment entities required by IFRS 12.
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Key definitions
Interest in another entity
Refers to contractual and non-contractual involvement that exposes an entity to variability of returns from
the performance of the other entity. An interest in another entity can be evidenced by, but is not limited to,
the holding of equity or debt instruments as well as other forms of involvement such as the provision of
funding, liquidity support, credit enhancement and guarantees. It includes the means by which an entity
has control or joint control of, or significant influence over, another entity. An entity does not necessarily
have an interest in another entity solely because of a typical customer supplier relationship.
Structured entity
An entity that has been designed so that voting or similar rights are not the dominant factor in deciding
who controls the entity, such as when any voting rights relate to administrative tasks only and the relevant
activities are directed by means of contractual arrangements.
Disclosures required
Significant judgements and assumptions
An entity discloses information about significant judgements and assumptions it has made (and changes
in those judgements and assumptions) in determining:
that it controls another entity
that it has joint control of an arrangement or significant influence over another entity
the type of joint arrangement (i.e. joint operation or joint venture) when the arrangement has been
structured through a separate vehicle.
Interests in subsidiaries
An entity shall disclose information that enables users of its consolidated financial statements to:
understand the composition of the group
understand the interest that non-controlling interests have in the group's activities and cash flows
evaluate the nature and extent of significant restrictions on its ability to access or use assets, and
settle liabilities, of the group
evaluate the nature of, and changes in, the risks associated with its interests in consolidated
structured entities
evaluate the consequences of changes in its ownership interest in a subsidiary that do not result
in a loss of control
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evaluate the consequences of losing control of a subsidiary during the reporting period.
Interests in unconsolidated subsidiaries
In accordance with IFRS 10 Consolidated Financial Statements, an investment entity is required to apply
the exception to consolidation and instead account for its investment in a subsidiary at fair value through
profit or loss.
Where an entity is an investment entity, IFRS 12 requires additional disclosure, including:
the fact the entity is an investment entity
information about significant judgements and assumptions it has made in determining that it is an
investment entity, and specifically where the entity does not have one or more of the 'typical
characteristics' of an investment entity
details of subsidiaries that have not been consolidated (name, place of business, ownership
interests held)
details of the relationship and certain transactions between the investment entity and the
subsidiary (e.g. restrictions on transfer of funds, commitments, support arrangements, contractual
arrangements)
information where an entity becomes, or ceases to be, an investment entity [IFRS 12:9B]
An entity making these disclosures are not required to provide various other disclosures required by IFRS
12.
Interests in joint arrangements and associates
An entity shall disclose information that enables users of its financial statements to evaluate: [IFRS 12:20]
the nature, extent and financial effects of its interests in joint arrangements and associates,
including the nature and effects of its contractual relationship with the other investors with joint
control of, or significant influence over, joint arrangements and associates
the nature of, and changes in, the risks associated with its interests in joint ventures and
associates.
Interests in unconsolidated structured entities
An entity shall disclose information that enables users of its financial statements to: [IFRS 12:24]
understand the nature and extent of its interests in unconsolidated structured entities
evaluate the nature of, and changes in, the risks associated with its interests in unconsolidated
structured entities.
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IFRS 13 Fair Value Measurement
Overview
IFRS 13 Fair Value Measurement applies to IFRSs that require or permit fair value measurements or
disclosures and provides a single IFRS framework for measuring fair value and requires disclosures
about fair value measurement. The Standard defines fair value on the basis of an 'exit price' notion and
uses a 'fair value hierarchy', which results in a market-based, rather than entity-specific, measurement.
IFRS 13:
defines fair value
sets out in a single IFRS a framework for measuring fair value
requires disclosures about fair value measurements.
IFRS 13 applies when another IFRS requires or permits fair value measurements or disclosures about fair
value measurements (and measurements, such as fair value less costs to sell, based on fair value or
disclosures about those measurements), except for:
share-based payment transactions within the scope of IFRS 2 Share-based Payment
leasing transactions within the scope of IAS 17 Leases
measurements that have some similarities to fair value but that are not fair value, such as net
realisable value in IAS 2 Inventories or value in use in IAS 36 Impairment of Assets.
Key definitions
Fair value
The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date
Active market
A market in which transactions for the asset or liability take place with sufficient frequency and volume to
provide pricing information on an ongoing basis
Exit price
The price that would be received to sell an asset or paid to transfer a liability
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Highest and best use
The use of a non-financial asset by market participants that would maximise the value of the asset or the
group of assets and liabilities (e.g. a business) within which the asset would be used
Most advantageous market
The market that maximises the amount that would be received to sell the asset or minimises the amount
that would be paid to transfer the liability, after taking into account transaction costs and transport costs
Principal market
The market with the greatest volume and level of activity for the asset or liability
Fair value hierarchy
IFRS 13 seeks to increase consistency and comparability in fair value measurements and related
disclosures through a 'fair value hierarchy'. The hierarchy categorises the inputs used in valuation
techniques into three levels. The hierarchy gives the highest priority to (unadjusted) quoted prices in
active markets for identical assets or liabilities and the lowest priority to unobservable inputs.
If the inputs used to measure fair value are categorised into different levels of the fair value hierarchy, the
fair value measurement is categorised in its entirety in the level of the lowest level input that is significant
to the entire measurement (based on the application of judgement).
Level 1 inputs
Level 1 inputs are quoted prices in active markets for identical assets or liabilities that the entity can
access at the measurement date.
A quoted market price in an active market provides the most reliable evidence of fair value and is used
without adjustment to measure fair value whenever available, with limited exceptions.
If an entity holds a position in a single asset or liability and the asset or liability is traded in an active
market, the fair value of the asset or liability is measured within Level 1 as the product of the quoted price
for the individual asset or liability and the quantity held by the entity, even if the market's normal daily
trading volume is not sufficient to absorb the quantity held and placing orders to sell the position in a
single transaction might affect the quoted price.
Level 2 inputs
Level 2 inputs are inputs other than quoted market prices included within Level 1 that are observable for
the asset or liability, either directly or indirectly.
Level 2 inputs include:
quoted prices for similar assets or liabilities in active markets
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quoted prices for identical or similar assets or liabilities in markets that are not active
inputs other than quoted prices that are observable for the asset or liability, for example
o
interest rates and yield curves observable at commonly quoted intervals
o
implied volatilities
o
credit spreads
inputs that are derived principally from or corroborated by observable market data by correlation
or other means ('market-corroborated inputs').
Level 3 inputs
Level 3 inputs inputs are unobservable inputs for the asset or liability. [IFRS 13:86]
Unobservable inputs are used to measure fair value to the extent that relevant observable inputs are not
available, thereby allowing for situations in which there is little, if any, market activity for the asset or
liability at the measurement date. An entity develops unobservable inputs using the best information
available in the circumstances, which might include the entity's own data, taking into account all
information about market participant assumptions that is reasonably available. [IFRS 13:87-89]
Measurement of fair value
The objective of a fair value measurement is to estimate the price at which an orderly transaction to sell
the asset or to transfer the liability would take place between market participants at the measurement
date under current market conditions. A fair value measurement requires an entity to determine all of the
following:
the particular asset or liability that is the subject of the measurement (consistently with its unit of
account)
for a non-financial asset, the valuation premise that is appropriate for the measurement
(consistently with its highest and best use)
the principal (or most advantageous) market for the asset or liability
the valuation technique(s) appropriate for the measurement, considering the availability of data
with which to develop inputs that represent the assumptions that market participants would use
when pricing the asset or liability and the level of the fair value hierarchy within which the inputs
are categorised.
Guidance on measurement
IFRS 13 provides the guidance on the measurement of fair value, including the following:
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An entity takes into account the characteristics of the asset or liability being measured that a
market participant would take into account when pricing the asset or liability at measurement date
(e.g. the condition and location of the asset and any restrictions on the sale and use of the asset)
Fair value measurement assumes an orderly transaction between market participants at the
measurement date under current market conditions
Fair value measurement assumes a transaction taking place in the principal market for the asset
or liability, or in the absence of a principal market, the most advantageous market for the asset or
liability
A fair value measurement of a non-financial asset takes into account its highest and best use
A fair value measurement of a financial or non-financial liability or an entity's own equity
instruments assumes it is transferred to a market participant at the measurement date, without
settlement, extinguishment, or cancellation at the measurement date
The fair value of a liability reflects non-performance risk (the risk the entity will not fulfil an
obligation), including an entity's own credit risk and assuming the same non-performance risk
before and after the transfer of the liability
An optional exception applies for certain financial assets and financial liabilities with offsetting
positions in market risks or counterparty credit risk, provided conditions are met (additional
disclosure is required).
Valuation techniques
An entity uses valuation techniques appropriate in the circumstances and for which sufficient data are
available to measure fair value, maximising the use of relevant observable inputs and minimising the use
of unobservable inputs.
The objective of using a valuation technique is to estimate the price at which an orderly transaction to sell
the asset or to transfer the liability would take place between market participants and the measurement
date under current market conditions. Three widely used valuation techniques are:
market approach – uses prices and other relevant information generated by market transactions
involving identical or comparable (similar) assets, liabilities, or a group of assets and liabilities
(e.g. a business)
cost approach – reflects the amount that would be required currently to replace the service
capacity of an asset (current replacement cost)
income approach – converts future amounts (cash flows or income and expenses) to a single
current (discounted) amount, reflecting current market expectations about those future amounts.
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In some cases, a single valuation technique will be appropriate, whereas in others multiple valuation
techniques will be appropriate.
Disclosure
IFRS 13 requires an entity to disclose information that helps users of its financial statements assess both
of the following:
for assets and liabilities that are measured at fair value on a recurring or non-recurring basis in
the statement of financial position after initial recognition, the valuation techniques and inputs
used to develop those measurements
for fair value measurements using significant unobservable inputs (Level 3), the effect of the
measurements on profit or loss or other comprehensive income for the period.
Disclosure exemptions
The disclosure requirements are not required for:
plan assets measured at fair value in accordance with IAS 19 Employee Benefits
retirement benefit plan investments measured at fair value in accordance with IAS 26 Accounting
and Reporting by Retirement Benefit Plans
assets for which recoverable amount is fair value less costs of disposal in accordance with IAS 36
Impairment of Assets.
Identification of classes
Where disclosures are required to be provided for each class of asset or liability, an entity determines
appropriate classes on the basis of the nature, characteristics and risks of the asset or liability, and the
level of the fair value hierarchy within which the fair value measurement is categorised.
Determining appropriate classes of assets and liabilities for which disclosures about fair value
measurements should be provided requires judgement. A class of assets and liabilities will often require
greater disaggregation than the line items presented in the statement of financial position. The number of
classes may need to be greater for fair value measurements categorised within Level 3.
Some disclosures are differentiated on whether the measurements are:
Recurring fair value measurements – fair value measurements required or permitted by other
IFRSs to be recognised in the statement of financial position at the end of each reporting period
Non-recurring fair value measurements are fair value measurements that are required or
permitted by other IFRSs to be measured in the statement of financial position in particular
circumstances.
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Specific disclosures required
To meet the disclosure objective, the following minimum disclosures are required for each class of assets
and liabilities measured at fair value (including measurements based on fair value within the scope of this
IFRS) in the statement of financial position after initial recognition (note these are requirements have
been summarised and additional disclosure is required where necessary):
the fair value measurement at the end of the reporting period*
for non-recurring fair value measurements, the reasons for the measurement*
the level of the fair value hierarchy within which the fair value measurements are categorised in
their entirety (Level 1, 2 or 3)
for assets and liabilities held at the reporting date that are measured at fair value on a recurring
basis, the amounts of any transfers between Level 1 and Level 2 of the fair value hierarchy, the
reasons for those transfers and the entity's policy for determining when transfers between levels
are deemed to have occurred, separately disclosing and discussing transfers into and out of each
level
for fair value measurements categorised within Level 2 and Level 3 of the fair value hierarchy, a
description of the valuation technique(s) and the inputs used in the fair value measurement, any
change in the valuation techniques and the reason(s) for making such change (with some
exceptions)*
for fair value measurements categorised within Level 3 of the fair value hierarchy, quantitative
information about the significant unobservable inputs used in the fair value measurement (with
some exceptions)
for recurring fair value measurements categorised within Level 3 of the fair value hierarchy, a
reconciliation from the opening balances to the closing balances, disclosing separately changes
during the period attributable to the following:
o
total gains or losses for the period recognised in profit or loss, and the line item(s) in profit
or loss in which those gains or losses are recognised – separately disclosing the amount
included in profit or loss that is attributable to the change in unrealised gains or losses
relating to those assets and liabilities held at the end of the reporting period, and the line
item(s) in profit or loss in which those unrealised gains or losses are recognised
o
total gains or losses for the period recognised in other comprehensive income, and the
line item(s) in other comprehensive income in which those gains or losses are recognised
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o
purchases, sales, issues and settlements (each of those types of changes disclosed
separately)
o
the amounts of any transfers into or out of Level 3 of the fair value hierarchy, the reasons
for those transfers and the entity's policy for determining when transfers between levels
are deemed to have occurred. Transfers into Level 3 shall be disclosed and discussed
separately from transfers out of Level 3
for fair value measurements categorised within Level 3 of the fair value hierarchy, a description of
the valuation processes used by the entity
for recurring fair value measurements categorised within Level 3of the fair value hierarchy:
o
a narrative description of the sensitivity of the fair value measurement to changes in
unobservable inputs if a change in those inputs to a different amount might result in a
significantly higher or lower fair value measurement. If there are interrelationships
between those inputs and other unobservable inputs used in the fair value measurement,
the entity also provides a description of those interrelationships and of how they might
magnify or mitigate the effect of changes in the unobservable inputs on the fair value
measurement
o
for financial assets and financial liabilities, if changing one or more of the unobservable
inputs to reflect reasonably possible alternative assumptions would change fair value
significantly, an entity shall state that fact and disclose the effect of those changes. The
entity shall disclose how the effect of a change to reflect a reasonably possible alternative
assumption was calculated
if the highest and best use of a non-financial asset differs from its current use, an entity shall
disclose that fact and why the non-financial asset is being used in a manner that differs from its
highest and best use.
Quantitative disclosures are required to be presented in a tabular format unless another format is more
appropriate.
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IFRS 14 Regulatory Deferral Accounts
Overview
The objective of IFRS 14 Regulatory Deferral Accounts is to specify the financial reporting requirements
for 'regulatory deferral account balances' that arise when an entity provides good or services to customers
at a price or rate that is subject to rate regulation.
Regulatory deferral account balances, and movements in them, are presented separately in the statement
of financial position and statement of profit or loss and other comprehensive income, and specific
disclosures are required.
IFRS 14 was originally issued in January 2014 and applies to an entity's first annual IFRS financial
statements for a period beginning on or after 1 January 2016.
IFRS 14 is designed as a limited scope Standard to provide an interim, short-term solution for rateregulated entities that have not yet adopted International Financial Reporting Standards (IFRS). Its
purpose is to allow rate-regulated entities adopting IFRS for the first-time to avoid changes in accounting
policies in respect of regulatory deferral accounts until such time as the International Accounting
Standards Board (IASB) can complete its comprehensive project on rate regulated activities.
Scope
IFRS 14 is permitted, but not required, to be applied where an entity conducts rate-regulated activities
and has recognised amounts in its previous GAAP financial statements that meet the definition of
'regulatory deferral account balances' (sometimes referred to 'regulatory assets' and 'regulatory
liabilities').
Entities which are eligible to apply IFRS 14 are not required to do so, and so can chose to apply only the
requirements of IFRS 1 First-time Adoption of International Financial Reporting Standards when first
applying IFRSs. The election to adopt IFRS 14 is only available on the initial adoption of IFRSs, meaning
an entity cannot apply IFRS 14 for the first time in financial statements subsequent to those prepared on
the initial adoption of IFRSs. However, an entity that elects to apply IFRS 14 in its first IFRS financial
statements must continue to apply it in subsequent financial statements. [IFRS 14.6]
When applied, the requirements of IFRS 14 must be applied to all regulatory deferral account balances
arising from an entity's rate-regulated activities. [IFRS 14.8]
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Key definitions
Rate regulation
A framework for establishing the prices that can be charged to customers for goods and services and that
framework is subject to oversight and/or approval by a rate-regulator.
Rate regulator
An authorised body that is empowered by statute or regulation to establish the rate or range of rates that
bind an entity. The rate regulator may be a third-party body or a related party of the entity, including the
entity's own governing board, if that body is required by statute or regulation to set rates both in the
interest of customers and to ensure the overall financial viability of the entity.
Regulatory deferral account balance
The balance of any expense (or income) account that would not be recognised as an asset or a liability in
accordance with other Standards, but that qualifies for deferral because it is included, or is expected to be
included, by the rate regulator in establishing the rate(s) that can be charged to customers.
Accounting policies for regulatory deferral account balances
IFRS 14 provides an exemption from paragraph 11 of IAS 8 Accounting Policies, Changes in Accounting
Estimates and Errors when an entity determines its accounting policies for regulatory deferral account
balances. Paragraph 11 of IAS 8 requires an entity to consider the requirements of IFRSs dealing with
similar matters and the requirements of the Conceptual Framework when setting its accounting policies.
The effect of the exemption is that eligible entities can continue to apply the accounting policies used for
regulatory deferral account balances under the basis of accounting used immediately before adopting
IFRS ('previous GAAP') when applying IFRSs, subject to the presentation requirements of IFRS 14.
Entities are permitted to change their accounting policies for regulatory deferral account balances in
accordance with IAS 8, but only if the change makes the financial statements more relevant and no less
reliable, or more reliable and not less relevant, to the economic decision-making needs of users of the
entity's financial statements. However, an entity is not permitted to change accounting policies to start to
recognise regulatory deferral account balances.
Presentation in financial statements
The impact of regulatory deferral account balances are separately presented in an entity's financial
statements. This requirements applies regardless of the entity's previous presentation policies in respect
of regulatory deferral balance accounts under its previous GAAP. Accordingly:
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Separate line items are presented in the statement of financial position for the total of all
regulatory deferral account debit balances, and all regulatory deferral account credit balances.
Regulatory deferral account balances are not classified between current and non-current, but are
separately disclosed using subtotals.
The net movement in regulatory deferral account balances are separately presented in the
statement of profit or loss and other comprehensive income using subtotals.
The Illustrative examples accompanying IFRS 14 set out an illustrative presentation of financial
statements by an entity applying the Standard.
Disclosures
IFRS 14 sets out disclosure objectives to allow users to assess:
the nature of, and risks associated with, the rate regulation that establishes the price(s) the entity
can charge customers for the goods or services it provides - including information about the
entity's rate-regulated activities and the rate-setting process, the identity of the rate regulator(s),
and the impacts of risks and uncertainties on the recovery or reversal of regulatory deferral
balance accounts
the effects of rate regulation on the entity's financial statements - including the basis on which
regulatory deferral account balances are recognised, how they are assessed for recovery, a
reconciliation of the carrying amount at the beginning and end of the reporting period, discount
rates applicable, income tax impacts and details of balances that are no longer considered
recoverable or reversible.
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IFRS 15 Revenue from Contracts with Customers
Overview
IFRS 15 specifies how and when an IFRS reporter will recognise revenue as well as requiring such
entities to provide users of financial statements with more informative, relevant disclosures. The standard
provides a single, principles based five-step model to be applied to all contracts with customers.
IFRS 15 was issued in May 2014 and applies to an annual reporting period beginning on or after 1
January 2017.
IFRS 15 replaces the following standards and interpretations:
IAS 11 Construction contracts
IAS 18 Revenue
IFRIC 13 Customer Loyalty Programmes
IFRIC 15 Agreements for the Construction of Real Estate
IFRIC 18 Transfers of Assets from Customers
SIC-31 Revenue - Barter Transactions Involving Advertising Services
The objective of IFRS 15 is to establish the principles that an entity shall apply to report useful information
to users of financial statements about the nature, amount, timing, and uncertainty of revenue and cash
flows arising from a contract with a customer. Application of the standard is mandatory for annual
reporting periods starting from 1 January 2017 onwards. Earlier application is permitted.
Scope
IFRS 15 Revenue from Contracts with Customers applies to all contracts with customers except for:
leases within the scope of IAS 17 Leases; financial instruments and other contractual rights or obligations
within the scope of IFRS 9 Financial Instruments, IFRS 10 Consolidated Financial Statements, IFRS 11
Joint Arrangements, IAS 27 Separate Financial Statements and IAS 28 Investments in Associates and
Joint Ventures; insurance contracts within the scope of IFRS 4 Insurance Contracts; and non-monetary
exchanges between entities in the same line of business to facilitate sales to customers or potential
customers.
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A contract with a customer may be partially within the scope of IFRS 15 and partially within the scope of
another standard. In that scenario:
if other standards specify how to separate and/or initially measure one or more parts of the
contract, then those separation and measurement requirements are applied first. The transaction
price is then reduced by the amounts that are initially measured under other standards;
if no other standard provides guidance on how to separate and/or initially measure one or more
parts of the contract, then IFRS 15 will be applied.
Key definitions
Contract
An agreement between two or more parties that creates enforceable rights and obligations.
Customer
A party that has contracted with an entity to obtain goods or services that are an output of the entity’s
ordinary activities in exchange for consideration.
Income
Increases in economic benefits during the accounting period in the form of inflows or enhancements of
assets or decreases of liabilities that result in an increase in equity, other than those relating to
contributions from equity participants.
Performance obligation
A promise in a contract with a customer to transfer to the customer either:
a good or service (or a bundle of goods or services) that is distinct; or
a series of distinct goods or services that are substantially the same and that have the same
pattern of transfer to the customer.
Revenue
Income arising in the course of an entity’s ordinary activities.
Transaction price
The amount of consideration to which an entity expects to be entitled in exchange for transferring
promised goods or services to a customer, excluding amounts collected on behalf of third parties.
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Accounting requirements for revenue
The five-step model framework
The core principle of IFRS 15 is that an entity will recognise revenue to depict the transfer of promised
goods or services to customers in an amount that reflects the consideration to which the entity expects to
be entitled in exchange for those goods or services. This core principle is delivered in a five-step model
framework:
Identify the contract(s) with a customer
Identify the performance obligations in the contract
Determine the transaction price
Allocate the transaction price to the performance obligations in the contract
Recognise revenue when (or as) the entity satisfies a performance obligation.
Application of this guidance will depend on the facts and circumstances present in a contract with a
customer and will require the exercise of judgment.
Step 1: Identify the contract with the customer
A contract with a customer will be within the scope of IFRS 15 if all the following conditions are met: [IFRS
15:9]
the contract has been approved by the parties to the contract;
each party’s rights in relation to the goods or services to be transferred can be identified;
the payment terms for the goods or services to be transferred can be identified;
the contract has commercial substance; and
it is probable that the consideration to which the entity is entitled to in exchange for the goods or
services will be collected.
If a contract with a customer does not yet meet all of the above criteria, the entity will continue to reassess the contract going forward to determine whether it subsequently meets the above criteria. From
that point, the entity will apply IFRS 15 to the contract.
The standard provides detailed guidance on how to account for approved contract modifications. If certain
conditions are met, a contract modification will be accounted for as a separate contract with the customer.
If not, it will be accounted for by modifying the accounting for the current contract with the customer.
Whether the latter type of modification is accounted for prospectively or retrospectively depends on
whether the remaining goods or services to be delivered after the modification are distinct from those
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delivered prior to the modification. Further details on accounting for contract modifications can be found in
the Standard.
Step 2: Identify the performance obligations in the contract
At the inception of the contract, the entity should assess the goods or services that have been promised
to the customer, and identify as a performance obligation:
a good or service (or bundle of goods or services) that is distinct; or
a series of distinct goods or services that are substantially the same and that have the same
pattern of transfer to the customer.
A series of distinct goods or services is transferred to the customer in the same pattern if both of the
following criteria are met:
each distinct good or service in the series that the entity promises to transfer consecutively to the
customer would be a performance obligation that is satisfied over time (see below); and
a single method of measuring progress would be used to measure the entity’s progress towards
complete satisfaction of the performance obligation to transfer each distinct good or service in the
series to the customer.
A good or service is distinct if both of the following criteria are met:
the customer can benefit from the good or services on its own or in conjunction with other readily
available resources; and
the entity’s promise to transfer the good or service to the customer is separately identifiable from
other promises in the contract.
Factors for consideration as to whether a promise to transfer the good or service to the customer is
separately identifiable include, but are not limited to:
the entity does not provide a significant service of integrating the good or service with other goods
or services promised in the contract.
the good or service does not significantly modify or customise another good or service promised
in the contract.
the good or service is not highly interrelated with or highly dependent on other goods or services
promised in the contract.
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Step 3: Determine the transaction price
The transaction price is the amount to which an entity expects to be entitled in exchange for the transfer
of goods and services. When making this determination, an entity will consider past customary business
practices.
Where a contract contains elements of variable consideration, the entity will estimate the amount of
variable consideration to which it will be entitled under the contract. Variable consideration can arise, for
example, as a result of discounts, rebates, refunds, credits, price concessions, incentives, performance
bonuses, penalties or other similar items. Variable consideration is also present if an entity’s right to
consideration is contingent on the occurrence of a future event.
The standard deals with the uncertainty relating to variable consideration by limiting the amount of
variable consideration that can be recognised. Specifically, variable consideration is only included in the
transaction price if, and to the extent that, it is highly probable that its inclusion will not result in a
significant revenue reversal in the future when the uncertainty has been subsequently resolved.
However, a different, more restrictive approach is applied in respect of sales or usage-based royalty
revenue arising from licences of intellectual property. Such revenue is recognised only when the
underlying sales or usage occur.
Step 4: Allocate the transaction price to the performance obligations in the
contracts
Where a contract has multiple performance obligations, an entity will allocate the transaction price to the
performance obligations in the contract by reference to their relative standalone selling prices. [IFRS
15:74] If a standalone selling price is not directly observable, the entity will need to estimate it. IFRS 15
suggests various methods that might be used, including: [IFRS 15:79]
Adjusted market assessment approach
Expected cost plus a margin approach
Residual approach (only permissible in limited circumstances).
Any overall discount compared to the aggregate of standalone selling prices is allocated between
performance obligations on a relative standalone selling price basis. In certain circumstances, it may be
appropriate to allocate such a discount to some but not all of the performance obligations. [IFRS 15:81]
Where consideration is paid in advance or in arrears, the entity will need to consider whether the contract
includes a significant financing arrangement and, if so, adjust for the time value of money. [IFRS 15:60] A
practical expedient is available where the interval between transfer of the promised goods or services and
payment by the customer is expected to be less than 12 months. [IFRS 15:63]
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Step 5: Recognise revenue when (or as) the entity satisfies a performance
obligation
Revenue is recognised as control is passed, either over time or at a point in time.
Control of an asset is defined as the ability to direct the use of and obtain substantially all of the remaining
benefits from the asset. This includes the ability to prevent others from directing the use of and obtaining
the benefits from the asset. The benefits related to the asset are the potential cash flows that may be
obtained directly or indirectly. These include, but are not limited to:
using the asset to produce goods or provide services;
using the asset to enhance the value of other assets;
using the asset to settle liabilities or to reduce expenses;
selling or exchanging the asset;
pledging the asset to secure a loan; and
holding the asset.
An entity recognises revenue over time if one of the following criteria is met:
the customer simultaneously receives and consumes all of the benefits provided by the entity as
the entity performs;
the entity’s performance creates or enhances an asset that the customer controls as the asset is
created; or
the entity’s performance does not create an asset with an alternative use to the entity and the
entity has an enforceable right to payment for performance completed to date.
If an entity does not satisfy its performance obligation over time, it satisfies it at a point in time. Revenue
will therefore be recognised when control is passed at a certain point in time. Factors that may indicate
the point in time at which control passes include, but are not limited to: [IFRS 15:38]
the entity has a present right to payment for the asset;
the customer has legal title to the asset;
the entity has transferred physical possession of the asset;
the customer has the significant risks and rewards related to the ownership of the asset; and
the customer has accepted the asset.
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Contract costs
The incremental costs of obtaining a contract must be recognised as an asset if the entity expects to
recover those costs. However, those incremental costs are limited to the costs that the entity would not
have incurred if the contract had not been successfully obtained (e.g. ‘success fees’ paid to agents). A
practical expedient is available, allowing the incremental costs of obtaining a contract to be expensed if
the associated amortisation period would be 12 months or less.
Costs incurred to fulfil a contract are recognised as an asset if and only if all of the following criteria are
met: [IFRS 15:95]
the costs relate directly to a contract (or a specific anticipated contract);
the costs generate or enhance resources of the entity that will be used in satisfying performance
obligations in the future; and
the costs are expected to be recovered.
These include costs such as direct labour, direct materials, and the allocation of overheads that relate
directly to the contract. [IFRS 15:97]
The asset recognised in respect of the costs to obtain or fulfil a contract is amortised on a systematic
basis that is consistent with the pattern of transfer of the goods or services to which the asset relates.
[IFRS 15:99]
Further useful implementation guidance in relation to applying IFRS 15
These topics include:
Performance obligations satisfied over time
Methods for measuring progress towards complete satisfaction of a performance obligation
Sale with a right of return
Warranties
Principal versus agent considerations
Customer options for additional goods or services
Customers’ unexercised rights
Non-refundable upfront fees
Licensing
Repurchase arrangements
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Consignment arrangements
Bill-and-hold arrangements
Customer acceptance
Disclosures of disaggregation of revenue
These topics should be considered carefully when applying IFRS 15.
Presentation in financial statements
Contracts with customers will be presented in an entity’s statement of financial position as a contract
liability, a contract asset, or a receivable, depending on the relationship between the entity’s performance
and the customer’s payment. [IFRS 15:105]
A contract liability is presented in the statement of financial position where a customer has paid an
amount of consideration prior to the entity performing by transferring the related good or service to the
customer. [IFRS 15:106]
Where the entity has performed by transferring a good or service to the customer and the customer has
not yet paid the related consideration, a contract asset or a receivable is presented in the statement of
financial position, depending on the nature of the entity’s right to consideration. A contract asset is
recognised when the entity’s right to consideration is conditional on something other than the passage of
time, for example future performance of the entity. A receivable is recognised when the entity’s right to
consideration is unconditional except for the passage of time.
Contract assets and receivables shall be accounted for in accordance with IFRS 9. Any impairment
relating to contracts with customers should be measured, presented and disclosed in accordance with
IFRS 9. Any difference between the initial recognition of a receivable and the corresponding amount of
revenue recognised should also be presented as an expense, for example, an impairment loss. [IFRS
15:107-108]
Disclosures
The disclosure objective stated in IFRS 15 is for an entity to disclose sufficient information to enable users
of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash
flows arising from contracts with customers. Therefore, an entity should disclose qualitative and
quantitative information about all of the following: [IFRS 15:110]
its contracts with customers;
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the significant judgments, and changes in the judgments, made in applying the guidance to those
contracts; and
any assets recognised from the costs to obtain or fulfil a contract with a customer.
Entities will need to consider the level of detail necessary to satisfy the disclosure objective and how
much emphasis to place on each of the requirements. An entity should aggregate or disaggregate
disclosures to ensure that useful information is not obscured. [IFRS 15:111]
In order to achieve the disclosure objective stated above, the Standard introduces a number of new
disclosure requirements. Further detail about these specific requirements can be found at IFRS 15:113129.
Effective date and transition
The standard should be applied in an entity’s IFRS financial statements for annual reporting periods
beginning on or after 1 January 2017. Earlier application is permitted. An entity that chooses to apply
IFRS 15 earlier than 1 January 2017 should disclose this fact in its relevant financial statements. [IFRS
15:C1]
When first applying IFRS 15, entities should apply the standard in full for the current period, including
retrospective application to all contracts that were not yet complete at the beginning of that period. In
respect of prior periods, the transition guidance allows entities an option to either: [IFRS 15:C3]
apply IFRS 15 in full to prior periods (with certain limited practical expedients being available); or
retain prior period figures as reported under the previous standards, recognising the cumulative
effect of applying IFRS 15 as an adjustment to the opening balance of equity as at the date of
initial application (beginning of current reporting period).
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Standards
Financial
Reporting
This document contains summaries, history and resources for International Financial Reporting Standards
(IFRS) issued by the International Accounting Standards Board (IASB).
Table of contents
IFRSs at a glance....................................................................................................................................................................................3
IFRS 1 First-time Adoption of International Financial Reporting Standards...................................................................................4
Overview..............................................................................................................................................................................................4
Definition of first-time adoption............................................................................................................................................................4
Measurement.......................................................................................................................................................................................7
Disclosures in the financial statements of a first-time adopter............................................................................................................8
Exceptions to the retrospective application of other IFRSs.................................................................................................................9
IFRS 2 Share-based Payment..............................................................................................................................................................14
Overview............................................................................................................................................................................................14
Definition of share-based payment....................................................................................................................................................14
Scope.................................................................................................................................................................................................14
Recognition and measurement..........................................................................................................................................................15
Illustration – Recognition of employee share option grant................................................................................................................15
Disclosure..........................................................................................................................................................................................18
IFRS 3 Business Combinations..........................................................................................................................................................19
Overview............................................................................................................................................................................................19
Key definitions....................................................................................................................................................................................19
Scope.................................................................................................................................................................................................19
Determining whether a transaction is a business combination.........................................................................................................20
Method of accounting for business combinations..............................................................................................................................20
Choice in the measurement of non-controlling interests (NCI)..........................................................................................................23
Business combination achieved in stages (step acquisitions)...........................................................................................................24
Disclosure..........................................................................................................................................................................................27
IFRS 4 Insurance Contracts................................................................................................................................................................30
Overview............................................................................................................................................................................................30
Scope.................................................................................................................................................................................................30
Disclosures.........................................................................................................................................................................................32
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations.......................................................................................34
Overview............................................................................................................................................................................................34
Held-for-sale classification.................................................................................................................................................................34
Held for distribution to owners classification......................................................................................................................................34
Disposal group concept.....................................................................................................................................................................35
Measurement.....................................................................................................................................................................................35
Presentation.......................................................................................................................................................................................36
Disclosures.........................................................................................................................................................................................36
Classification as discontinuing...........................................................................................................................................................36
IFRS 6 Exploration for and Evaluation of Mineral Resources.........................................................................................................38
Overview............................................................................................................................................................................................38
Definitions..........................................................................................................................................................................................38
Accounting policies for exploration and evaluation............................................................................................................................38
Presentation and disclosure...............................................................................................................................................................39
IFRS 7 Financial Instruments: Disclosures.......................................................................................................................................40
Overview............................................................................................................................................................................................40
Disclosure requirements of IFRS 7....................................................................................................................................................40
Nature and extent of exposure to risks arising from financial instruments........................................................................................43
Transfers of financial assets..............................................................................................................................................................44
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IFRS 8 Operating Segments................................................................................................................................................................46
Overview............................................................................................................................................................................................46
Scope.................................................................................................................................................................................................46
Operating segments...........................................................................................................................................................................46
Reportable segments.........................................................................................................................................................................46
Disclosure requirements....................................................................................................................................................................47
IFRS 9 Financial Instruments..............................................................................................................................................................49
Overview............................................................................................................................................................................................49
Initial measurement of financial instruments.....................................................................................................................................49
Subsequent measurement of financial assets...................................................................................................................................49
Debt instruments................................................................................................................................................................................50
Fair value option.................................................................................................................................................................................50
Measurement guidance.....................................................................................................................................................................51
Derecognition of financial assets.......................................................................................................................................................52
Derecognition of financial liabilities....................................................................................................................................................53
Qualifying criteria for hedge accounting............................................................................................................................................54
Impairment.........................................................................................................................................................................................59
Scope of Impairment model...............................................................................................................................................................59
Disclosures.........................................................................................................................................................................................63
IFRS 10 Consolidated Financial Statements.....................................................................................................................................64
Overview............................................................................................................................................................................................64
Key definitions....................................................................................................................................................................................64
Accounting requirements...................................................................................................................................................................66
Disclosure..........................................................................................................................................................................................69
IFRS 11 Joint Arrangements................................................................................................................................................................70
Overview............................................................................................................................................................................................70
Key definitions....................................................................................................................................................................................70
Financial statements of parties to a joint arrangement......................................................................................................................72
Disclosure..........................................................................................................................................................................................73
IFRS 12 Disclosure of Interests in Other Entities.............................................................................................................................74
Overview............................................................................................................................................................................................74
Key definitions....................................................................................................................................................................................75
Disclosures required..........................................................................................................................................................................75
IFRS 13 Fair Value Measurement........................................................................................................................................................77
Overview............................................................................................................................................................................................77
Key definitions....................................................................................................................................................................................77
Fair value hierarchy...........................................................................................................................................................................78
Measurement of fair value.................................................................................................................................................................79
Valuation techniques..........................................................................................................................................................................80
Disclosure..........................................................................................................................................................................................81
Specific disclosures required.............................................................................................................................................................82
IFRS 14 Regulatory Deferral Accounts..............................................................................................................................................84
Overview............................................................................................................................................................................................84
Scope.................................................................................................................................................................................................84
Key definitions....................................................................................................................................................................................85
Accounting policies for regulatory deferral account balances...........................................................................................................85
Presentation in financial statements..................................................................................................................................................85
Disclosures.........................................................................................................................................................................................86
IFRS 15 Revenue from Contracts with Customers...........................................................................................................................87
Overview............................................................................................................................................................................................87
Scope.................................................................................................................................................................................................87
Key definitions....................................................................................................................................................................................88
Accounting requirements for revenue................................................................................................................................................89
Contract costs....................................................................................................................................................................................93
Presentation in financial statements..................................................................................................................................................94
Disclosures.........................................................................................................................................................................................94
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IFRSs at a glance
Date
Effective
issued
Date
24 Nov 2008
01 Jul 2009
IFRS 2 — Share-based Payment
19 Feb 2004
01 Jan 2005
IFRS 3 — Business Combinations
10 Jan 2008
01 Jul 2009
IFRS 4 — Insurance Contracts (N/E)
31 Mar 2004
01 Jan 2005
31 Mar 2004
01 Jan 2005
09 Dec 2004
01 Jan 2006
IFRS 7 — Financial Instruments: Disclosures
18 Aug 2005
01 Jan 2007
IFRS 8 — Operating Segments
30 Nov 2006
01 Jan 2009
IFRS 9 — Financial Instruments
24 Jul 2014
01 Jan 2018
IFRS 10 — Consolidated Financial Statements
12 May 2011
01 Jan 2013
IFRS 11 — Joint Arrangements
12 May 2011
01 Jan 2013
IFRS 12 — Disclosure of Interests in Other Entities (N/E)
12 May 2011
01 Jan 2013
IFRS 13 — Fair Value Measurement (N/I)
12 May 2011
01 Jan 2013
IFRS 14 — Regulatory Deferral Accounts (N/E)
30 Jan 2014
01 Jan 2016
IFRS 15 — Revenue from Contracts with Customers (N/E)
28 May 2014
01 Jan 2017
Title
IFRS
1
—
First-time
Adoption
of
International
Financial
Reporting Standards
IFRS 5 — Non-current Assets Held for Sale and Discontinued
Operations
IFRS 6 — Exploration for and Evaluation of Mineral Resources
(N/E)
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IFRS
1
First-time
Adoption
of
International
Financial Reporting Standards
Overview
IFRS 1 First-time Adoption of International Financial Reporting Standards sets out the procedures that an
entity must follow when it adopts IFRSs for the first time as the basis for preparing its general purpose
financial statements.
A restructured version of IFRS 1 was issued in November 2008 and applies if an entity's first IFRS
financial statements are for a period beginning on or after 1 July 2009.
Definition of first-time adoption
A first-time adopter is an entity that, for the first time, makes an explicit and unreserved statement that its
general purpose financial statements comply with IFRSs. [IFRS 1.3]
An entity may be a first-time adopter if, in the preceding year, it prepared IFRS financial statements for
internal management use, as long as those IFRS financial statements were not made available to owners
or external parties such as investors or creditors. If a set of IFRS financial statements was, for any
reason, made available to owners or external parties in the preceding year, then the entity will already be
considered to be on IFRSs, and IFRS 1 does not apply. [IFRS 1.3]
An entity can also be a first-time adopter if, in the preceding year, its financial statements: [IFRS 1.3]
asserted compliance with some but not all IFRSs, or
included only a reconciliation of selected figures from previous GAAP to IFRSs. (Previous GAAP
means the GAAP that an entity followed immediately before adopting to IFRSs.)
However, an entity is not a first-time adopter if, in the preceding year, its financial statements asserted:
Compliance with IFRSs even if the auditor's report contained a qualification with respect to
conformity with IFRSs.
Compliance with both previous GAAP and IFRSs.
An entity that applied IFRSs in a previous reporting period, but whose most recent previous annual
financial statements did not contain an explicit and unreserved statement of compliance with IFRSs can
choose to:
apply the requirements of IFRS 1 (including the various permitted exemptions to full retrospective
application), or
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retrospectively apply IFRSs in accordance with IAS 8 Accounting Policies, Changes in
Accounting Estimates and Errors, as if it never stopped applying IFRSs. [IFRS 1.4A]
Overview for an entity that adopts IFRSs for the first time in its annual financial statements for the
year ended 31 December 2014
Accounting policies
Select accounting policies based on IFRSs effective at 31 December 2014.
IFRS reporting periods
Prepare at least 2014 and 2013 financial statements and the opening balance sheet (as of 1 January
2012 or beginning of the first period for which full comparative financial statements are presented, if
earlier) by applying the IFRSs effective at 31 December 2014. [IFRS 1.7]
Since IAS 1 requires that at least one year of comparative prior period financial information be
presented, the opening balance sheet will be 1 January 2012 if not earlier. This would mean that
an entity's first financial statements should include at least: [IFRS 1.21]
o
three statements of financial position
o
two statements of profit or loss and other comprehensive income
o
two separate statements of profit or loss (if presented)
o
two statements of cash flows
o
two statements of changes in equity, and
o
related notes, including comparative information
If a 31 December 2014 adopter reports selected financial data (but not full financial statements)
on an IFRS basis for periods prior to 2013, in addition to full financial statements for 2014 and
2013, that does not change the fact that its opening IFRS balance sheet is as of 1 January 2012.
Adjustments required to move from previous GAAP to IFRSs at the time of first-time adoption
Derecognition of some previous GAAP assets and liabilities
The entity should eliminate previous-GAAP assets and liabilities from the opening balance sheet if they
do not qualify for recognition under IFRSs. [IFRS 1.10(b)] For example:
IAS 38 does not permit recognition of expenditure on any of the following as an intangible asset:
o
research
o
start-up, pre-operating, and pre-opening costs
o
training
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o
advertising and promotion
o
moving and relocation
If the entity's previous GAAP had recognised these as assets, they are eliminated in the opening IFRS
balance sheet
If the entity's previous GAAP had allowed accrual of liabilities for "general reserves",
restructurings, future operating losses, or major overhauls that do not meet the conditions for
recognition as a provision under IAS 37, these are eliminated in the opening IFRS balance sheet
If the entity's previous GAAP had allowed recognition of contingent assets as defined in IAS
37.10, these are eliminated in the opening IFRS balance sheet
Recognition of some assets and liabilities not recognised under previous GAAP
Conversely, the entity should recognise all assets and liabilities that are required to be recognised by
IFRS even if they were never recognised under previous GAAP. [IFRS 1.10(a)] For example:
IAS 39 requires recognition of all derivative financial assets and liabilities, including embedded
derivatives. These were not recognised under many local GAAPs.
IAS 19 requires an employer to recognise a liability when an employee has provided service in
exchange for benefits to be paid in the future. These are not just post-employment benefits (e.g.,
pension plans) but also obligations for medical and life insurance, vacations, termination benefits,
and deferred compensation. In the case of 'over-funded' defined benefit plans, this would be a
plan asset.
IAS 37 requires recognition of provisions as liabilities. Examples could include an entity's
obligations for restructurings, onerous contracts, decommissioning, remediation, site restoration,
warranties, guarantees, and litigation.
Deferred tax assets and liabilities would be recognised in conformity with IAS 12.
Reclassification
The entity should reclassify previous-GAAP opening balance sheet items into the appropriate IFRS
classification. [IFRS 1.10(c)] Examples:
IAS 10 does not permit classifying dividends declared or proposed after the balance sheet date
as a liability at the balance sheet date. If such liability was recognised under previous GAAP it
would be reversed in the opening IFRS balance sheet.
If the entity's previous GAAP had allowed treasury stock (an entity's own shares that it had
purchased) to be reported as an asset, it would be reclassified as a component of equity under
IFRS.
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Items classified as identifiable intangible assets in a business combination accounted for under
the previous GAAP may be required to be reclassified as goodwill under IFRS 3 because they do
not meet the definition of an intangible asset under IAS 38. The converse may also be true in
some cases.
IAS 32 has principles for classifying items as financial liabilities or equity. Thus mandatorily
redeemable preferred shares that may have been classified as equity under previous GAAP
would
be
reclassified
as
liabilities
in
the
opening
IFRS
balance
sheet.
Note that IFRS 1 makes an exception from the "split-accounting" provisions of IAS 32. If the
liability component of a compound financial instrument is no longer outstanding at the date of the
opening IFRS balance sheet, the entity is not required to reclassify out of retained earnings and
into other equity the original equity component of the compound instrument.
The reclassification principle would apply for the purpose of defining reportable segments under
IFRS 8.
Some offsetting (netting) of assets and liabilities or of income and expense items that had been
acceptable under previous GAAP may no longer be acceptable under IFRS.
Measurement
The general measurement principle – there are several significant exceptions noted below – is to apply
effective IFRSs in measuring all recognised assets and liabilities. [IFRS 1.10(d)]
How to recognise adjustments required to move from previous GAAP to IFRSs
Adjustments required to move from previous GAAP to IFRSs at the date of transition should be
recognised directly in retained earnings or, if appropriate, another category of equity at the date of
transition to IFRSs. [IFRS 1.11]
Estimates
In preparing IFRS estimates at the date of transition to IFRSs retrospectively, the entity must use the
inputs and assumptions that had been used to determine previous GAAP estimates as of that date (after
adjustments to reflect any differences in accounting policies). The entity is not permitted to use
information that became available only after the previous GAAP estimates were made except to correct
an error. [IFRS 1.14]
Changes to disclosures
For many entities, new areas of disclosure will be added that were not requirements under the previous
GAAP (perhaps segment information, earnings per share, discontinuing operations, contingencies and
fair values of all financial instruments) and disclosures that had been required under previous GAAP will
be broadened (perhaps related party disclosures).
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Disclosure of selected financial data for periods before the first IFRS statement of financial
position (balance sheet)
If a first-time adopter wants to disclose selected financial information for periods before the date of the
opening IFRS balance sheet, it is not required to conform that information to IFRS. Conforming that
earlier selected financial information to IFRSs is optional.[IFRS 1.22]
If the entity elects to present the earlier selected financial information based on its previous GAAP rather
than IFRS, it must prominently label that earlier information as not complying with IFRS and, further, it
must disclose the nature of the main adjustments that would make that information comply with IFRS.
This latter disclosure is narrative and not necessarily quantified.[IFRS 1.22]
Disclosures in the financial statements of a first-time adopter
IFRS 1 requires disclosures that explain how the transition from previous GAAP to IFRS affected the
entity's reported financial position, financial performance and cash flows. [IFRS 1.23] This includes:
1. reconciliations of equity reported under previous GAAP to equity under IFRS both (a) at the date
of transition to IFRSs and (b) the end of the last annual period reported under the previous GAAP.
(For an entity adopting IFRSs for the first time in its 31 December 2014 financial statements, the
reconciliations would be as of 1 January 2012 and 31 December 2013.)
2. reconciliations of total comprehensive income for the last annual period reported under the
previous GAAP to total comprehensive income under IFRSs for the same period [IFRS 1.24(b)]
3. explanation of material adjustments that were made, in adopting IFRSs for the first time, to the
statement of financial position, statement of comprehensive income and statement of cash flows
(the latter if presented under previous GAAP) [IFRS 1.25]
4. if errors in previous GAAP financial statements were discovered in the course of transition to
IFRSs, those must be separately disclosed [IFRS 1.26]
5. if the entity recognised or reversed any impairment losses in preparing its opening IFRS balance
sheet, these must be disclosed [IFRS 1.24(c)]
6. appropriate explanations if the entity has elected to apply any of the specific recognition and
measurement exemptions permitted under IFRS 1 – for instance, if it used fair values as deemed
cost
Disclosures in interim financial reports
If an entity is going to adopt IFRSs for the first time in its annual financial statements for the year ended
31 December 2014, certain disclosure are required in its interim financial statements prior to the 31
December 2014 statements, but only if those interim financial statements purport to comply with IAS 34
Interim Financial Reporting. Explanatory information and reconciliation are required in the interim report
Page 8 of 97
that immediately precedes the first set of IFRS annual financial statements. The information includes
reconciliations between IFRS and previous GAAP. [IFRS 1.32]
Exceptions to the retrospective application of other IFRSs
There are five exceptions to the general principle of retrospective application effective 1 January 2010.
The five exceptions are:
IAS 39 – Derecognition of financial instruments
A first-time adopter shall apply the derecognition requirements in IAS 39 prospectively for transactions
occurring on or after 1 January 2004. However, the entity may apply the derecognition requirements
retrospectively provided that the needed information was obtained at the time of initially accounting for
those transactions. [IFRS 1.B2-3]
IAS 39 – Hedge accounting
The general rule is that the entity shall not reflect in its opening IFRS balance sheet (statement of
financial position) a hedging relationship of a type that does not qualify for hedge accounting in
accordance with IAS 39. However, if an entity designated a net position as a hedged item in accordance
with previous GAAP, it may designate an individual item within that net position as a hedged item in
accordance with IFRS, provided that it does so no later than the date of transition to IFRSs. [IFRS 1.B5]
Note: Modified requirements apply when an entity applies IFRS 9 Financial Instruments (2013).
IAS 27 – Non-controlling interest
IFRS 1.B7 lists specific requirements of IFRS 10 Consolidated Financial Statements that shall be applied
prospectively.
Full-cost oil and gas assets
Entities using the full cost method may elect exemption from retrospective application of IFRSs for oil and
gas assets. Entities electing this exemption will use the carrying amount under its old GAAP as the
deemed cost of its oil and gas assets at the date of first-time adoption of IFRSs.
Determining whether an arrangement contains a lease
If a first-time adopter with a leasing contract made the same type of determination of whether an
arrangement contained a lease in accordance with previous GAAP as that required by IFRIC 4
Determining whether an Arrangement Contains a Lease, but at a date other than that required by IFRIC
4, the amendments exempt the entity from having to apply IFRIC 4 when it adopts IFRSs.
Optional exemptions from the basic measurement principle in IFRS 1
There are some further optional exemptions to the general restatement and measurement principles set
out above. The following exceptions are individually optional. They relate to:
Page 9 of 97
business combinations [IFRS 1.Appendix C]
and a number of others [IFRS 1.Appendix D]:
o
share-based payment transactions
o
insurance contracts
o
fair value, previous carrying amount, or revaluation as deemed cost
o
leases
o
cumulative translation differences
o
investments in subsidiaries, jointly controlled entities, associates and joint ventures
o
assets and liabilities of subsidiaries, associated and joint ventures
o
compound financial instruments
o
designation of previously recognised financial instruments
o
fair value measurement of financial assets or financial liabilities at initial recognition
o
decommissioning liabilities included in the cost of property, plant and equipment
o
financial assets or intangible assets accounted for in accordance with IFRIC 12 Service
Concession Arrangements
o
borrowing costs
o
transfers of assets from customers
o
extinguishing financial liabilities with equity instruments
o
severe hyperinflation
o
joint arrangements
o
stripping costs in the production phase of a surface mine
Some, but not all, of them are described below.
Business combinations that occurred before opening balance sheet date
IFRS 1 includes Appendix C explaining how a first-time adopter should account for business combinations
that occurred prior to transition to IFRS.
An entity may keep the original previous GAAP accounting, that is, not restate:
previous mergers or goodwill written-off from reserves
Page 10 of 97
the carrying amounts of assets and liabilities recognised at the date of acquisition or merger, or
how goodwill was initially determined (do not adjust the purchase price allocation on acquisition)
However, should it wish to do so, an entity can elect to restate all business combinations starting from a
date it selects prior to the opening balance sheet date.
In all cases, the entity must make an initial IAS 36 impairment test of any remaining goodwill in the
opening IFRS balance sheet, after reclassifying, as appropriate, previous GAAP intangibles to goodwill.
The exemption for business combinations also applies to acquisitions of investments in associates,
interests in joint ventures and interests in a joint operation when the operation constitutes a business.
Deemed cost
Assets carried at cost (e.g. property, plant and equipment) may be measured at their fair value at the date
of transition to IFRSs. Fair value becomes the 'deemed cost' going forward under the IFRS cost model.
Deemed cost is an amount used as a surrogate for cost or depreciated cost at a given date. [IFRS 1.D6]
If, before the date of its first IFRS balance sheet, the entity had revalued any of these assets under its
previous GAAP either to fair value or to a price-index-adjusted cost, that previous GAAP revalued amount
at the date of the revaluation can become the deemed cost of the asset under IFRS. [IFRS 1.D6]
If, before the date of its first IFRS balance sheet, the entity had made a one-time revaluation of assets or
liabilities to fair value because of a privatisation or initial public offering, and the revalued amount became
deemed cost under the previous GAAP, that amount would continue to be deemed cost after the initial
adoption of IFRS. [IFRS 1.D8]
This option applies to intangible assets only if an active market exists. [IFRS 1.D7]
If the carrying amount of property, plant and equipment or intangible assets that are used in rateregulated activities includes amounts under previous GAAP that do not qualify for capitalisation in
accordance with IFRSs, a first-time adopter may elect to use the previous GAAP carrying amount of such
items as deemed cost on the initial adoption of IFRSs. [IFRS 1.D8B]
Eligible entities subject to rate-regulation may also optionally apply IFRS 14 Regulatory Deferral Accounts
on transition to IFRSs, and in subsequent financial statements.
IAS 19 – Employee benefits: actuarial gains and losses
An entity may elect to recognise all cumulative actuarial gains and losses for all defined benefit plans at
the opening IFRS balance sheet date (that is, reset any corridor recognised under previous GAAP to
zero), even if it elects to use the IAS 19 corridor approach for actuarial gains and losses that arise after
first-time adoption of IFRS. If a first-time adopter uses this exemption, it shall apply it to all plans. [IFRS
1.D10]
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Note: This exemption is not available where IAS 19 Employee Benefits (2011) is applied. IAS 19 (2011) is
effective for annual reporting periods beginning on or after 1 January 2013.
IAS 21 – Accumulated translation reserves
An entity may elect to recognise all translation adjustments arising on the translation of the financial
statements of foreign entities in accumulated profits or losses at the opening IFRS balance sheet date
(that is, reset the translation reserve included in equity under previous GAAP to zero). If the entity elects
this exemption, the gain or loss on subsequent disposal of the foreign entity will be adjusted only by those
accumulated translation adjustments arising after the opening IFRS balance sheet date. [IFRS 1.D13]
IAS 27 – Investments in separate financial statements
In May 2008, the IASB amended the standard to change the way the cost of an investment in the
separate financial statements is measured on first-time adoption of IFRSs. The amendments to IFRS 1:
allow first-time adopters to use a 'deemed cost' of either fair value or the carrying amount under
previous accounting practice to measure the initial cost of investments in subsidiaries, jointly
controlled entities and associates in the separate financial statements
remove the definition of the cost method from IAS 27 and add a requirement to present dividends
as income in the separate financial statements of the investor
require that, when a new parent is formed in a reorganisation, the new parent must measure the
cost of its investment in the previous parent at the carrying amount of its share of the equity items
of the previous parent at the date of the reorganisation
Assets and liabilities of subsidiaries, associates and joint ventures: different IFRS adoption dates
of investor and investee
If a subsidiary becomes a first-time adopter later than its parent, IFRS 1 permits a choice between two
measurement bases in the subsidiary's separate financial statements. In this case, a subsidiary should
measure its assets and liabilities as either: [IFRS 1.D16]
the carrying amount that would be included in the parent's consolidated financial statements,
based on the parent's date of transition to IFRSs, if no adjustments were made for consolidation
procedures and for the effects of the business combination in which the parent acquired the
subsidiary or
the carrying amounts required by IFRS 1 based on the subsidiary's date of transition to IFRSs
A similar election is available to an associate or joint venture that becomes a first-time adopter later than
an entity that has significant influence or joint control over it. [IFRS 1.D16]
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If a parent becomes a first-time adopter later than its subsidiary, the parent should in its consolidated
financial statements, measure the assets and liabilities of the subsidiary at the same carrying amount as
in the separate financial statements of the subsidiary, after adjusting for consolidation adjustments and for
the effects of the business combination in which the parent acquired the subsidiary. The same approach
applies in the case of associates and joint ventures. [IFRS 1.D17]
July 2009: Two Amendments to IFRS 1
On 23 July 2009, the IASB amended IFRS 1 to:
exempt entities using the full cost method from retrospective application of IFRSs for oil and gas
assets.
exempt entities with existing leasing contracts from reassessing the classification of those
contracts in accordance with IFRIC 4 Determining whether an Arrangement contains a Lease
when the application of their national accounting requirements produced the same result.
November 2009: Proposed Limited Scope Exemption for IFRS 7 Disclosures
On 26 November 2009, the IASB issued an exposure draft (ED) proposing to amend IFRS 1 to state that
an entity need not provide the comparative prior-period information required by the March 2009
amendments to IFRS 7 Improving Disclosures about Financial Instruments for first-time adopters adopting
before 1 January 2010. As a result, IFRS 1, Appendix E, paragraph E1 will be amended as follows:
E1 A first-time adopter may apply the transitional provisions in paragraph 44G of IFRS 7 to the extent that
the entity's first IFRS reporting period starts earlier than 1 January 2010.
The proposed limited exemption from comparative IFRS 7 disclosures for first-time adopters is consistent
with the exemption permitted for early adopters of the March 2009 amendments to IFRS 7. Deadline for
comments on the ED is 29 December 2009. Click for IASB Press Release (PDF 101k).
January 2010: IASB amends IFRS 1 to provide IFRS 7 disclosure exemption
On 28 January 2010, the IASB amended IFRS 1 to exempt first-time adopters of IFRSs from providing the
additional disclosures introduced in March 2009 by Improving Disclosures about Financial Instruments
(Amendments to IFRS 7). The amendment gives first-time adopters the same transition provisions that
Amendments to IFRS 7 provides to current IFRS preparers. The amendment is effective on 1 July 2010,
with earlier application permitted. Click for IASB Press Release (PDF 100k).
December 2010: Two Amendments to IFRS 1
On 20 December, the IASB amended IFRS 1 to:
provide relief for first-time adopters of IFRSs from having to reconstruct transactions that
occurred before their date of transition to IFRSs.
Page 13 of 97
provide guidance for entities emerging from severe hyperinflation either to resume presenting
IFRS financial statements or to present IFRS financial statements for the first time.
Page 14 of 97
IFRS 2 Share-based Payment
Overview
IFRS 2 Share-based Payment requires an entity to recognise share-based payment transactions (such as
granted shares, share options, or share appreciation rights) in its financial statements, including
transactions with employees or other parties to be settled in cash, other assets, or equity instruments of
the entity. Specific requirements are included for equity-settled and cash-settled share-based payment
transactions, as well as those where the entity or supplier has a choice of cash or equity instruments.
Definition of share-based payment
A share-based payment is a transaction in which the entity receives goods or services either as
consideration for its equity instruments or by incurring liabilities for amounts based on the price of the
entity's shares or other equity instruments of the entity. The accounting requirements for the share-based
payment depend on how the transaction will be settled, that is, by the issuance of (a) equity, (b) cash, or
(c) equity or cash.
Scope
The concept of share-based payments is broader than employee share options. IFRS 2 encompasses the
issuance of shares, or rights to shares, in return for services and goods. Examples of items included in
the scope of IFRS 2 are share appreciation rights, employee share purchase plans, employee share
ownership plans, share option plans and plans where the issuance of shares (or rights to shares) may
depend on market or non-market related conditions.
IFRS 2 applies to all entities. There is no exemption for private or smaller entities. Furthermore,
subsidiaries using their parent's or fellow subsidiary's equity as consideration for goods or services are
within the scope of the Standard.
There are two exemptions to the general scope principle:
First, the issuance of shares in a business combination should be accounted for under IFRS 3
Business Combinations. However, care should be taken to distinguish share-based payments
related to the acquisition from those related to continuing employee services
Second, IFRS 2 does not address share-based payments within the scope of paragraphs 8-10 of
IAS 32 Financial Instruments: Presentation, or paragraphs 5-7 of IAS 39 Financial Instruments:
Recognition and Measurement. Therefore, IAS 32 and IAS 39 should be applied for commoditybased derivative contracts that may be settled in shares or rights to shares.
Page 15 of 97
IFRS 2 does not apply to share-based payment transactions other than for the acquisition of goods and
services. Share dividends, the purchase of treasury shares, and the issuance of additional shares are
therefore outside its scope.
Recognition and measurement
The issuance of shares or rights to shares requires an increase in a component of equity. IFRS 2 requires
the offsetting debit entry to be expensed when the payment for goods or services does not represent an
asset. The expense should be recognised as the goods or services are consumed. For example, the
issuance of shares or rights to shares to purchase inventory would be presented as an increase in
inventory and would be expensed only once the inventory is sold or impaired.
The issuance of fully vested shares, or rights to shares, is presumed to relate to past service, requiring
the full amount of the grant-date fair value to be expensed immediately. The issuance of shares to
employees with, say, a three-year vesting period is considered to relate to services over the vesting
period. Therefore, the fair value of the share-based payment, determined at the grant date, should be
expensed over the vesting period.
As a general principle, the total expense related to equity-settled share-based payments will equal the
multiple of the total instruments that vest and the grant-date fair value of those instruments. In short, there
is truing up to reflect what happens during the vesting period. However, if the equity-settled share-based
payment has a market related performance condition, the expense would still be recognised if all other
vesting conditions are met. The following example provides an illustration of a typical equity-settled sharebased payment.
Illustration – Recognition of employee share option grant
Company grants a total of 100 share options to 10 members of its executive management team (10
options each) on 1 January 20X5. These options vest at the end of a three-year period. The company has
determined that each option has a fair value at the date of grant equal to 15. The company expects that
all 100 options will vest and therefore records the following entry at 30 June 20X5 - the end of its first sixmonth interim reporting period.
Dr. Share option expense
Cr. Equity
250
250
[(100 × 15) ÷ 6 periods] = 250 per period
If all 100 shares vest, the above entry would be made at the end of each 6-month reporting period.
However, if one member of the executive management team leaves during the second half of 20X6,
therefore forfeiting the entire amount of 10 options, the following entry at 31 December 20X6 would be
made:
Page 16 of 97
Dr. Share option expense
150
Cr. Equity
150
[(90 × 15) ÷ 6 periods = 225 per period. [225 × 4] – [250+250+250] = 150
Measurement guidance
Depending on the type of share-based payment, fair value may be determined by the value of the shares
or rights to shares given up, or by the value of the goods or services received:
General fair value measurement principle. In principle, transactions in which goods or services
are received as consideration for equity instruments of the entity should be measured at the fair
value of the goods or services received. Only if the fair value of the goods or services cannot be
measured reliably would the fair value of the equity instruments granted be used.
Measuring employee share options. For transactions with employees and others providing
similar services, the entity is required to measure the fair value of the equity instruments granted,
because it is typically not possible to estimate reliably the fair value of employee services
received.
When to measure fair value - options. For transactions measured at the fair value of the equity
instruments granted (such as transactions with employees), fair value should be estimated at
grant date.
When to measure fair value - goods and services. For transactions measured at the fair value
of the goods or services received, fair value should be estimated at the date of receipt of those
goods or services.
Measurement guidance. For goods or services measured by reference to the fair value of the
equity instruments granted, IFRS 2 specifies that, in general, vesting conditions are not taken into
account when estimating the fair value of the shares or options at the relevant measurement date
(as specified above). Instead, vesting conditions are taken into account by adjusting the number
of equity instruments included in the measurement of the transaction amount so that, ultimately,
the amount recognised for goods or services received as consideration for the equity instruments
granted is based on the number of equity instruments that eventually vest.
More measurement guidance. IFRS 2 requires the fair value of equity instruments granted to be
based on market prices, if available, and to take into account the terms and conditions upon
which those equity instruments were granted. In the absence of market prices, fair value is
estimated using a valuation technique to estimate what the price of those equity instruments
would have been on the measurement date in an arm's length transaction between
knowledgeable, willing parties. The standard does not specify which particular model should be
used.
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If fair value cannot be reliably measured. IFRS 2 requires the share-based payment
transaction to be measured at fair value for both listed and unlisted entities. IFRS 2 permits the
use of intrinsic value (that is, fair value of the shares less exercise price) in those "rare cases" in
which the fair value of the equity instruments cannot be reliably measured. However this is not
simply measured at the date of grant. An entity would have to remeasure intrinsic value at each
reporting date until final settlement.
Performance conditions. IFRS 2 makes a distinction between the handling of market based
performance conditions from non-market performance conditions. Market conditions are those
related to the market price of an entity's equity, such as achieving a specified share price or a
specified target based on a comparison of the entity's share price with an index of share prices of
other entities. Market based performance conditions are included in the grant-date fair value
measurement (similarly, non-vesting conditions are taken into account in the measurement).
However, the fair value of the equity instruments is not adjusted to take into consideration nonmarket based performance features - these are instead taken into account by adjusting the
number of equity instruments included in the measurement of the share-based payment
transaction, and are adjusted each period until such time as the equity instruments vest.
Modifications, cancellations, and settlements
The determination of whether a change in terms and conditions has an effect on the amount recognised
depends on whether the fair value of the new instruments is greater than the fair value of the original
instruments (both determined at the modification date).
Modification of the terms on which equity instruments were granted may have an effect on the expense
that will be recorded. IFRS 2 clarifies that the guidance on modifications also applies to instruments
modified after their vesting date. If the fair value of the new instruments is more than the fair value of the
old instruments (e.g. by reduction of the exercise price or issuance of additional instruments), the
incremental amount is recognised over the remaining vesting period in a manner similar to the original
amount. If the modification occurs after the vesting period, the incremental amount is recognised
immediately. If the fair value of the new instruments is less than the fair value of the old instruments, the
original fair value of the equity instruments granted should be expensed as if the modification never
occurred.
The cancellation or settlement of equity instruments is accounted for as an acceleration of the vesting
period and therefore any amount unrecognised that would otherwise have been charged should be
recognised immediately. Any payments made with the cancellation or settlement (up to the fair value of
the equity instruments) should be accounted for as the repurchase of an equity interest. Any payment in
excess of the fair value of the equity instruments granted is recognised as an expense
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New equity instruments granted may be identified as a replacement of cancelled equity instruments. In
those cases, the replacement equity instruments are accounted for as a modification. The fair value of the
replacement equity instruments is determined at grant date, while the fair value of the cancelled
instruments is determined at the date of cancellation, less any cash payments on cancellation that is
accounted for as a deduction from equity.
Disclosure
Required disclosures include:
the nature and extent of share-based payment arrangements that existed during the period
how the fair value of the goods or services received, or the fair value of the equity instruments
granted, during the period was determined
the effect of share-based payment transactions on the entity's profit or loss for the period and on
its financial position.
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IFRS 3 Business Combinations
Overview
IFRS 3 Business Combinations outlines the accounting when an acquirer obtains control of a business
(e.g. an acquisition or merger). Such business combinations are accounted for using the 'acquisition
method', which generally requires assets acquired and liabilities assumed to be measured at their fair
values at the acquisition date. It sets out the principles on the recognition and measurement of acquired
assets and liabilities, the determination of goodwill and the necessary disclosures.
Key definitions
business combination
A transaction or other event in which an acquirer obtains control of one or more businesses. Transactions
sometimes referred to as 'true mergers' or 'mergers of equals' are also business combinations as that
term is used in [IFRS 3]
business
An integrated set of activities and assets that is capable of being conducted and managed for the purpose
of providing a return in the form of dividends, lower costs or other economic benefits directly to investors
or other owners, members or participants
acquisition date
The date on which the acquirer obtains control of the acquiree
acquirer
The entity that obtains control of the acquiree
acquiree
The business or businesses that the acquirer obtains control of in a business combination
Scope
IFRS 3 must be applied when accounting for business combinations, but does not apply to:
The formation of a joint venture* [IFRS 3.2(a)]
The acquisition of an asset or group of assets that is not a business, although general guidance is
provided on how such transactions should be accounted for [IFRS 3.2(b)]
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Combinations of entities or businesses under common control (the IASB has a separate agenda
project on common control transactions) [IFRS 3.2(c)]
Acquisitions by an investment entity of a subsidiary that is required to be measured at fair value
through profit or loss under IFRS 10 Consolidated Financial Statements. [IFRS 3.2A]
Determining whether a transaction is a business combination
IFRS 3 provides additional guidance on determining whether a transaction meets the definition of a
business combination, and so accounted for in accordance with its requirements. This guidance includes:
Business combinations can occur in various ways, such as by transferring cash, incurring
liabilities, issuing equity instruments (or any combination thereof), or by not issuing consideration
at all (i.e. by contract alone) [IFRS 3.B5]
Business combinations can be structured in various ways to satisfy legal, taxation or other
objectives, including one entity becoming a subsidiary of another, the transfer of net assets from
one entity to another or to a new entity [IFRS 3.B6]
The business combination must involve the acquisition of a business, which generally has three
elements: [IFRS 3.B7]
o
Inputs – an economic resource (e.g. non-current assets, intellectual property) that creates
outputs when one or more processes are applied to it
o
Process – a system, standard, protocol, convention or rule that when applied to an input
or inputs, creates outputs (e.g. strategic management, operational processes, resource
management)
o
Output – the result of inputs and processes applied to those inputs.
Method of accounting for business combinations
1. Acquisition method
The acquisition method (called the 'purchase method' in the 2004 version of IFRS 3) is used for all
business combinations. [IFRS 3.4]
Steps in applying the acquisition method are: [IFRS 3.5]
1. Identification of the 'acquirer'
2. Determination of the 'acquisition date'
3. Recognition and measurement of the identifiable assets acquired, the liabilities assumed and any
non-controlling interest (NCI, formerly called minority interest) in the acquiree
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4. Recognition and measurement of goodwill or a gain from a bargain purchase
Identifying an acquirer
The guidance in IFRS 10 Consolidated Financial Statements is used to identify an acquirer in a business
combination, i.e. the entity that obtains 'control' of the acquiree. [IFRS 3.7]
If the guidance in IFRS 10 does not clearly indicate which of the combining entities is an acquirer, IFRS 3
provides additional guidance which is then considered:
The acquirer is usually the entity that transfers cash or other assets where the business
combination is effected in this manner [IFRS 3.B14]
The acquirer is usually, but not always, the entity issuing equity interests where the transaction is
effected in this manner, however the entity also considers other pertinent facts and circumstances
including: [IFRS 3.B15]
o
relative voting rights in the combined entity after the business combination
o
the existence of any large minority interest if no other owner or group of owners has a
significant voting interest
o
the composition of the governing body and senior management of the combined entity
o
the terms on which equity interests are exchanged
The acquirer is usually the entity with the largest relative size (assets, revenues or profit) [IFRS
3.B16]
For business combinations involving multiple entities, consideration is given to the entity initiating
the combination, and the relative sizes of the combining entities. [IFRS 3.B17]
Acquisition date
An acquirer considers all pertinent facts and circumstances when determining the acquisition date, i.e. the
date on which it obtains control of the acquiree. The acquisition date may be a date that is earlier or later
than the closing date. [IFRS 3.8-9]
IFRS 3 does not provide detailed guidance on the determination of the acquisition date and the date
identified should reflect all relevant facts and circumstances. Considerations might include, among
others, the date a public offer becomes unconditional (with a controlling interest acquired), when the
acquirer can effect change in the board of directors of the acquiree, the date of acceptance of an
unconditional offer, when the acquirer starts directing the acquiree's operating and financing policies, or
the date competition or other authorities provide necessarily clearances.
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Acquired assets and liabilities
IFRS 3 establishes the following principles in relation to the recognition and measurement of items arising
in a business combination:
Recognition principle. Identifiable assets acquired, liabilities assumed, and non-controlling
interests in the acquiree, are recognised separately from goodwill [IFRS 3.10]
Measurement principle. All assets acquired and liabilities assumed in a business combination
are measured at acquisition-date fair value. [IFRS 3.18]
Exceptions to the recognition and measurement principles
The following exceptions to the above principles apply:
Contingent liabilities – the requirements of IAS 37 Provisions, Contingent Liabilities and
Contingent Assets do not apply to the recognition of contingent liabilities arising in a business
combination [IFRS 3.22-23]
Income taxes – the recognition and measurement of income taxes is in accordance with IAS 12
Income Taxes [IFRS 3.24-25]
Employee benefits – assets and liabilities arising from an acquiree's employee benefits
arrangements are recognised and measured in accordance with IAS 19 Employee Benefits
(2011) [IFRS 2.26]
Indemnification assets - an acquirer recognises indemnification assets at the same time and on
the same basis as the indemnified item [IFRS 3.27-28]
Reacquired rights – the measurement of reacquired rights is by reference to the remaining
contractual term without renewals [IFRS 3.29]
Share-based payment transactions - these are measured by reference to the method in IFRS
2 Share-based Payment
Assets held for sale – IFRS 5 Non-current Assets Held for Sale and Discontinued Operations is
applied in measuring acquired non-current assets and disposal groups classified as held for sale
at the acquisition date.
In applying the principles, an acquirer classifies and designates assets acquired and liabilities assumed
on the basis of the contractual terms, economic conditions, operating and accounting policies and other
pertinent conditions existing at the acquisition date. For example, this might include the identification of
derivative financial instruments as hedging instruments, or the separation of embedded derivatives from
host contracts.[IFRS 3.15] However, exceptions are made for lease classification (between operating and
finance leases) and the classification of contracts as insurance contracts, which are classified on the
basis of conditions in place at the inception of the contract. [IFRS 3.17]
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Acquired intangible assets must be recognised and measured at fair value in accordance with the
principles if it is separable or arises from other contractual rights, irrespective of whether the acquiree had
recognised the asset prior to the business combination occurring. This is because there is always
sufficient information to reliably measure the fair value of these assets. [IAS 38.33-37] There is no 'reliable
measurement' exception for such assets, as was present under IFRS 3 (2004).
Goodwill
Goodwill is measured as the difference between:
the aggregate of (i) the value of the consideration transferred (generally at fair value), (ii) the
amount of any non-controlling interest (NCI, see below), and (iii) in a business combination
achieved in stages (see below), the acquisition-date fair value of the acquirer's previously-held
equity interest in the acquiree, and
the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities
assumed (measured in accordance with IFRS 3). [IFRS 3.32]
This can be written in simplified equation form as follows:
Goodwill =
Consideration
transferred
+
Amount
of
non-
controlling interests
+
Fair value of previous
equity interests
-
Net
assets
recognised
If the difference above is negative, the resulting gain is a bargain purchase in profit or loss, which may
arise in circumstances such as a forced seller acting under compulsion. [IFRS 3.34-35] However, before
any bargain purchase gain is recognised in profit or loss, the acquirer is required to undertake a review to
ensure the identification of assets and liabilities is complete, and that measurements appropriately reflect
consideration of all available information. [IFRS 3.36]
Choice in the measurement of non-controlling interests (NCI)
IFRS 3 allows an accounting policy choice, available on a transaction by transaction basis, to measure
non-controlling interests (NCI) either at: [IFRS 3.19]
fair value (sometimes called the full goodwill method), or
the NCI's proportionate share of net assets of the acquiree.
The choice in accounting policy applies only to present ownership interests in the acquiree that entitle
holders to a proportionate share of the entity's net assets in the event of a liquidation (e.g. outside
holdings of an acquiree's ordinary shares). Other components of non-controlling interests at must be
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measured at acquisition date fair values or in accordance with other applicable IFRSs (e.g. share-based
payment transactions accounted for under IFRS 2 Share-based Payment). [IFRS 3.19]
Example
P pays 800 to acquire an 80% interest in the ordinary shares of S. The aggregated fair value of 100% of
S's identifiable assets and liabilities (determined in accordance with the requirements of IFRS 3) is 600,
and the fair value of the non-controlling interest (the remaining 20% holding of ordinary shares) is 185.
The measurement of the non-controlling interest, and its resultant impacts on the determination of
goodwill, under each option is illustrated below:
NCI based on
fair value
Consideration transferred
800
Non-controlling interest
185 (1)
985
Net assets
(600)
Goodwill
385
NCI based on
net assets
800
120 (2)
920
(600)
320
(1) The fair value of the 20% non-controlling interest in S will not necessarily be proportionate to the price
paid by P for its 80% interest, primarily due to any control premium or discount [IFRS 3.B45]
(2) Calculated as 20% of the fair value of the net assets of 600.
Business combination achieved in stages (step acquisitions)
Prior to control being obtained, an acquirer accounts for its investment in the equity interests of an
acquiree in accordance with the nature of the investment by applying the relevant standard, e.g. IAS 28
Investments in Associates and Joint Ventures (2011), IFRS 11 Joint Arrangements, IAS 39
Financial Instruments: Recognition and Measurement or IFRS 9 Financial Instruments. As part of
accounting for the business combination, the acquirer remeasures any previously held interest at fair
value and takes this amount into account in the determination of goodwill as noted above. Any resultant
gain or loss is recognised in profit or loss or other comprehensive income as appropriate.
The accounting treatment of an entity's pre-combination interest in an acquiree is consistent with the view
that the obtaining of control is a significant economic event that triggers a remeasurement. Consistent
with this view, all of the assets and liabilities of the acquiree are fully remeasured in accordance with the
requirements of IFRS 3 (generally at fair value). Accordingly, the determination of goodwill occurs only at
the acquisition date. This is different to the accounting for step acquisitions under IFRS 3 (2004).
Related transactions and subsequent accounting
General principles
In general:
Page 25 of 97
transactions that are not part of what the acquirer and acquiree (or its former owners) exchanged
in the business combination are identified and accounted for separately from business
combination
the recognition and measurement of assets and liabilities arising in a business combination after
the initial accounting for the business combination is dealt with under other relevant standards,
e.g. acquired inventory is subsequently accounted under IAS 2 Inventories. [IFRS 3.54]
When determining whether a particular item is part of the exchange for the acquiree or whether it is
separate from the business combination, an acquirer considers the reason for the transaction, who
initiated the transaction and the timing of the transaction. [IFRS 3.B50]
Contingent consideration
Contingent consideration must be measured at fair value at the time of the business combination and is
taken into account in the determination of goodwill. If the amount of contingent consideration changes as
a result of a post-acquisition event (such as meeting an earnings target), accounting for the change in
consideration depends on whether the additional consideration is classified as an equity instrument or an
asset or liability:
If the contingent consideration is classified as an equity instrument, the original amount is not
remeasured
If the additional consideration is classified as an asset or liability that is a financial instrument, the
contingent consideration is measured at fair value and gains and losses are recognised in either
profit or loss or other comprehensive income in accordance with IFRS 9 Financial Instruments or
IAS 39 Financial Instruments: Recognition and Measurement
If the additional consideration is not within the scope of IFRS 9 (or IAS 39), it is accounted for in
accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets or other IFRSs
as appropriate.
Where a change in the fair value of contingent consideration is the result of additional information about
facts and circumstances that existed at the acquisition date, these changes are accounted for as
measurement period adjustments if they arise during the measurement period.
Acquisition costs
Costs of issuing debt or equity instruments are accounted for under IAS 32 Financial Instruments:
Presentation and IAS 39 Financial Instruments: Recognition and Measurement, IFRS 9 Financial
Instruments. All other costs associated with an acquisition must be expensed, including reimbursements
to the acquiree for bearing some of the acquisition costs. Examples of costs to be expensed include
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finder's fees; advisory, legal, accounting, valuation and other professional or consulting fees; and general
administrative costs, including the costs of maintaining an internal acquisitions department. [IFRS 3.53]
Pre-existing relationships and reacquired rights
If the acquirer and acquiree were parties to a pre-existing relationship (for instance, the acquirer had
granted the acquiree a right to use its intellectual property), this must be accounted for separately from
the business combination. In most cases, this will lead to the recognition of a gain or loss for the amount
of the consideration transferred to the vendor which effectively represents a 'settlement' of the preexisting relationship. The amount of the gain or loss is measured as follows:
for pre-existing non-contractual relationships (for example, a lawsuit): by reference to fair value
for pre-existing contractual relationships: at the lesser of (a) the favourable/unfavourable contract
position and (b) any stated settlement provisions in the contract available to the counterparty to
whom the contract is unfavourable. [IFRS 3.B51-53]
However, where the transaction effectively represents a reacquired right, an intangible asset is
recognised and measured on the basis of the remaining contractual term of the related contract excluding
any renewals. The asset is then subsequently amortised over the remaining contractual term, again
excluding any renewals.
Contingent liabilities
Until a contingent liability is settled, cancelled or expired, a contingent liability that was recognised in the
initial accounting for a business combination is measured at the higher of the amount the liability would be
recognised under IAS 37 Provisions, Contingent Liabilities and Contingent Assets, and the amount less
accumulated amortisation under IAS 18 Revenue.
Contingent payments to employees and shareholders
As part of a business combination, an acquirer may enter into arrangements with selling shareholders or
employees. In determining whether such arrangements are part of the business combination or
accounted for separately, the acquirer considers a number of factors, including whether the arrangement
requires continuing employment (and if so, its term), the level or remuneration compared to other
employees, whether payments to shareholder employees are incremental to non-employee shareholders,
the relative number of shares owns, linkages to valuation of the acquiree, how the consideration is
calculated, and other agreements and issues.
Where share-based payment arrangements of the acquiree exist and are replaced, the value of such
awards must be apportioned between pre-combination and post-combination service and accounted for
accordingly.
Indemnification assets
Page 27 of 97
Indemnification assets recognised at the acquisition date (under the exceptions to the general recognition
and measurement principles noted above) are subsequently measured on the same basis of the
indemnified liability or asset, subject to contractual impacts and collectibility. Indemnification assets are
only derecognised when collected, sold or when rights to it are lost.
Other issues
In addition, IFRS 3 provides guidance on some specific aspects of business combinations including:
business combinations achieved without the transfer of consideration, e.g. 'dual listed' and
'stapled' arrangements [IFRS 3.43-44]
reverse acquisitions [IFRS 3.B19]
identifying intangible assets acquired [IFRS 3.B31-34]
Disclosure
Disclosure of information about current business combinations
An acquirer is required to disclose information that enables users of its financial statements to evaluate
the nature and financial effect of a business combination that occurs either during the current reporting
period or after the end of the period but before the financial statements are authorised for issue. [IFRS
3.59]
Among the disclosures required to meet the foregoing objective are the following: [IFRS 3.B64-B66]
name and a description of the acquiree
acquisition date
percentage of voting equity interests acquired
primary reasons for the business combination and a description of how the acquirer obtained
control of the acquiree
description of the factors that make up the goodwill recognised
qualitative description of the factors that make up the goodwill recognised, such as expected
synergies from combining operations, intangible assets that do not qualify for separate
recognition
acquisition-date fair value of the total consideration transferred and the acquisition-date fair value
of each major class of consideration
details of contingent consideration arrangements and indemnification assets
Page 28 of 97
details of acquired receivables
the amounts recognised as of the acquisition date for each major class of assets acquired and
liabilities assumed
details of contingent liabilities recognised
total amount of goodwill that is expected to be deductible for tax purposes
details about any transactions that are recognised separately from the acquisition of assets and
assumption of liabilities in the business combination
information about a bargain purchase
information about the measurement of non-controlling interests
details about a business combination achieved in stages
information about the acquiree's revenue and profit or loss
information about a business combination whose acquisition date is after the end of the reporting
period but before the financial statements are authorised for issue
Disclosure of information about adjustments of past business combinations
An acquirer is required to disclose information that enables users of its financial statements to evaluate
the financial effects of adjustments recognised in the current reporting period that relate to business
combinations that occurred in the period or previous reporting periods. [IFRS 3.61]
Among the disclosures required to meet the foregoing objective are the following: [IFRS 3.B67]
details when the initial accounting for a business combination is incomplete for particular assets,
liabilities, non-controlling interests or items of consideration (and the amounts recognised in the
financial statements for the business combination thus have been determined only provisionally)
follow-up information on contingent consideration
follow-up information about contingent liabilities recognised in a business combination
a reconciliation of the carrying amount of goodwill at the beginning and end of the reporting
period, with various details shown separately
the amount and an explanation of any gain or loss recognised in the current reporting period that
both:
o
relates to the identifiable assets acquired or liabilities assumed in a business combination
that was effected in the current or previous reporting period, and
Page 29 of 97
o
is of such a size, nature or incidence that disclosure is relevant to understanding the
combined entity's financial statements.
Page 30 of 97
IFRS 4 Insurance Contracts
Overview
IFRS 4 Insurance Contracts applies, with limited exceptions, to all insurance contracts (including
reinsurance contracts) that an entity issues and to reinsurance contracts that it holds. In light of the
IASB's comprehensive project on insurance contracts, the standard provides a temporary exemption from
the requirements of some other IFRSs, including the requirement to consider IAS 8 Accounting Policies,
Changes in Accounting Estimates and Errors when selecting accounting policies for insurance contracts.
Scope
IFRS 4 applies to virtually all insurance contracts (including reinsurance contracts) that an entity issues
and to reinsurance contracts that it holds. [IFRS 4.2] It does not apply to other assets and liabilities of an
insurer, such as financial assets and financial liabilities within the scope of IAS 39 Financial Instruments:
Recognition and Measurement. [IFRS 4.3] Furthermore, it does not address accounting by policyholders.
[IFRS 4.4(f)]
In 2005, the IASB amended the scope of IAS 39 to include financial guarantee contracts issued. However,
if an issuer of financial guarantee contracts has previously asserted explicitly that it regards such
contracts as insurance contracts and has used accounting applicable to insurance contracts, the issuer
may elect to apply either IAS 39 or IFRS 4 to such financial guarantee contracts. [IFRS 4.4(d)]
Definition of insurance contract
An insurance contract is a "contract under which one party (the insurer) accepts significant insurance risk
from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain
future event (the insured event) adversely affects the policyholder." [IFRS 4.Appendix A]
Accounting policies
The IFRS exempts an insurer temporarily (until completion of Phase II of the Insurance Project) from
some requirements of other IFRSs, including the requirement to consider IAS 8 Accounting Policies,
Changes in Accounting Estimates and Errors in selecting accounting policies for insurance contracts.
However, the standard: [IFRS 4.14]
prohibits provisions for possible claims under contracts that are not in existence at the reporting
date (such as catastrophe and equalisation provisions)
requires a test for the adequacy of recognised insurance liabilities and an impairment test for
reinsurance assets
Page 31 of 97
requires an insurer to keep insurance liabilities in its balance sheet until they are discharged or
cancelled, or expire, and prohibits offsetting insurance liabilities against related reinsurance
assets and income or expense from reinsurance contracts against the expense or income from
the related insurance contract.
Changes in accounting policies
IFRS 4 permits an insurer to change its accounting policies for insurance contracts only if, as a result, its
financial statements present information that is more relevant and no less reliable, or more reliable and no
less relevant. [IFRS 4.22] In particular, an insurer cannot introduce any of the following practices,
although it may continue using accounting policies that involve them: [IFRS 4.25]
measuring insurance liabilities on an undiscounted basis
measuring contractual rights to future investment management fees at an amount that exceeds
their fair value as implied by a comparison with current market-based fees for similar services
using non-uniform accounting policies for the insurance liabilities of subsidiaries.
Remeasuring insurance liabilities
The IFRS permits the introduction of an accounting policy that involves remeasuring designated
insurance liabilities consistently in each period to reflect current market interest rates (and, if the insurer
so elects, other current estimates and assumptions). Without this permission, an insurer would have been
required to apply the change in accounting policies consistently to all similar liabilities. [IFRS 4.24]
Prudence
An insurer need not change its accounting policies for insurance contracts to eliminate excessive
prudence. However, if an insurer already measures its insurance contracts with sufficient prudence, it
should not introduce additional prudence. [IFRS 4.26]
Future investment margins
There is a rebuttable presumption that an insurer's financial statements will become less relevant and
reliable if it introduces an accounting policy that reflects future investment margins in the measurement of
insurance contracts. [IFRS 4.27]
Asset classifications
When an insurer changes its accounting policies for insurance liabilities, it may reclassify some or all
financial assets as 'at fair value through profit or loss'. [IFRS 4.45]
Other issues
The standard:
Page 32 of 97
clarifies that an insurer need not account for an embedded derivative separately at fair value if the
embedded derivative meets the definition of an insurance contract [IFRS 4.7-8]
requires an insurer to unbundle (that is, to account separately for) deposit components of some
insurance contracts, to avoid the omission of assets and liabilities from its balance sheet [IFRS
4.10]
clarifies the applicability of the practice sometimes known as 'shadow accounting' [IFRS 4.30]
permits an expanded presentation for insurance contracts acquired in a business combination or
portfolio transfer [IFRS 4.31-33]
addresses limited aspects of discretionary participation features contained in insurance contracts
or financial instruments. [IFRS 4.34-35]
Disclosures
The standard requires disclosure of:
information that helps users understand the amounts in the insurer's financial statements that
arise from insurance contracts: [IFRS 4.36-37]
o
accounting policies for insurance contracts and related assets, liabilities, income, and
expense
o
the recognised assets, liabilities, income, expense, and cash flows arising from insurance
contracts
o
if the insurer is a cedant, certain additional disclosures are required
o
information about the assumptions that have the greatest effect on the measurement of
assets, liabilities, income, and expense including, if practicable, quantified disclosure of
those assumptions
o
the effect of changes in assumptions
o
reconciliations of changes in insurance liabilities, reinsurance assets, and, if any, related
deferred acquisition costs
Information that helps users to evaluate the nature and extent of risks arising from insurance
contracts: [IFRS 4.38-39]
o
risk management objectives and policies
o
those terms and conditions of insurance contracts that have a material effect on the
amount, timing, and uncertainty of the insurer's future cash flows
Page 33 of 97
o
information about insurance risk (both before and after risk mitigation by reinsurance),
including information about:
o
the sensitivity to insurance risk
concentrations of insurance risk
actual claims compared with previous estimates
the information about credit risk, liquidity risk and market risk that IFRS 7 would require if
the insurance contracts were within the scope of IFRS 7
o
information about exposures to market risk arising from embedded derivatives contained
in a host insurance contract if the insurer is not required to, and does not, measure the
embedded derivatives at fair value.
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IFRS 5 Non-current Assets Held for Sale and
Discontinued Operations
Overview
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations outlines how to account for noncurrent assets held for sale (or for distribution to owners). In general terms, assets (or disposal groups)
held for sale are not depreciated, are measured at the lower of carrying amount and fair value less costs
to sell, and are presented separately in the statement of financial position. Specific disclosures are also
required for discontinued operations and disposals of non-current assets.
Held-for-sale classification
In general, the following conditions must be met for an asset (or 'disposal group') to be classified as held
for sale: [IFRS 5.6-8]
management is committed to a plan to sell
the asset is available for immediate sale
an active programme to locate a buyer is initiated
the sale is highly probable, within 12 months of classification as held for sale (subject to limited
exceptions)
the asset is being actively marketed for sale at a sales price reasonable in relation to its fair value
actions required to complete the plan indicate that it is unlikely that plan will be significantly
changed or withdrawn
The assets need to be disposed of through sale. Therefore, operations that are expected to be wound
down or abandoned would not meet the definition (but may be classified as discontinued once
abandoned). [IFRS 5.13]
An entity that is committed to a sale involving loss of control of a subsidiary that qualifies for held-for-sale
classification under IFRS 5 classifies all of the assets and liabilities of that subsidiary as held for sale,
even if the entity will retain a non-controlling interest in its former subsidiary after the sale. [IFRS 5.8A]
Held for distribution to owners classification
The classification, presentation and measurement requirements of IFRS 5 also apply to a non-current
asset (or disposal group) that is classified as held for distribution to owners. The entity must be committed
Page 35 of 97
to the distribution, the assets must be available for immediate distribution and the distribution must be
highly probable.
Disposal group concept
A 'disposal group' is a group of assets, possibly with some associated liabilities, which an entity intends to
dispose of in a single transaction. The measurement basis required for non-current assets classified as
held for sale is applied to the group as a whole, and any resulting impairment loss reduces the carrying
amount of the non-current assets in the disposal group in the order of allocation required by IAS 36.
[IFRS 5.4]
Measurement
The following principles apply:
At the time of classification as held for sale. Immediately before the initial classification of the
asset as held for sale, the carrying amount of the asset will be measured in accordance with
applicable IFRSs. Resulting adjustments are also recognised in accordance with applicable
IFRSs.
After classification as held for sale. Non-current assets or disposal groups that are classified as
held for sale are measured at the lower of carrying amount and fair value less costs to sell (fair
value less costs to distribute in the case of assets classified as held for distribution to owners).
Impairment. Impairment must be considered both at the time of classification as held for sale and
subsequently:
o
At the time of classification as held for sale. Immediately prior to classifying an asset or
disposal group as held for sale, impairment is measured and recognised in accordance
with the applicable IFRSs (generally IAS 16 Property, Plant and Equipment, IAS 36
Impairment of Assets, IAS 38 Intangible Assets, and IAS 39 Financial Instruments:
Recognition and Measurement / IFRS 9 Financial Instruments). Any impairment loss is
recognised in profit or loss unless the asset had been measured at revalued amount
under IAS 16 or IAS 38, in which case the impairment is treated as a revaluation
decrease.
o
After classification as held for sale. Calculate any impairment loss based on the
difference between the adjusted carrying amounts of the asset/disposal group and fair
value less costs to sell. Any impairment loss that arises by using the measurement
principles in IFRS 5 must be recognised in profit or loss [IFRS 5.20], even for assets
previously carried at revalued amounts. This is supported by IFRS 5 BC.47 and BC.48,
which indicate the inconsistency with IAS 36.
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Assets carried at fair value prior to initial classification. For such assets, the requirement to
deduct costs to sell from fair value may result in an immediate charge to profit or loss.
Subsequent increases in fair value. A gain for any subsequent increase in fair value less costs to
sell of an asset can be recognised in the profit or loss to the extent that it is not in excess of the
cumulative impairment loss that has been recognised in accordance with IFRS 5 or previously in
accordance with IAS 36.
No depreciation. Non-current assets or disposal groups that are classified as held for sale are not
depreciated.
The measurement provisions of IFRS 5 do not apply to deferred tax assets, assets arising from employee
benefits, financial assets within the scope of IFRS 9 Financial Instruments, non-current assets measured
at fair value in accordance with IAS 41 Agriculture, and contractual rights under insurance contracts.
Presentation
Assets classified as held for sale, and the assets and liabilities included within a disposal group classified
as held for sale, must be presented separately on the face of the statement of financial position.
Disclosures
IFRS 5 requires the following disclosures about assets (or disposal groups) that are held for sale:
description of the non-current asset or disposal group
description of facts and circumstances of the sale (disposal) and the expected timing
impairment losses and reversals, if any, and where in the statement of comprehensive income
they are recognised
if applicable, the reportable segment in which the non-current asset (or disposal group) is
presented in accordance with IFRS 8 Operating Segments
Disclosures in other IFRSs do not apply to assets held for sale (or discontinued operations, discussed
below) unless those other IFRSs require specific disclosures in respect of such assets, or in respect of
certain measurement disclosures where assets and liabilities are outside the scope of the measurement
requirements of IFRS 5.
Classification as discontinuing
A discontinued operation is a component of an entity that either has been disposed of or is classified as
held for sale, and:
represents either a separate major line of business or a geographical area of operations
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is part of a single co-ordinated plan to dispose of a separate major line of business or
geographical area of operations, or
is a subsidiary acquired exclusively with a view to resale and the disposal involves loss of control.
IFRS 5 prohibits the retroactive classification as a discontinued operation, when the discontinued criteria
are met after the end of the reporting period. [IFRS 5.12]
Disclosure in the statement of comprehensive income
The sum of the post-tax profit or loss of the discontinued operation and the post-tax gain or loss
recognised on the measurement to fair value less cost to sell or fair value adjustments on the disposal of
the assets (or disposal group) is presented as a single amount on the face of the statement of
comprehensive income. If the entity presents profit or loss in a separate statement, a section identified as
relating to discontinued operations is presented in that separate statement. [IFRS 5.33-33A].
Detailed disclosure of revenue, expenses, pre-tax profit or loss and related income taxes is required
either in the notes or in the statement of comprehensive income in a section distinct from continuing
operations. [IFRS 5.33] Such detailed disclosures must cover both the current and all prior periods
presented in the financial statements. [IFRS 5.34]
Cash flow information
The net cash flows attributable to the operating, investing, and financing activities of a discontinued
operation is separately presented on the face of the cash flow statement or disclosed in the notes.
[IFRS 5.33]
Disclosures
The following additional disclosures are required:
adjustments made in the current period to amounts disclosed as a discontinued operation in prior
periods must be separately disclosed [IFRS 5.35]
if an entity ceases to classify a component as held for sale, the results of that component
previously presented in discontinued operations must be reclassified and included in income from
continuing operations for all periods presented [IFRS 5.36]
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IFRS 6 Exploration for and Evaluation of Mineral
Resources
Overview
IFRS 6 Exploration for and Evaluation of Mineral Resources has the effect of allowing entities adopting
the standard for the first time to use accounting policies for exploration and evaluation assets that were
applied before adopting IFRSs. It also modifies impairment testing of exploration and evaluation assets by
introducing different impairment indicators and allowing the carrying amount to be tested at an aggregate
level (not greater than a segment).
Definitions
Exploration for and evaluation of mineral resources means the search for mineral resources, including
minerals, oil, natural gas and similar non-regenerative resources after the entity has obtained legal rights
to explore in a specific area, as well as the determination of the technical feasibility and commercial
viability of extracting the mineral resource.
Exploration and evaluation expenditures are expenditures incurred in connection with the exploration and
evaluation of mineral resources before the technical feasibility and commercial viability of extracting a
mineral resource is demonstrable.
Accounting policies for exploration and evaluation
IFRS 6 permits an entity to develop an accounting policy for recognition of exploration and evaluation
expenditures as assets without specifically considering the requirements of paragraphs 11 and 12 of
IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. [IFRS 6.9] Thus, an entity
adopting IFRS 6 may continue to use the accounting policies applied immediately before adopting the
IFRS. This includes continuing to use recognition and measurement practices that are part of those
accounting policies.
Impairment
IFRS 6 effectively modifies the application of IAS 36 Impairment of Assets to exploration and evaluation
assets recognised by an entity under its accounting policy. Specifically:
Entities recognising exploration and evaluation assets are required to perform an impairment test
on those assets when specific facts and circumstances outlined in the standard indicate an
impairment test is required. The facts and circumstances outlined in IFRS 6 are non-exhaustive,
and are applied instead of the 'indicators of impairment' in IAS 36 [IFRS 6.19-20]
Page 39 of 97
Entities are permitted to determine an accounting policy for allocating exploration and evaluation
assets to cash-generating units or groups of CGUs. [IFRS 6.21] This accounting policy may result
in a different allocation than might otherwise arise on applying the requirements of IAS 36
If an impairment test is required, any impairment loss is measured, presented and disclosed in
accordance with IAS 36.
Presentation and disclosure
An entity treats exploration and evaluation assets as a separate class of assets and make the disclosures
required by either IAS 16 Property, Plant and Equipment or IAS 38 Intangible Assets consistent with how
the assets are classified.
IFRS 6 requires disclosure of information that identifies and explains the amounts recognised in its
financial statements arising from the exploration for and evaluation of mineral resources, including:
1. its accounting policies for exploration and evaluation expenditures including the recognition of
exploration and evaluation assets
2. the amounts of assets, liabilities, income and expense and operating and investing cash flows
arising from the exploration for and evaluation of mineral resources.
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IFRS 7 Financial Instruments: Disclosures
Overview
IFRS 7 Financial Instruments: Disclosures requires disclosure of information about the significance of
financial instruments to an entity, and the nature and extent of risks arising from those financial
instruments, both in qualitative and quantitative terms. Specific disclosures are required in relation to
transferred financial assets and a number of other matters. This standard puts all of those financial
instruments disclosures together in a new standard on Financial Instruments: Disclosures. The remaining
parts of IAS 32 deal only with financial instruments presentation matters.
Disclosure requirements of IFRS 7
IFRS requires certain disclosures to be presented by category of instrument based on the IAS 39
measurement categories. Certain other disclosures are required by class of financial instrument. For
those disclosures an entity must group its financial instruments into classes of similar instruments as
appropriate to the nature of the information presented.
The two main categories of disclosures required by IFRS 7 are:
1. information about the significance of financial instruments.
2. information about the nature and extent of risks arising from financial instruments
Information about the significance of financial instruments
Statement of financial position
Disclose the significance of financial instruments for an entity's financial position and
performance. This includes disclosures for each of the following categories:
o
financial assets measured at fair value through profit and loss, showing separately those
held for trading and those designated at initial recognition
o
held-to-maturity investments
o
loans and receivables
o
available-for-sale assets
o
financial liabilities at fair value through profit and loss, showing separately those held for
trading and those designated at initial recognition
o
financial liabilities measured at amortised cost
Other balance sheet-related disclosures:
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o
special disclosures about financial assets and financial liabilities designated to be
measured at fair value through profit and loss, including disclosures about credit risk and
market risk, changes in fair values attributable to these risks and the methods of
measurement.
o
reclassifications of financial instruments from one category to another (e.g. from fair value
to amortised cost or vice versa)
o
information about financial assets pledged as collateral and about financial or nonfinancial assets held as collateral
o
reconciliation of the allowance account for credit losses (bad debts) by class of financial
assets
o
information about compound financial instruments with multiple embedded derivatives
o
breaches of terms of loan agreements
Statement of comprehensive income
Items of income, expense, gains, and losses, with separate disclosure of gains and losses from:
o
financial assets measured at fair value through profit and loss, showing separately those
held for trading and those designated at initial recognition.
o
held-to-maturity investments.
o
loans and receivables.
o
available-for-sale assets.
o
financial liabilities measured at fair value through profit and loss, showing separately
those held for trading and those designated at initial recognition.
o
financial liabilities measured at amortised cost.
Other income statement-related disclosures:
o
total interest income and total interest expense for those financial instruments that are not
measured at fair value through profit and loss
o
fee income and expense
o
amount of impairment losses by class of financial assets
o
interest income on impaired financial assets
Other disclosures
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Accounting policies for financial instruments
Information about hedge accounting, including:
o
description of each hedge, hedging instrument, and fair values of those instruments, and
nature of risks being hedged
o
for cash flow hedges, the periods in which the cash flows are expected to occur, when
they are expected to enter into the determination of profit or loss, and a description of any
forecast transaction for which hedge accounting had previously been used but which is
no longer expected to occur
o
if a gain or loss on a hedging instrument in a cash flow hedge has been recognised in
other comprehensive income, an entity should disclose the following:
o
the amount that was so recognised in other comprehensive income during the period
o
the amount that was removed from equity and included in profit or loss for the period
o
the amount that was removed from equity during the period and included in the initial
measurement of the acquisition cost or other carrying amount of a non-financial asset or
non-
financial
liability
in
a
hedged
highly
probable
forecast
transaction
Note: Where IFRS 9 Financial Instruments (2013) is applied, revised disclosure
requirements apply. The required hedge accounting disclosures apply where the entity
elects to adopt hedge accounting and require information to be provided in three broad
categories: (1) the entity’s risk management strategy and how it is applied to manage risk
(2) how the entity’s hedging activities may affect the amount, timing and uncertainty of its
future cash flows, and (3) the effect that hedge accounting has had on the entity’s
statement of financial position, statement of comprehensive income and statement of
changes in equity. The disclosures are required to be presented in a single note or
separate section in its financial statements, although some information can be
incorporated by reference.
For fair value hedges, information about the fair value changes of the hedging instrument and the
hedged item
Hedge ineffectiveness recognised in profit and loss (separately for cash flow hedges and hedges
of a net investment in a foreign operation)
Information about the fair values of each class of financial asset and financial liability, along with:
o
comparable carrying amounts
o
description of how fair value was determined
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o
the level of inputs used in determining fair value
o
reconciliations of movements between levels of fair value measurement hierarchy
additional disclosures for financial instruments whose fair value is determined using level
3 inputs including impacts on profit and loss, other comprehensive income and sensitivity
analysis
o
information if fair value cannot be reliably measured
The fair value hierarchy introduces 3 levels of inputs based on the lowest level of input significant to the
overall fair value:
Level 1 – quoted prices for similar instruments
Level 2 – directly observable market inputs other than Level 1 inputs
Level 3 – inputs not based on observable market data
Note that disclosure of fair values is not required when the carrying amount is a reasonable
approximation of fair value, such as short-term trade receivables and payables, or for instruments whose
fair value cannot be measured reliably.
Nature and extent of exposure to risks arising from financial
instruments
Qualitative disclosures
The qualitative disclosures describe:
o
risk exposures for each type of financial instrument
o
management's objectives, policies, and processes for managing those risks
o
changes from the prior period
Quantitative disclosures
The quantitative disclosures provide information about the extent to which the entity is exposed to
risk, based on information provided internally to the entity's key management personnel. These
disclosures include:
o
summary quantitative data about exposure to each risk at the reporting date
o
disclosures about credit risk, liquidity risk, and market risk and how these risks are
managed as further described below
o
concentrations of risk
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Credit risk
Credit risk is the risk that one party to a financial instrument will cause a loss for the other party
by failing to pay for its obligation.
Disclosures about credit risk include:
o
maximum amount of exposure (before deducting the value of collateral), description of
collateral, information about credit quality of financial assets that are neither past due nor
impaired, and information about credit quality of financial assets whose terms have been
renegotiated
o
for financial assets that are past due or impaired, analytical disclosures are required
o
information about collateral or other credit enhancements obtained or called
Liquidity risk
Liquidity risk is the risk that an entity will have difficulties in paying its financial liabilities.
Disclosures about liquidity risk include:
o
a maturity analysis of financial liabilities
o
description of approach to risk management
Market risk
Market risk is the risk that the fair value or cash flows of a financial instrument will fluctuate due to
changes in market prices. Market risk reflects interest rate risk, currency risk and other price
risks.
Disclosures about market risk include:
o
a sensitivity analysis of each type of market risk to which the entity is exposed
o
additional information if the sensitivity analysis is not representative of the entity's risk
exposure (for example because exposures during the year were different to exposures at
year-end).
o
IFRS 7 provides that if an entity prepares a sensitivity analysis such as value-at-risk for
management purposes that reflects interdependencies of more than one component of
market risk (for instance, interest risk and foreign currency risk combined), it may
disclose that analysis instead of a separate sensitivity analysis for each type of market
risk
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Transfers of financial assets
An entity shall disclose information that enables users of its financial statements:
1. to understand the relationship between transferred financial assets that are not derecognised in
their entirety and the associated liabilities; and
2. to evaluate the nature of, and risks associated with, the entity's continuing involvement in
derecognised financial assets.
Transferred financial assets that are not derecognised in their entirety
Required disclosures include description of the nature of the transferred assets, nature of risk and
rewards as well as description of the nature and quantitative disclosure depicting relationship
between transferred financial assets and the associated liabilities.
Transferred financial assets that are derecognised in their entirety
Required disclosures include the carrying amount of the assets and liabilities recognised, fair
value of the assets and liabilities that represent continuing involvement, maximum exposure to
loss from the continuing involvement as well as maturity analysis of the undiscounted cash flows
to repurchase the derecognised financial assets.
Additional disclosures are required for any gain or loss recognised at the date of transfer of the
assets, income or expenses recognise from the entity's continuing involvement in the
derecognised financial assets as well as details of uneven distribution of proceed from transfer
activity throughout the reporting period.
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IFRS 8 Operating Segments
Overview
IFRS 8 Operating Segments requires particular classes of entities (essentially those with publicly traded
securities) to disclose information about their operating segments, products and services, the
geographical areas in which they operate, and their major customers. Information is based on internal
management reports, both in the identification of operating segments and measurement of disclosed
segment information.
Scope
IFRS 8 applies to the separate or individual financial statements of an entity (and to the consolidated
financial statements of a group with a parent):
whose debt or equity instruments are traded in a public market or
that files, or is in the process of filing, its (consolidated) financial statements with a securities
commission or other regulatory organisation for the purpose of issuing any class of instruments in
a public market
However, when both separate and consolidated financial statements for the parent are presented in a
single financial report, segment information need be presented only on the basis of the consolidated
financial statements.
Operating segments
IFRS 8 defines an operating segment as follows. An operating segment is a component of an entity:
that engages in business activities from which it may earn revenues and incur expenses
(including revenues and expenses relating to transactions with other components of the same
entity)
whose operating results are reviewed regularly by the entity's chief operating decision maker to
make decisions about resources to be allocated to the segment and assess its performance and
for which discrete financial information is available
Reportable segments
IFRS 8 requires an entity to report financial and descriptive information about its reportable segments.
Reportable segments are operating segments or aggregations of operating segments that meet specified
criteria:
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its reported revenue, from both external customers and intersegment sales or transfers, is 10 per
cent or more of the combined revenue, internal and external, of all operating segments, or
the absolute measure of its reported profit or loss is 10 per cent or more of the greater, in
absolute amount, of (i) the combined reported profit of all operating segments that did not report a
loss and (ii) the combined reported loss of all operating segments that reported a loss, or
its assets are 10 per cent or more of the combined assets of all operating segments.
Two or more operating segments may be aggregated into a single operating segment if aggregation is
consistent with the core principles of the the standard, the segments have similar economic
characteristics and are similar in various prescribed respects.
If the total external revenue reported by operating segments constitutes less than 75 per cent of the
entity's revenue, additional operating segments must be identified as reportable segments (even if they
do not meet the quantitative thresholds set out above) until at least 75 per cent of the entity's revenue is
included in reportable segments.
Disclosure requirements
Required disclosures include:
general information about how the entity identified its operating segments and the types of
products and services from which each operating segment derives its revenues
judgements made by management in applying the aggregation criteria to allow two or more
operating segments to be aggregated
information about the profit or loss for each reportable segment, including certain specified
revenues* and expenses* such as revenue from external customers and from transactions with
other segments, interest revenue and expense, depreciation and amortisation, income tax
expense or income and material non-cash items
a measure of total assets* and total liabilities* for each reportable segment, and the amount of
investments in associates and joint ventures and the amounts of additions to certain non-current
assets ('capital expenditure')
an explanation of the measurements of segment profit or loss, segment assets and segment
liabilities, including certain minimum disclosures, e.g. how transactions between segments are
measured, the nature of measurement differences between segment information and other
information included in the financial statements, and asymmetrical allocations to reportable
segments
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reconciliations of the totals of segment revenues, reported segment profit or loss, segment
assets*, segment liabilities* and other material items to corresponding items in the entity's
financial statements
some entity-wide disclosures that are required even when an entity has only one reportable
segment, including information about each product and service or groups of products and
services
analyses of revenues and certain non-current assets by geographical area – with an expanded
requirement to disclose revenues/assets by individual foreign country (if material), irrespective of
the identification of operating segments
information about transactions with major customers
* This disclosure is required only if such amounts are regularly provided to the chief operating decision
maker, or in the case of specific items of revenue and expense or asset-related items, if those specified
amounts are included in the relevant measure (segment profit or loss or segment assets).
Considerable segment information is required at interim reporting dates by IAS 34.
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IFRS 9 Financial Instruments
Overview
IFRS 9 Financial Instruments issued on 24 July 2014 is the IASB's replacement of IAS 39 Financial
Instruments: Recognition and Measurement. The Standard includes requirements for recognition and
measurement, impairment, derecognition and general hedge accounting.
The version of IFRS 9 issued in 2014 supersedes all previous versions and is mandatorily effective for
periods beginning on or after 1 January 2018 with early adoption permitted (subject to local endorsement
requirements). For a limited period, previous versions of IFRS 9 may be adopted early if not already done
so provided the relevant date of initial application is before 1 February 2015.
IFRS 9 does not replace the requirements for portfolio fair value hedge accounting for interest rate risk
(often referred to as the ‘macro hedge accounting’ requirements) since this phase of the project was
separated from the IFRS 9 project due to the longer term nature of the macro hedging project which is
currently at the discussion paper phase of the due process. In April 2014, the IASB published a
Discussion Paper Accounting for Dynamic Risk management: a Portfolio Revaluation Approach to Macro
Hedging. Consequently, the exception in IAS 39 for a fair value hedge of an interest rate exposure of a
portfolio of financial assets or financial liabilities continues to apply.
Initial measurement of financial instruments
All financial instruments are initially measured at fair value plus or minus, in the case of a financial asset
or financial liability not at fair value through profit or loss, transaction costs.
Subsequent measurement of financial assets
IFRS 9 divides all financial assets that are currently in the scope of IAS 39 into two classifications - those
measured at amortised cost and those measured at fair value.
Where assets are measured at fair value, gains and losses are either recognised entirely in profit or loss
(fair value through profit or loss, FVTPL), or recognised in other comprehensive income (fair value
through other comprehensive income, FVTOCI).
For debt instruments the FVTOCI classification is mandatory for certain assets unless the fair value option
is elected. Whilst for equity investments, the FVTOCI classification is an election. Furthermore, the
requirements for reclassifying gains or losses recognised in other comprehensive income are different for
debt instruments and equity investments.
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The classification of a financial asset is made at the time it is initially recognised, namely when the entity
becomes a party to the contractual provisions of the instrument. [IFRS 9, paragraph 4.1.1] If certain
conditions are met, the classification of an asset may subsequently need to be reclassified.
Debt instruments
A debt instrument that meets the following two conditions must be measured at amortised cost (net of any
write down for impairment) unless the asset is designated at FVTPL under the fair value option (see
below):
Business model test: The objective of the entity's business model is to hold the financial asset
to collect the contractual cash flows (rather than to sell the instrument prior to its contractual
maturity to realise its fair value changes).
Cash flow characteristics test: The contractual terms of the financial asset give rise on
specified dates to cash flows that are solely payments of principal and interest on the principal
amount outstanding.
A debt instrument that meets the following two conditions must be measured at FVTOCI unless the asset
is designated at FVTPL under the fair value option (see below):
Business model test: The financial asset is held within a business model whose objective is
achieved by both collecting contractual cash flows and selling financial assets.
Cash flow characteristics test: The contractual terms of the financial asset give rise on
specified dates to cash flows that are solely payments of principal and interest on the principal
amount outstanding.
All other debt instruments must be measured at fair value through profit or loss (FVTPL). [IFRS 9,
paragraph 4.1.4]
Fair value option
Even if an instrument meets the two requirements to be measured at amortised cost or FVTOCI, IFRS 9
contains an option to designate, at initial recognition, a financial asset as measured at FVTPL if doing so
eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as
an 'accounting mismatch') that would otherwise arise from measuring assets or liabilities or recognising
the gains and losses on them on different bases. [IFRS 9, paragraph 4.1.5]
Equity instruments
All equity investments in scope of IFRS 9 are to be measured at fair value in the statement of financial
position, with value changes recognised in profit or loss, except for those equity investments for which the
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entity has elected to present value changes in 'other comprehensive income'. There is no 'cost exception'
for unquoted equities.
'Other comprehensive income' option
If an equity investment is not held for trading, an entity can make an irrevocable election at initial
recognition to measure it at FVTOCI with only dividend income recognised in profit or loss. [IFRS 9,
paragraph 5.7.5]
Measurement guidance
Despite the fair value requirement for all equity investments, IFRS 9 contains guidance on when cost may
be the best estimate of fair value and also when it might not be representative of fair value.
Subsequent measurement of financial liabilities
IFRS 9 doesn't change the basic accounting model for financial liabilities under IAS 39. Two
measurement categories continue to exist: FVTPL and amortised cost. Financial liabilities held for trading
are measured at FVTPL, and all other financial liabilities are measured at amortised cost unless the fair
value option is applied. [IFRS 9, paragraph 4.2.1]
Fair value option
IFRS 9 contains an option to designate a financial liability as measured at FVTPL if:
doing so eliminates or significantly reduces a measurement or recognition inconsistency
(sometimes referred to as an 'accounting mismatch') that would otherwise arise from measuring
assets or liabilities or recognising the gains and losses on them on different bases, or
the liability is part or a group of financial liabilities or financial assets and financial liabilities that is
managed and its performance is evaluated on a fair value basis, in accordance with a
documented risk management or investment strategy, and information about the group is
provided internally on that basis to the entity's key management personnel.
A financial liability which does not meet any of these criteria may still be designated as measured at
FVTPL when it contains one or more embedded derivatives that sufficiently modify the cash flows of the
liability and are not clearly closely related.
IFRS 9 requires gains and losses on financial liabilities designated as at FVTPL to be split into the
amount of change in fair value attributable to changes in credit risk of the liability, presented in other
comprehensive income, and the remaining amount presented in profit or loss. The new guidance allows
the recognition of the full amount of change in the fair value in profit or loss only if the presentation of
changes in the liability's credit risk in other comprehensive income would create or enlarge an accounting
mismatch in profit or loss. That determination is made at initial recognition and is not reassessed.
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Amounts presented in other comprehensive income shall not be subsequently transferred to profit or loss,
the entity may only transfer the cumulative gain or loss within equity.
Derecognition of financial assets
The basic premise for the derecognition model in IFRS 9 (carried over from IAS 39) is to determine
whether the asset under consideration for derecognition is:
an asset in its entirety or
specifically identified cash flows from an asset (or a group of similar financial assets) or
a fully proportionate (pro rata) share of the cash flows from an asset (or a group of similar
financial assets). or
a fully proportionate (pro rata) share of specifically identified cash flows from a financial asset (or
a group of similar financial assets)
Once the asset under consideration for derecognition has been determined, an assessment is made as to
whether the asset has been transferred, and if so, whether the transfer of that asset is subsequently
eligible for derecognition.
An asset is transferred if either the entity has transferred the contractual rights to receive the cash flows,
or the entity has retained the contractual rights to receive the cash flows from the asset, but has assumed
a contractual obligation to pass those cash flows on under an arrangement that meets the following three
conditions:
the entity has no obligation to pay amounts to the eventual recipient unless it collects equivalent
amounts on the original asset
the entity is prohibited from selling or pledging the original asset (other than as security to the
eventual recipient),
the entity has an obligation to remit those cash flows without material delay
Once an entity has determined that the asset has been transferred, it then determines whether or not it
has transferred substantially all of the risks and rewards of ownership of the asset. If substantially all the
risks and rewards have been transferred, the asset is derecognised. If substantially all the risks and
rewards have been retained, derecognition of the asset is precluded.
If the entity has neither retained nor transferred substantially all of the risks and rewards of the asset, then
the entity must assess whether it has relinquished control of the asset or not. If the entity does not control
the asset then derecognition is appropriate; however if the entity has retained control of the asset, then
the entity continues to recognise the asset to the extent to which it has a continuing involvement in the
asset.
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These various derecognition steps are summarised in the decision tree in paragraph B3.2.1.
Derecognition of financial liabilities
A financial liability should be removed from the balance sheet when, and only when, it is extinguished,
that is, when the obligation specified in the contract is either discharged or cancelled or expires. [IFRS 9,
paragraph 3.3.1] Where there has been an exchange between an existing borrower and lender of debt
instruments with substantially different terms, or there has been a substantial modification of the terms of
an existing financial liability, this transaction is accounted for as an extinguishment of the original financial
liability and the recognition of a new financial liability. A gain or loss from extinguishment of the original
financial liability is recognised in profit or loss.
Derivatives
All derivatives in scope of IFRS 9, including those linked to unquoted equity investments, are measured at
fair value. Value changes are recognised in profit or loss unless the entity has elected to apply hedge
accounting by designating the derivative as a hedging instrument in an eligible hedging relationship.
Embedded derivatives
An embedded derivative is a component of a hybrid contract that also includes a non-derivative host, with
the effect that some of the cash flows of the combined instrument vary in a way similar to a stand-alone
derivative. A derivative that is attached to a financial instrument but is contractually transferable
independently of that instrument, or has a different counterparty, is not an embedded derivative, but a
separate financial instrument. [IFRS 9, paragraph 4.3.1]
The embedded derivative concept that existed in IAS 39 has been included in IFRS 9 to apply only to
hosts that are not financial assets within the scope of the Standard. Consequently, embedded derivatives
that under IAS 39 would have been separately accounted for at FVTPL because they were not closely
related to the host financial asset will no longer be separated. Instead, the contractual cash flows of the
financial asset are assessed in their entirety, and the asset as a whole is measured at FVTPL if the
contractual cash flow characteristics test is not passed (see above).
The embedded derivative guidance that existed in IAS 39 is included in IFRS 9 to help preparers identify
when an embedded derivative is closely related to a financial liability host contract or a host contract not
within the scope of the Standard (e.g. leasing contracts, insurance contracts, contracts for the purchase
or sale of a non-financial items).
Reclassification
For financial assets, reclassification is required between FVTPL, FVTOCI and amortised cost, if and only
if the entity's business model objective for its financial assets changes so its previous model assessment
would no longer apply.
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If reclassification is appropriate, it must be done prospectively from the reclassification date which is
defined as the first day of the first reporting period following the change in business model. An entity does
not restate any previously recognised gains, losses, or interest.
IFRS 9 does not allow reclassification:
for equity investments measured at FVTOCI, or
where the fair value option has been exercised in any circumstance for a financial assets or
financial liability.
Hedge accounting
The hedge accounting requirements in IFRS 9 are optional. If certain eligibility and qualification criteria
are met, hedge accounting allows an entity to reflect risk management activities in the financial
statements by matching gains or losses on financial hedging instruments with losses or gains on the risk
exposures they hedge.
The hedge accounting model in IFRS 9 is not designed to accommodate hedging of open, dynamic
portfolios. As a result, for a fair value hedge of interest rate risk of a portfolio of financial assets or
liabilities an entity can apply the hedge accounting requirements in IAS 39 instead of those in IFRS 9.
In addition when an entity first applies IFRS 9, it may choose as its accounting policy choice to continue to
apply the hedge accounting requirements of IAS 39.
Qualifying criteria for hedge accounting
A hedging relationship qualifies for hedge accounting only if all of the following criteria are met:
1. the hedging relationship consists only of eligible hedging instruments and eligible hedged items.
2. at the inception of the hedging relationship there is formal designation and documentation of the
hedging relationship and the entity’s risk management objective and strategy for undertaking the
hedge.
3. the hedging relationship meets all of the hedge effectiveness requirements
Hedging instruments
Only contracts with a party external to the reporting entity may be designated as hedging instruments.
A hedging instrument may be a derivative (except for some written options) or non-derivative financial
instrument measured at FVTPL unless it is a financial liability designated as at FVTPL for which changes
due to credit risk are presented in OCI. For a hedge of foreign currency risk, the foreign currency risk
component of a non-derivative financial instrument, except equity investments designated as FVTOCI,
may be designated as the hedging instrument.
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IFRS 9 allows a proportion (e.g. 60%) but not a time portion (eg the first 6 years of cash flows of a 10 year
instrument) of a hedging instrument to be designated as the hedging instrument. IFRS 9 also allows only
the intrinsic value of an option, or the spot element of a forward to be designated as the hedging
instrument. An entity may also exclude the foreign currency basis spread from a designated hedging
instrument.
IFRS 9 allows combinations of derivatives and non-derivatives to be designated as the hedging
instrument.
Combinations of purchased and written options do not qualify if they amount to a net written option at the
date of designation.
Hedged items
A hedged item can be a recognised asset or liability, an unrecognised firm commitment, a highly probable
forecast transaction or a net investment in a foreign operation and must be reliably measurable.
An aggregated exposure that is a combination of an eligible hedged item as described above and a
derivative may be designated as a hedged item.
The hedged item must generally be with a party external to the reporting entity, however, as an exception
the foreign currency risk of an intragroup monetary item may qualify as a hedged item in the consolidated
financial statements if it results in an exposure to foreign exchange rate gains or losses that are not fully
eliminated on consolidation. In addition, the foreign currency risk of a highly probable forecast intragroup
transaction may qualify as a hedged item in consolidated financial statements provided that the
transaction is denominated in a currency other than the functional currency of the entity entering into that
transaction and the foreign currency risk will affect consolidated profit or loss.
An entity may designate an item in its entirety or a component of an item as the hedged item. The
component may be a risk component that is separately identifiable and reliably measurable; one or more
selected contractual cash flows; or components of a nominal amount.
A group of items (including net positions is an eligible hedged item only if:
1. it consists of items individually, eligible hedged items;
2. the items in the group are managed together on a group basis for risk management purposes;
and
3. in the case of a cash flow hedge of a group of items whose variabilities in cash flows are not
expected to be approximately proportional to the overall variability in cash flows of the group:
1. it is a hedge of foreign currency risk; and
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2. the designation of that net position specifies the reporting period in which the forecast
transactions are expected to affect profit or loss, as well as their nature and volume [IFRS
9 paragraph 6.6.1]
For a hedge of a net position whose hedged risk affects different line items in the statement of profit or
loss and other comprehensive income, any hedging gains or losses in that statement are presented in a
separate line from those affected by the hedged items.
Accounting for qualifying hedging relationships
There are three types of hedging relationships:
Fair value hedge: a hedge of the exposure to changes in fair value of a recognised asset or liability or an
unrecognised firm commitment, or a component of any such item, that is attributable to a particular risk
and could affect profit or loss (or OCI in the case of an equity instrument designated as at FVTOCI). [IFRS
9 paragraphs 6.5.2(a) and 6.5.3]
For a fair value hedge, the gain or loss on the hedging instrument is recognised in profit or loss (or OCI, if
hedging an equity instrument at FVTOCI and the hedging gain or loss on the hedged item adjusts the
carrying amount of the hedged item and is recognised in profit or loss. However, if the hedged item is an
equity instrument at FVTOCI, those amounts remain in OCI. When a hedged item is an unrecognised firm
commitment the cumulative hedging gain or loss is recognised as an asset or a liability with a
corresponding gain or loss recognised in profit or loss.
If the hedged item is a debt instrument measured at amortised cost or FVTOCI any hedge adjustment is
amortised to profit or loss based on a recalculated effective interest rate. Amortisation may begin as soon
as an adjustment exists and shall begin no later than when the hedged item ceases to be adjusted for
hedging gains and losses.
Cash flow hedge: a hedge of the exposure to variability in cash flows that is attributable to a particular
risk associated with all, or a component of, a recognised asset or liability (such as all or some future
interest payments on variable-rate debt) or a highly probable forecast transaction, and could affect profit
or loss.
For a cash flow hedge the cash flow hedge reserve in equity is adjusted to the lower of the following (in
absolute amounts):
the cumulative gain or loss on the hedging instrument from inception of the hedge; and
the cumulative change in fair value of the hedged item from inception of the hedge.
The portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is
recognised in OCI and any remaining gain or loss is hedge ineffectiveness that is recognised in profit or
loss.
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If a hedged forecast transaction subsequently results in the recognition of a non-financial item or
becomes a firm commitment for which fair value hedge accounting is applied, the amount that has been
accumulated in the cash flow hedge reserve is removed and included directly in the initial cost or other
carrying amount of the asset or the liability. In other cases the amount that has been accumulated in the
cash flow hedge reserve is reclassified to profit or loss in the same period(s) as the hedged cash flows
affect profit or loss.
When an entity discontinues hedge accounting for a cash flow hedge, if the hedged future cash flows are
still expected to occur, the amount that has been accumulated in the cash flow hedge reserve remains
there until the future cash flows occur; if the hedged future cash flows are no longer expected to occur,
that amount is immediately reclassified to profit or loss.
A hedge of the foreign currency risk of a firm commitment may be accounted for as a fair value hedge or a
cash flow hedge.
Hedge of a net investment in a foreign operation (as defined in IAS 21), including a hedge of a
monetary item that is accounted for as part of the net investment, is accounted for similarly to cash flow
hedges:
the portion of the gain or loss on the hedging instrument that is determined to be an effective
hedge is recognised in OCI; and
the ineffective portion is recognised in profit or loss.
The cumulative gain or loss on the hedging instrument relating to the effective portion of the hedge is
reclassified to profit or loss on the disposal or partial disposal of the foreign operation.
Hedge effectiveness requirements
In order to qualify for hedge accounting, the hedge relationship must meet the following effectiveness
criteria at the beginning of each hedged period:
there is an economic relationship between the hedged item and the hedging instrument;
the effect of credit risk does not dominate the value changes that result from that economic
relationship; and
the hedge ratio of the hedging relationship is the same as that actually used in the economic
hedge
Rebalancing and discontinuation
If a hedging relationship ceases to meet the hedge effectiveness requirement relating to the hedge ratio
but the risk management objective for that designated hedging relationship remains the same, an entity
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adjusts the hedge ratio of the hedging relationship (i.e. rebalances the hedge) so that it meets the
qualifying criteria again.
An entity discontinues hedge accounting prospectively only when the hedging relationship (or a part of a
hedging relationship) ceases to meet the qualifying criteria (after any rebalancing). This includes
instances when the hedging instrument expires or is sold, terminated or exercised. Discontinuing hedge
accounting can either affect a hedging relationship in its entirety or only a part of it (in which case hedge
accounting continues for the remainder of the hedging relationship).
Time value of options
When an entity separates the intrinsic value and time value of an option contract and designates as the
hedging instrument only the change in intrinsic value of the option, it recognises some or all of the change
in the time value in OCI which is later removed or reclassified from equity as a single amount or on an
amortised basis (depending on the nature of the hedged item) and ultimately recognised in profit or loss.
This reduces profit or loss volatility compared to recognising the change in value of time value directly in
profit or loss.
Forward points and foreign currency basis spreads
When an entity separates the forward points and the spot element of a forward contract and designates
as the hedging instrument only the change in the value of the spot element, or when an entity excludes
the foreign currency basis spread from a hedge the entity may recognise the change in value of the
excluded portion in OCI to be later removed or reclassified from equity as a single amount or on an
amortised basis (depending on the nature of the hedged item) and ultimately recognised in profit or loss.
This reduces profit or loss volatility compared to recognising the change in value of forward points or
currency basis spreads directly in profit or loss.
Credit exposures designated at FVTPL
If an entity uses a credit derivative measured at FVTPL to manage the credit risk of a financial instrument
(credit exposure) it may designate all or a proportion of that financial instrument as measured at FVTPL if:
the name of the credit exposure matches the reference entity of the credit derivative (‘name
matching’); and
the seniority of the financial instrument matches that of the instruments that can be delivered in
accordance with the credit derivative.
An entity may make this designation irrespective of whether the financial instrument that is managed for
credit risk is within the scope of IFRS 9 (for example, it can apply to loan commitments that are outside
the scope of IFRS 9). The entity may designate that financial instrument at, or subsequent to, initial
recognition, or while it is unrecognised and shall document the designation concurrently.
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If designated after initial recognition, any difference in the previous carrying amount and fair value is
recognised immediately in profit or loss
An entity discontinues measuring the financial instrument that gave rise to the credit risk at FVTPL if the
qualifying criteria are no longer met and the instrument is not otherwise required to be measured at
FVTPL. The fair value at discontinuation becomes its new carrying amount.
Impairment
The impairment model in IFRS 9 is based on the premise of providing for expected losses.
Scope of Impairment model
IFRS 9 requires that the same impairment model apply to all of the following:
Financial assets measured at amortised cost;
Financial assets mandatorily measured at FVTOCI;
Loan commitments when there is a present obligation to extend credit (except where these are
measured at FVTPL);
o
Financial guarantee contracts to which IFRS 9 is applied (except those measured at
FVTPL);
o
Lease receivables within the scope of IAS 17 Leases; and
o
Contract assets within the scope of IFRS 15 Revenue from Contracts with Customers
(i.e. rights to consideration following transfer of goods or services).
General approach
With the exception of purchased or originated credit impaired financial assets (see below), expected
credit losses are required to be measured through a loss allowance at an amount equal to:
the 12-month expected credit losses (expected credit losses that result from those default events
on the financial instrument that are possible within 12 months after the reporting date); or
full lifetime expected credit losses (expected credit losses that result from all possible default
events over the life of the financial instrument).
A loss allowance for full lifetime expected credit losses is required for a financial instrument if the credit
risk of that financial instrument has increased significantly since initial recognition, as well as to contract
assets or trade receivables that do not constitute a financing transaction in accordance with IFRS 15.
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Additionally, entities can elect an accounting policy to recognise full lifetime expected losses for all
contract assets and/or all trade receivables that do constitute a financing transaction in accordance with
IFRS 15. The same election is also separately permitted for lease receivables.
For all other financial instruments, expected credit losses are measured at an amount equal to the 12month expected credit losses.
Significant increase in credit risk
With the exception of purchased or originated credit-impaired financial assets (see below), the loss
allowance for financial instruments is measured at an amount equal to lifetime expected losses if the
credit risk of a financial instrument has increased significantly since initial recognition, unless the credit
risk of the financial instrument is low at the reporting date in which case it can be assumed that credit risk
on the financial instrument has not increased significantly since initial recognition.
The Standard considers credit risk low if there is a low risk of default, the borrower has a strong capacity
to meet its contractual cash flow obligations in the near term and adverse changes in economic and
business conditions in the longer term may, but will not necessarily, reduce the ability of the borrower to
fulfil its contractual cash flow obligations. The Standard suggests that ‘investment grade’ rating might be
an indicator for a low credit risk.
The assessment of whether there has been a significant increase in credit risk is based on an increase in
the probability of a default occurring since initial recognition. Under the Standard, an entity may use
various approaches to assess whether credit risk has increased significantly (provided that the approach
is consistent with the requirements). An approach can be consistent with the requirements even if it does
not include an explicit probability of default occurring as an input. The application guidance provides a list
of factors that may assist an entity in making the assessment. Also, whilst in principle the assessment of
whether a loss allowance should be based on lifetime expected credit losses is to be made on an
individual basis, some factors or indicators might not be available at an instrument level. In this case, the
entity should perform the assessment on appropriate groups or portions of a portfolio of financial
instruments.
The requirements also contain a rebuttable presumption that the credit risk has increased significantly
when contractual payments are more than 30 days past due. IFRS 9 also requires that (other than for
purchased or originated credit impaired financial instruments) if a significant increase in credit risk that
had taken place since initial recognition and has reversed by a subsequent reporting period (i.e.,
cumulatively credit risk is not significantly higher than at initial recognition) then the expected credit losses
on the financial instrument revert to being measured based on an amount equal to the 12-month expected
credit losses.
Purchased or originated credit-impaired financial assets
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Purchased or originated credit-impaired financial assets are treated differently because the asset is creditimpaired at initial recognition. For these assets, an entity would recognise changes in lifetime expected
losses since initial recognition as a loss allowance with any changes recognised in profit or loss. Under
the requirements, any favourable changes for such assets are an impairment gain even if the resulting
expected cash flows of a financial asset exceed the estimated cash flows on initial recognition.
Credit-impaired financial asset
Under IFRS 9 a financial asset is credit-impaired when one or more events that have occurred and have a
significant impact on the expected future cash flows of the financial asset. It includes observable data that
has come to the attention of the holder of a financial asset about the following events:
significant financial difficulty of the issuer or borrower;
a breach of contract, such as a default or past-due event;
the lenders for economic or contractual reasons relating to the borrower’s financial difficulty
granted the borrower a concession that would not otherwise be considered;
it becoming probable that the borrower will enter bankruptcy or other financial reorganisation;
the disappearance of an active market for the financial asset because of financial difficulties; or
the purchase or origination of a financial asset at a deep discount that reflects incurred credit
losses.
Basis for estimating expected credit losses
Any measurement of expected credit losses under IFRS 9 shall reflect an unbiased and probabilityweighted amount that is determined by evaluating the range of possible outcomes as well as
incorporating the time value of money. Also, the entity should consider reasonable and supportable
information about past events, current conditions and reasonable and supportable forecasts of future
economic conditions when measuring expected credit losses.
The Standard defines expected credit losses as the weighted average of credit losses with the respective
risks of a default occurring as the weightings. [IFRS 9 Appendix A] Whilst an entity does not need to
consider every possible scenario, it must consider the risk or probability that a credit loss occurs by
considering the possibility that a credit loss occurs and the possibility that no credit loss occurs, even if
the probability of a credit loss occurring is low.
In particular, for lifetime expected losses, an entity is required to estimate the risk of a default occurring on
the financial instrument during its expected life. 12-month expected credit losses represent the lifetime
cash shortfalls that will result if a default occurs in the 12 months after the reporting date, weighted by the
probability of that default occurring.
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An entity is required to incorporate reasonable and supportable information (i.e., that which is reasonably
available at the reporting date). Information is reasonably available if obtaining it does not involve undue
cost or effort (with information available for financial reporting purposes qualifying as such).
For applying the model to a loan commitment an entity will consider the risk of a default occurring under
the loan to be advanced, whilst application of the model for financial guarantee contracts an entity
considers the risk of a default occurring of the specified debtor.
An entity may use practical expedients when estimating expected credit losses if they are consistent with
the principles in the Standard (for example, expected credit losses on trade receivables may be
calculated using a provision matrix where a fixed provision rate applies depending on the number of days
that a trade receivable is outstanding).
To reflect time value, expected losses should be discounted to the reporting date using the effective
interest rate of the asset (or an approximation thereof) that was determined at initial recognition. A “creditadjusted effective interest” rate should be used for expected credit losses of purchased or originated
credit-impaired financial assets. In contrast to the “effective interest rate” (calculated using expected cash
flows that ignore expected credit losses), the credit-adjusted effective interest rate reflects expected credit
losses of the financial asset.
Expected credit losses of undrawn loan commitments should be discounted by using the effective interest
rate (or an approximation thereof) that will be applied when recognising the financial asset resulting from
the commitment. If the effective interest rate of a loan commitment cannot be determined, the discount
rate should reflect the current market assessment of time value of money and the risks that are specific to
the cash flows but only if, and to the extent that, such risks are not taken into account by adjusting the
discount rate. This approach shall also be used to discount expected credit losses of financial guarantee
contracts.
Presentation
Whilst interest revenue is always required to be presented as a separate line item, it is calculated
differently according to the status of the asset with regard to credit impairment. In the case of a financial
asset that is not a purchased or originated credit-impaired financial asset and for which there is no
objective evidence of impairment at the reporting date, interest revenue is calculated by applying the
effective interest rate method to the gross carrying amount.
In the case of a financial asset that is not a purchased or originated credit-impaired financial asset but
subsequently has become credit-impaired, interest revenue is calculated by applying the effective interest
rate to the amortised cost balance, which comprises the gross carrying amount adjusted for any loss
allowance.
In the case of purchased or originated credit-impaired financial assets, interest revenue is always
recognised by applying the credit-adjusted effective interest rate to the amortised cost carrying amount.
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[IFRS 9 paragraph 5.4.1] The credit-adjusted effective interest rate is the rate that discounts the cash
flows expected on initial recognition (explicitly taking account of expected credit losses as well as
contractual terms of the instrument) back to the amortised cost at initial recognition.
Consequential amendments of IFRS 9 to IAS 1 require that impairment losses, including reversals of
impairment losses and impairment gains (in the case of purchased or originated credit-impaired financial
assets), are presented in a separate line item in the statement of profit or loss and other comprehensive
income.
Disclosures
IFRS 9 amends some of the requirements of IFRS 7 Financial Instruments: Disclosures including adding
disclosures about investments in equity instruments designated as at FVTOCI, disclosures on risk
management activities and hedge accounting and disclosures on credit risk management and impairment.
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IFRS 10 Consolidated Financial Statements
Overview
IFRS 10 Consolidated Financial Statements outlines the requirements for the preparation and
presentation of consolidated financial statements, requiring entities to consolidate entities it controls.
Control requires exposure or rights to variable returns and the ability to affect those returns through power
over an investee.
The Standard:
requires a parent entity (an entity that controls one or more other entities) to present consolidated
financial statements
defines the principle of control, and establishes control as the basis for consolidation
set out how to apply the principle of control to identify whether an investor controls an investee
and therefore must consolidate the investee
sets out the accounting requirements for the preparation of consolidated financial statements
defines an investment entity and sets out an exception to consolidating particular subsidiaries of
an investment entity.
Key definitions
Consolidated financial statements
The financial statements of a group in which the assets, liabilities, equity, income, expenses and cash
flows of the parent and its subsidiaries are presented as those of a single economic entity
Control of an investee
An investor controls an investee when the investor is exposed, or has rights, to variable returns from its
involvement with the investee and has the ability to affect those returns through its power over the
investee
Investment entity
An entity that:
1. obtains funds from one or more investors for the purpose of providing those investor(s) with
investment management services
2. commits to its investor(s) that its business purpose is to invest funds solely for returns from
capital appreciation, investment income, or both, and
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3. measures and evaluates the performance of substantially all of its investments on a fair value
basis.
Parent
An entity that controls one or more entities
Power
Existing rights that give the current ability to direct the relevant activities
Protective rights
Rights designed to protect the interest of the party holding those rights without giving that party power
over the entity to which those rights relate
Relevant activities
Activities of the investee that significantly affect the investee's returns
Control
An investor determines whether it is a parent by assessing whether it controls one or more investees. An
investor considers all relevant facts and circumstances when assessing whether it controls an investee.
An investor controls an investee when it is exposed, or has rights, to variable returns from its involvement
with the investee and has the ability to affect those returns through its power over the investee.
An investor controls an investee if and only if the investor has all of the following elements:
power over the investee, i.e. the investor has existing rights that give it the ability to direct the
relevant activities (the activities that significantly affect the investee's returns)
exposure, or rights, to variable returns from its involvement with the investee
the ability to use its power over the investee to affect the amount of the investor's returns.
Power arises from rights. Such rights can be straightforward (e.g. through voting rights) or be complex
(e.g. embedded in contractual arrangements). An investor that holds only protective rights cannot have
power over an investee and so cannot control an investee.
An investor must be exposed, or have rights, to variable returns from its involvement with an investee to
control the investee. Such returns must have the potential to vary as a result of the investee's
performance and can be positive, negative, or both.
A parent must not only have power over an investee and exposure or rights to variable returns from its
involvement with the investee, a parent must also have the ability to use its power over the investee to
affect its returns from its involvement with the investee.
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When assessing whether an investor controls an investee an investor with decision-making rights
determines whether it acts as principal or as an agent of other parties. A number of factors are considered
in making this assessment. For instance, the remuneration of the decision-maker is considered in
determining whether it is an agent.
Accounting requirements
Preparation of consolidated financial statements
A parent prepares consolidated financial statements using uniform accounting policies for like
transactions and other events in similar circumstances.
However, a parent need not present consolidated financial statements if it meets all of the following
conditions:
it is a wholly-owned subsidiary or is a partially-owned subsidiary of another entity and its other
owners, including those not otherwise entitled to vote, have been informed about, and do not
object to, the parent not presenting consolidated financial statements
its debt or equity instruments are not traded in a public market (a domestic or foreign stock
exchange or an over-the-counter market, including local and regional markets)
it did not file, nor is it in the process of filing, its financial statements with a securities commission
or other regulatory organisation for the purpose of issuing any class of instruments in a public
market, and
its ultimate or any intermediate parent of the parent produces financial statements available for
public use that comply with IFRSs, in which subsidiaries are consolidated or are measured at fair
value through profit or loss in accordance with IFRS 10.
Investment entities are prohibited from consolidating particular subsidiaries (see further information
below).
Furthermore, post-employment benefit plans or other long-term employee benefit plans to which IAS 19
Employee Benefits applies are not required to apply the requirements of IFRS 10.
Consolidation procedures
Consolidated financial statements:
combine like items of assets, liabilities, equity, income, expenses and cash flows of the parent
with those of its subsidiaries
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offset (eliminate) the carrying amount of the parent's investment in each subsidiary and the
parent's portion of equity of each subsidiary (IFRS 3 Business Combinations explains how to
account for any related goodwill)
eliminate in full intragroup assets and liabilities, equity, income, expenses and cash flows relating
to transactions between entities of the group (profits or losses resulting from intragroup
transactions that are recognised in assets, such as inventory and fixed assets, are eliminated in
full).
A reporting entity includes the income and expenses of a subsidiary in the consolidated financial
statements from the date it gains control until the date when the reporting entity ceases to control the
subsidiary. Income and expenses of the subsidiary are based on the amounts of the assets and liabilities
recognised in the consolidated financial statements at the acquisition date.
The parent and subsidiaries are required to have the same reporting dates, or consolidation based on
additional financial information prepared by subsidiary, unless impracticable. Where impracticable, the
most recent financial statements of the subsidiary are used, adjusted for the effects of significant
transactions or events between the reporting dates of the subsidiary and consolidated financial
statements. The difference between the date of the subsidiary's financial statements and that of the
consolidated financial statements shall be no more than three months.
Non-controlling interests (NCIs)
A parent presents non-controlling interests in its consolidated statement of financial position within equity,
separately from the equity of the owners of the parent.
A reporting entity attributes the profit or loss and each component of other comprehensive income to the
owners of the parent and to the non-controlling interests. The proportion allocated to the parent and noncontrolling interests are determined on the basis of present ownership interests.
The reporting entity also attributes total comprehensive income to the owners of the parent and to the
non-controlling interests even if this results in the non-controlling interests having a deficit balance.
Changes in ownership interests
Changes in a parent's ownership interest in a subsidiary that do not result in the parent losing control of
the subsidiary are equity transactions (i.e. transactions with owners in their capacity as owners). When
the proportion of the equity held by non-controlling interests changes, the carrying amounts of the
controlling and non-controlling interests area adjusted to reflect the changes in their relative interests in
the subsidiary. Any difference between the amount by which the non-controlling interests are adjusted and
the fair value of the consideration paid or received is recognised directly in equity and attributed to the
owners of the parent.
If a parent loses control of a subsidiary, the parent :
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derecognises the assets and liabilities of the former subsidiary from the consolidated statement of
financial position
recognises any investment retained in the former subsidiary when control is lost and
subsequently accounts for it and for any amounts owed by or to the former subsidiary in
accordance with relevant IFRSs. That retained interest is remeasured and the remeasured value
is regarded as the fair value on initial recognition of a financial asset in accordance with IFRS 9
Financial Instruments or, when appropriate, the cost on initial recognition of an investment in an
associate or joint venture
recognises the gain or loss associated with the loss of control attributable to the former controlling
interest.
If a parent loses control of a subsidiary that does not contain a business in a transaction with an associate
or a joint venture gains or losses resulting from those transactions are recognised in the parent's profit or
loss only to the extent of the unrelated investors' interests in that associate or joint venture.
Investment entities consolidation exemption
IFRS 10 contains special accounting requirements for investment entities. Where an entity meets the
definition of an 'investment entity', it does not consolidate its subsidiaries, or apply IFRS 3 Business
Combinations when it obtains control of another entity.
An entity is required to consider all facts and circumstances when assessing whether it is an investment
entity, including its purpose and design. IFRS 10 provides that an investment entity should have the
following typical characteristics:
it has more than one investment
it has more than one investor
it has investors that are not related parties of the entity
it has ownership interests in the form of equity or similar interests.
The absence of any of these typical characteristics does not necessarily disqualify an entity from being
classified as an investment entity.
An investment entity is required to measure an investment in a subsidiary at fair value through profit or
loss in accordance with IFRS 9 Financial Instruments or IAS 39 Financial Instruments: Recognition and
Measurement.
However, an investment entity is still required to consolidate a subsidiary where that subsidiary provides
services that relate to the investment entity’s investment activities.*
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* Investment Entities: Applying the Consolidation Exception (Amendments to IFRS 10, IFRS 12 and IAS
28) clarifies, effective 1 January 2016, that this relates to a subsidiary that is not itself an investment entity
and whose main purpose and activities are providing services that relate to the investment entity's
investment activities.
Because an investment entity is not required to consolidate its subsidiaries, intragroup related party
transactions and outstanding balances are not eliminated.
Special requirements apply where an entity becomes, or ceases to be, an investment entity.
The exemption from consolidation only applies to the investment entity itself. Accordingly, a parent of an
investment entity is required to consolidate all entities that it controls, including those controlled through
an investment entity subsidiary, unless the parent itself is an investment entity.
Disclosure
There are no disclosures specified in IFRS 10. Instead, IFRS 12 Disclosure of Interests in Other Entities
outlines the disclosures required.
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IFRS 11 Joint Arrangements
Overview
IFRS 11 Joint Arrangements outlines the accounting by entities that jointly control an arrangement. Joint
control involves the contractually agreed sharing of control and arrangements subject to joint control are
classified as either a joint venture (representing a share of net assets and equity accounted) or a joint
operation (representing rights to assets and obligations for liabilities, accounted for accordingly).
Key definitions
Joint operation
A joint arrangement whereby the parties that have joint control of the arrangement have rights to the
assets, and obligations for the liabilities, relating to the arrangement
Joint venture
A joint arrangement whereby the parties that have joint control of the arrangement have rights to the net
assets of the arrangement
Joint venturer
A party to a joint venture that has joint control of that joint venture
Party to a joint arrangement
An entity that participates in a joint arrangement, regardless of whether that entity has joint control of the
arrangement
Separate vehicle
A separately identifiable financial structure, including separate legal entities or entities recognised by
statute, regardless of whether those entities have a legal personality
Joint arrangements
A joint arrangement is an arrangement of which two or more parties have joint control.
A joint arrangement has the following characteristics:
the parties are bound by a contractual arrangement, and
the contractual arrangement gives two or more of those parties joint control of the arrangement.
A joint arrangement is either a joint operation or a joint venture.
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Joint control
Joint control is the contractually agreed sharing of control of an arrangement, which exists only when
decisions about the relevant activities require the unanimous consent of the parties sharing control.
Before assessing whether an entity has joint control over an arrangement, an entity first assesses
whether the parties, or a group of the parties, control the arrangement (in accordance with the definition of
control in IFRS 10 Consolidated Financial Statements).
After concluding that all the parties, or a group of the parties, control the arrangement collectively, an
entity shall assess whether it has joint control of the arrangement. Joint control exists only when decisions
about the relevant activities require the unanimous consent of the parties that collectively control the
arrangement.
The requirement for unanimous consent means that any party with joint control of the arrangement can
prevent any of the other parties, or a group of the parties, from making unilateral decisions (about the
relevant activities) without its consent.
Types of joint arrangements
Joint arrangements are either joint operations or joint ventures:
A joint operation is a joint arrangement whereby the parties that have joint control of the
arrangement have rights to the assets, and obligations for the liabilities, relating to the
arrangement. Those parties are called joint operators.
A joint venture is a joint arrangement whereby the parties that have joint control of the
arrangement have rights to the net assets of the arrangement. Those parties are called joint
venturers.
Classifying joint arrangements
The classification of a joint arrangement as a joint operation or a joint venture depends upon the rights
and obligations of the parties to the arrangement. An entity determines the type of joint arrangement in
which it is involved by considering the structure and form of the arrangement, the terms agreed by the
parties in the contractual arrangement and other facts and circumstances.
Regardless of the purpose, structure or form of the arrangement, the classification of joint arrangements
depends upon the parties' rights and obligations arising from the arrangement.
A joint arrangement in which the assets and liabilities relating to the arrangement are held in a separate
vehicle can be either a joint venture or a joint operation.
A joint arrangement that is not structured through a separate vehicle is a joint operation. In such cases,
the contractual arrangement establishes the parties' rights to the assets, and obligations for the liabilities,
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relating to the arrangement, and the parties' rights to the corresponding revenues and obligations for the
corresponding expenses.
Financial statements of parties to a joint arrangement
Joint operations
A joint operator recognises in relation to its interest in a joint operation:
its assets, including its share of any assets held jointly;
its liabilities, including its share of any liabilities incurred jointly;
its revenue from the sale of its share of the output of the joint operation;
its share of the revenue from the sale of the output by the joint operation; and
its expenses, including its share of any expenses incurred jointly.
A joint operator accounts for the assets, liabilities, revenues and expenses relating to its involvement in a
joint operation in accordance with the relevant IFRSs.
The acquirer of an interest in a joint operation in which the activity constitutes a business, as defined in
IFRS 3 Business Combinations, is required to apply all of the principles on business combinations
accounting in IFRS 3 and other IFRSs with the exception of those principles that conflict with the
guidance in IFRS 11. These requirements apply both to the initial acquisition of an interest in a joint
operation, and the acquisition of an additional interest in a joint operation (in the latter case, previously
held interests are not remeasured).
Note: The requirements above were introduced by Accounting for Acquisitions of Interests in Joint
Operations, which applies to annual periods beginning on or after 1 January 2016 on a prospective basis
to acquisitions of interests in joint operations occurring from the beginning of the first period in which the
amendments are applied.
A party that participates in, but does not have joint control of, a joint operation shall also account for its
interest in the arrangement in accordance with the above if that party has rights to the assets, and
obligations for the liabilities, relating to the joint operation.
Joint ventures
A joint venturer recognises its interest in a joint venture as an investment and shall account for that
investment using the equity method in accordance with IAS 28 Investments in Associates and Joint
Ventures unless the entity is exempted from applying the equity method as specified in that standard.
A party that participates in, but does not have joint control of, a joint venture accounts for its interest in the
arrangement in accordance with IFRS 9 Financial Instruments unless it has significant influence over the
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joint venture, in which case it accounts for it in accordance with IAS 28 (as amended in 2011).
[IFRS 11:25]
Separate Financial Statements
The accounting for joint arrangements in an entity's separate financial statements depends on the
involvement of the entity in that joint arrangement and the type of the joint arrangement:
If the entity is a joint operator or joint venturer it shall account for its interest in
o
a joint operation in accordance with paragraphs 20-22;
o
a joint venture in accordance with paragraph 10 of IAS 27 Separate Financial
Statements. [IFRS 11:26]
If the entity is a party that participates in, but does not have joint control of, a joint arrangement
shall account for its interest in:
o
a joint operation in accordance with paragraphs 23;
o
a joint venture in accordance with IFRS 9, unless the entity has significant influence over
the joint venture, in which case it shall apply paragraph 10 of IAS 27 (as amended in
2011). [IFRS 11:27]
Disclosure
There are no disclosures specified in IFRS 11. Instead, IFRS 12 Disclosure of Interests in Other Entities
outlines the disclosures required.
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IFRS 12 Disclosure of Interests in Other Entities
Overview
IFRS 12 Disclosure of Interests in Other Entities is a consolidated disclosure standard requiring a wide
range of disclosures about an entity's interests in subsidiaries, joint arrangements, associates and
unconsolidated 'structured entities'. Disclosures are presented as a series of objectives, with detailed
guidance on satisfying those objectives.
Objective and scope
The objective of IFRS 12 is to require the disclosure of information that enables users of financial
statements to evaluate:
the nature of, and risks associated with, its interests in other entities
the effects of those interests on its financial position, financial performance and cash flows.
Where the disclosures required by IFRS 12, together with the disclosures required by other IFRSs, do not
meet the above objective, an entity is required to disclose whatever additional information is necessary to
meet the objective.
IFRS 12 is required to be applied by an entity that has an interest in any of the following: [IFRS 12:5]
subsidiaries
joint arrangements (joint operations or joint ventures)
associates
unconsolidated structured entities
IFRS 12 does not apply to certain employee benefit plans, separate financial statements to which IAS 27
Separate Financial Statements applies (except in relation to unconsolidated structured entities and
investment entities in some cases), certain interests in joint ventures held by an entity that does not share
in joint control, and the majority of interests in another entity accounted for in accordance with IFRS 9
Financial Instruments.
An investment entity that prepares financial statements in which all of its subsidiaries are measured at fair
value through profit or loss presents the disclosures relating to investment entities required by IFRS 12.
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Key definitions
Interest in another entity
Refers to contractual and non-contractual involvement that exposes an entity to variability of returns from
the performance of the other entity. An interest in another entity can be evidenced by, but is not limited to,
the holding of equity or debt instruments as well as other forms of involvement such as the provision of
funding, liquidity support, credit enhancement and guarantees. It includes the means by which an entity
has control or joint control of, or significant influence over, another entity. An entity does not necessarily
have an interest in another entity solely because of a typical customer supplier relationship.
Structured entity
An entity that has been designed so that voting or similar rights are not the dominant factor in deciding
who controls the entity, such as when any voting rights relate to administrative tasks only and the relevant
activities are directed by means of contractual arrangements.
Disclosures required
Significant judgements and assumptions
An entity discloses information about significant judgements and assumptions it has made (and changes
in those judgements and assumptions) in determining:
that it controls another entity
that it has joint control of an arrangement or significant influence over another entity
the type of joint arrangement (i.e. joint operation or joint venture) when the arrangement has been
structured through a separate vehicle.
Interests in subsidiaries
An entity shall disclose information that enables users of its consolidated financial statements to:
understand the composition of the group
understand the interest that non-controlling interests have in the group's activities and cash flows
evaluate the nature and extent of significant restrictions on its ability to access or use assets, and
settle liabilities, of the group
evaluate the nature of, and changes in, the risks associated with its interests in consolidated
structured entities
evaluate the consequences of changes in its ownership interest in a subsidiary that do not result
in a loss of control
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evaluate the consequences of losing control of a subsidiary during the reporting period.
Interests in unconsolidated subsidiaries
In accordance with IFRS 10 Consolidated Financial Statements, an investment entity is required to apply
the exception to consolidation and instead account for its investment in a subsidiary at fair value through
profit or loss.
Where an entity is an investment entity, IFRS 12 requires additional disclosure, including:
the fact the entity is an investment entity
information about significant judgements and assumptions it has made in determining that it is an
investment entity, and specifically where the entity does not have one or more of the 'typical
characteristics' of an investment entity
details of subsidiaries that have not been consolidated (name, place of business, ownership
interests held)
details of the relationship and certain transactions between the investment entity and the
subsidiary (e.g. restrictions on transfer of funds, commitments, support arrangements, contractual
arrangements)
information where an entity becomes, or ceases to be, an investment entity [IFRS 12:9B]
An entity making these disclosures are not required to provide various other disclosures required by IFRS
12.
Interests in joint arrangements and associates
An entity shall disclose information that enables users of its financial statements to evaluate: [IFRS 12:20]
the nature, extent and financial effects of its interests in joint arrangements and associates,
including the nature and effects of its contractual relationship with the other investors with joint
control of, or significant influence over, joint arrangements and associates
the nature of, and changes in, the risks associated with its interests in joint ventures and
associates.
Interests in unconsolidated structured entities
An entity shall disclose information that enables users of its financial statements to: [IFRS 12:24]
understand the nature and extent of its interests in unconsolidated structured entities
evaluate the nature of, and changes in, the risks associated with its interests in unconsolidated
structured entities.
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IFRS 13 Fair Value Measurement
Overview
IFRS 13 Fair Value Measurement applies to IFRSs that require or permit fair value measurements or
disclosures and provides a single IFRS framework for measuring fair value and requires disclosures
about fair value measurement. The Standard defines fair value on the basis of an 'exit price' notion and
uses a 'fair value hierarchy', which results in a market-based, rather than entity-specific, measurement.
IFRS 13:
defines fair value
sets out in a single IFRS a framework for measuring fair value
requires disclosures about fair value measurements.
IFRS 13 applies when another IFRS requires or permits fair value measurements or disclosures about fair
value measurements (and measurements, such as fair value less costs to sell, based on fair value or
disclosures about those measurements), except for:
share-based payment transactions within the scope of IFRS 2 Share-based Payment
leasing transactions within the scope of IAS 17 Leases
measurements that have some similarities to fair value but that are not fair value, such as net
realisable value in IAS 2 Inventories or value in use in IAS 36 Impairment of Assets.
Key definitions
Fair value
The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date
Active market
A market in which transactions for the asset or liability take place with sufficient frequency and volume to
provide pricing information on an ongoing basis
Exit price
The price that would be received to sell an asset or paid to transfer a liability
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Highest and best use
The use of a non-financial asset by market participants that would maximise the value of the asset or the
group of assets and liabilities (e.g. a business) within which the asset would be used
Most advantageous market
The market that maximises the amount that would be received to sell the asset or minimises the amount
that would be paid to transfer the liability, after taking into account transaction costs and transport costs
Principal market
The market with the greatest volume and level of activity for the asset or liability
Fair value hierarchy
IFRS 13 seeks to increase consistency and comparability in fair value measurements and related
disclosures through a 'fair value hierarchy'. The hierarchy categorises the inputs used in valuation
techniques into three levels. The hierarchy gives the highest priority to (unadjusted) quoted prices in
active markets for identical assets or liabilities and the lowest priority to unobservable inputs.
If the inputs used to measure fair value are categorised into different levels of the fair value hierarchy, the
fair value measurement is categorised in its entirety in the level of the lowest level input that is significant
to the entire measurement (based on the application of judgement).
Level 1 inputs
Level 1 inputs are quoted prices in active markets for identical assets or liabilities that the entity can
access at the measurement date.
A quoted market price in an active market provides the most reliable evidence of fair value and is used
without adjustment to measure fair value whenever available, with limited exceptions.
If an entity holds a position in a single asset or liability and the asset or liability is traded in an active
market, the fair value of the asset or liability is measured within Level 1 as the product of the quoted price
for the individual asset or liability and the quantity held by the entity, even if the market's normal daily
trading volume is not sufficient to absorb the quantity held and placing orders to sell the position in a
single transaction might affect the quoted price.
Level 2 inputs
Level 2 inputs are inputs other than quoted market prices included within Level 1 that are observable for
the asset or liability, either directly or indirectly.
Level 2 inputs include:
quoted prices for similar assets or liabilities in active markets
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quoted prices for identical or similar assets or liabilities in markets that are not active
inputs other than quoted prices that are observable for the asset or liability, for example
o
interest rates and yield curves observable at commonly quoted intervals
o
implied volatilities
o
credit spreads
inputs that are derived principally from or corroborated by observable market data by correlation
or other means ('market-corroborated inputs').
Level 3 inputs
Level 3 inputs inputs are unobservable inputs for the asset or liability. [IFRS 13:86]
Unobservable inputs are used to measure fair value to the extent that relevant observable inputs are not
available, thereby allowing for situations in which there is little, if any, market activity for the asset or
liability at the measurement date. An entity develops unobservable inputs using the best information
available in the circumstances, which might include the entity's own data, taking into account all
information about market participant assumptions that is reasonably available. [IFRS 13:87-89]
Measurement of fair value
The objective of a fair value measurement is to estimate the price at which an orderly transaction to sell
the asset or to transfer the liability would take place between market participants at the measurement
date under current market conditions. A fair value measurement requires an entity to determine all of the
following:
the particular asset or liability that is the subject of the measurement (consistently with its unit of
account)
for a non-financial asset, the valuation premise that is appropriate for the measurement
(consistently with its highest and best use)
the principal (or most advantageous) market for the asset or liability
the valuation technique(s) appropriate for the measurement, considering the availability of data
with which to develop inputs that represent the assumptions that market participants would use
when pricing the asset or liability and the level of the fair value hierarchy within which the inputs
are categorised.
Guidance on measurement
IFRS 13 provides the guidance on the measurement of fair value, including the following:
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An entity takes into account the characteristics of the asset or liability being measured that a
market participant would take into account when pricing the asset or liability at measurement date
(e.g. the condition and location of the asset and any restrictions on the sale and use of the asset)
Fair value measurement assumes an orderly transaction between market participants at the
measurement date under current market conditions
Fair value measurement assumes a transaction taking place in the principal market for the asset
or liability, or in the absence of a principal market, the most advantageous market for the asset or
liability
A fair value measurement of a non-financial asset takes into account its highest and best use
A fair value measurement of a financial or non-financial liability or an entity's own equity
instruments assumes it is transferred to a market participant at the measurement date, without
settlement, extinguishment, or cancellation at the measurement date
The fair value of a liability reflects non-performance risk (the risk the entity will not fulfil an
obligation), including an entity's own credit risk and assuming the same non-performance risk
before and after the transfer of the liability
An optional exception applies for certain financial assets and financial liabilities with offsetting
positions in market risks or counterparty credit risk, provided conditions are met (additional
disclosure is required).
Valuation techniques
An entity uses valuation techniques appropriate in the circumstances and for which sufficient data are
available to measure fair value, maximising the use of relevant observable inputs and minimising the use
of unobservable inputs.
The objective of using a valuation technique is to estimate the price at which an orderly transaction to sell
the asset or to transfer the liability would take place between market participants and the measurement
date under current market conditions. Three widely used valuation techniques are:
market approach – uses prices and other relevant information generated by market transactions
involving identical or comparable (similar) assets, liabilities, or a group of assets and liabilities
(e.g. a business)
cost approach – reflects the amount that would be required currently to replace the service
capacity of an asset (current replacement cost)
income approach – converts future amounts (cash flows or income and expenses) to a single
current (discounted) amount, reflecting current market expectations about those future amounts.
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In some cases, a single valuation technique will be appropriate, whereas in others multiple valuation
techniques will be appropriate.
Disclosure
IFRS 13 requires an entity to disclose information that helps users of its financial statements assess both
of the following:
for assets and liabilities that are measured at fair value on a recurring or non-recurring basis in
the statement of financial position after initial recognition, the valuation techniques and inputs
used to develop those measurements
for fair value measurements using significant unobservable inputs (Level 3), the effect of the
measurements on profit or loss or other comprehensive income for the period.
Disclosure exemptions
The disclosure requirements are not required for:
plan assets measured at fair value in accordance with IAS 19 Employee Benefits
retirement benefit plan investments measured at fair value in accordance with IAS 26 Accounting
and Reporting by Retirement Benefit Plans
assets for which recoverable amount is fair value less costs of disposal in accordance with IAS 36
Impairment of Assets.
Identification of classes
Where disclosures are required to be provided for each class of asset or liability, an entity determines
appropriate classes on the basis of the nature, characteristics and risks of the asset or liability, and the
level of the fair value hierarchy within which the fair value measurement is categorised.
Determining appropriate classes of assets and liabilities for which disclosures about fair value
measurements should be provided requires judgement. A class of assets and liabilities will often require
greater disaggregation than the line items presented in the statement of financial position. The number of
classes may need to be greater for fair value measurements categorised within Level 3.
Some disclosures are differentiated on whether the measurements are:
Recurring fair value measurements – fair value measurements required or permitted by other
IFRSs to be recognised in the statement of financial position at the end of each reporting period
Non-recurring fair value measurements are fair value measurements that are required or
permitted by other IFRSs to be measured in the statement of financial position in particular
circumstances.
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Specific disclosures required
To meet the disclosure objective, the following minimum disclosures are required for each class of assets
and liabilities measured at fair value (including measurements based on fair value within the scope of this
IFRS) in the statement of financial position after initial recognition (note these are requirements have
been summarised and additional disclosure is required where necessary):
the fair value measurement at the end of the reporting period*
for non-recurring fair value measurements, the reasons for the measurement*
the level of the fair value hierarchy within which the fair value measurements are categorised in
their entirety (Level 1, 2 or 3)
for assets and liabilities held at the reporting date that are measured at fair value on a recurring
basis, the amounts of any transfers between Level 1 and Level 2 of the fair value hierarchy, the
reasons for those transfers and the entity's policy for determining when transfers between levels
are deemed to have occurred, separately disclosing and discussing transfers into and out of each
level
for fair value measurements categorised within Level 2 and Level 3 of the fair value hierarchy, a
description of the valuation technique(s) and the inputs used in the fair value measurement, any
change in the valuation techniques and the reason(s) for making such change (with some
exceptions)*
for fair value measurements categorised within Level 3 of the fair value hierarchy, quantitative
information about the significant unobservable inputs used in the fair value measurement (with
some exceptions)
for recurring fair value measurements categorised within Level 3 of the fair value hierarchy, a
reconciliation from the opening balances to the closing balances, disclosing separately changes
during the period attributable to the following:
o
total gains or losses for the period recognised in profit or loss, and the line item(s) in profit
or loss in which those gains or losses are recognised – separately disclosing the amount
included in profit or loss that is attributable to the change in unrealised gains or losses
relating to those assets and liabilities held at the end of the reporting period, and the line
item(s) in profit or loss in which those unrealised gains or losses are recognised
o
total gains or losses for the period recognised in other comprehensive income, and the
line item(s) in other comprehensive income in which those gains or losses are recognised
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o
purchases, sales, issues and settlements (each of those types of changes disclosed
separately)
o
the amounts of any transfers into or out of Level 3 of the fair value hierarchy, the reasons
for those transfers and the entity's policy for determining when transfers between levels
are deemed to have occurred. Transfers into Level 3 shall be disclosed and discussed
separately from transfers out of Level 3
for fair value measurements categorised within Level 3 of the fair value hierarchy, a description of
the valuation processes used by the entity
for recurring fair value measurements categorised within Level 3of the fair value hierarchy:
o
a narrative description of the sensitivity of the fair value measurement to changes in
unobservable inputs if a change in those inputs to a different amount might result in a
significantly higher or lower fair value measurement. If there are interrelationships
between those inputs and other unobservable inputs used in the fair value measurement,
the entity also provides a description of those interrelationships and of how they might
magnify or mitigate the effect of changes in the unobservable inputs on the fair value
measurement
o
for financial assets and financial liabilities, if changing one or more of the unobservable
inputs to reflect reasonably possible alternative assumptions would change fair value
significantly, an entity shall state that fact and disclose the effect of those changes. The
entity shall disclose how the effect of a change to reflect a reasonably possible alternative
assumption was calculated
if the highest and best use of a non-financial asset differs from its current use, an entity shall
disclose that fact and why the non-financial asset is being used in a manner that differs from its
highest and best use.
Quantitative disclosures are required to be presented in a tabular format unless another format is more
appropriate.
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IFRS 14 Regulatory Deferral Accounts
Overview
The objective of IFRS 14 Regulatory Deferral Accounts is to specify the financial reporting requirements
for 'regulatory deferral account balances' that arise when an entity provides good or services to customers
at a price or rate that is subject to rate regulation.
Regulatory deferral account balances, and movements in them, are presented separately in the statement
of financial position and statement of profit or loss and other comprehensive income, and specific
disclosures are required.
IFRS 14 was originally issued in January 2014 and applies to an entity's first annual IFRS financial
statements for a period beginning on or after 1 January 2016.
IFRS 14 is designed as a limited scope Standard to provide an interim, short-term solution for rateregulated entities that have not yet adopted International Financial Reporting Standards (IFRS). Its
purpose is to allow rate-regulated entities adopting IFRS for the first-time to avoid changes in accounting
policies in respect of regulatory deferral accounts until such time as the International Accounting
Standards Board (IASB) can complete its comprehensive project on rate regulated activities.
Scope
IFRS 14 is permitted, but not required, to be applied where an entity conducts rate-regulated activities
and has recognised amounts in its previous GAAP financial statements that meet the definition of
'regulatory deferral account balances' (sometimes referred to 'regulatory assets' and 'regulatory
liabilities').
Entities which are eligible to apply IFRS 14 are not required to do so, and so can chose to apply only the
requirements of IFRS 1 First-time Adoption of International Financial Reporting Standards when first
applying IFRSs. The election to adopt IFRS 14 is only available on the initial adoption of IFRSs, meaning
an entity cannot apply IFRS 14 for the first time in financial statements subsequent to those prepared on
the initial adoption of IFRSs. However, an entity that elects to apply IFRS 14 in its first IFRS financial
statements must continue to apply it in subsequent financial statements. [IFRS 14.6]
When applied, the requirements of IFRS 14 must be applied to all regulatory deferral account balances
arising from an entity's rate-regulated activities. [IFRS 14.8]
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Key definitions
Rate regulation
A framework for establishing the prices that can be charged to customers for goods and services and that
framework is subject to oversight and/or approval by a rate-regulator.
Rate regulator
An authorised body that is empowered by statute or regulation to establish the rate or range of rates that
bind an entity. The rate regulator may be a third-party body or a related party of the entity, including the
entity's own governing board, if that body is required by statute or regulation to set rates both in the
interest of customers and to ensure the overall financial viability of the entity.
Regulatory deferral account balance
The balance of any expense (or income) account that would not be recognised as an asset or a liability in
accordance with other Standards, but that qualifies for deferral because it is included, or is expected to be
included, by the rate regulator in establishing the rate(s) that can be charged to customers.
Accounting policies for regulatory deferral account balances
IFRS 14 provides an exemption from paragraph 11 of IAS 8 Accounting Policies, Changes in Accounting
Estimates and Errors when an entity determines its accounting policies for regulatory deferral account
balances. Paragraph 11 of IAS 8 requires an entity to consider the requirements of IFRSs dealing with
similar matters and the requirements of the Conceptual Framework when setting its accounting policies.
The effect of the exemption is that eligible entities can continue to apply the accounting policies used for
regulatory deferral account balances under the basis of accounting used immediately before adopting
IFRS ('previous GAAP') when applying IFRSs, subject to the presentation requirements of IFRS 14.
Entities are permitted to change their accounting policies for regulatory deferral account balances in
accordance with IAS 8, but only if the change makes the financial statements more relevant and no less
reliable, or more reliable and not less relevant, to the economic decision-making needs of users of the
entity's financial statements. However, an entity is not permitted to change accounting policies to start to
recognise regulatory deferral account balances.
Presentation in financial statements
The impact of regulatory deferral account balances are separately presented in an entity's financial
statements. This requirements applies regardless of the entity's previous presentation policies in respect
of regulatory deferral balance accounts under its previous GAAP. Accordingly:
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Separate line items are presented in the statement of financial position for the total of all
regulatory deferral account debit balances, and all regulatory deferral account credit balances.
Regulatory deferral account balances are not classified between current and non-current, but are
separately disclosed using subtotals.
The net movement in regulatory deferral account balances are separately presented in the
statement of profit or loss and other comprehensive income using subtotals.
The Illustrative examples accompanying IFRS 14 set out an illustrative presentation of financial
statements by an entity applying the Standard.
Disclosures
IFRS 14 sets out disclosure objectives to allow users to assess:
the nature of, and risks associated with, the rate regulation that establishes the price(s) the entity
can charge customers for the goods or services it provides - including information about the
entity's rate-regulated activities and the rate-setting process, the identity of the rate regulator(s),
and the impacts of risks and uncertainties on the recovery or reversal of regulatory deferral
balance accounts
the effects of rate regulation on the entity's financial statements - including the basis on which
regulatory deferral account balances are recognised, how they are assessed for recovery, a
reconciliation of the carrying amount at the beginning and end of the reporting period, discount
rates applicable, income tax impacts and details of balances that are no longer considered
recoverable or reversible.
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IFRS 15 Revenue from Contracts with Customers
Overview
IFRS 15 specifies how and when an IFRS reporter will recognise revenue as well as requiring such
entities to provide users of financial statements with more informative, relevant disclosures. The standard
provides a single, principles based five-step model to be applied to all contracts with customers.
IFRS 15 was issued in May 2014 and applies to an annual reporting period beginning on or after 1
January 2017.
IFRS 15 replaces the following standards and interpretations:
IAS 11 Construction contracts
IAS 18 Revenue
IFRIC 13 Customer Loyalty Programmes
IFRIC 15 Agreements for the Construction of Real Estate
IFRIC 18 Transfers of Assets from Customers
SIC-31 Revenue - Barter Transactions Involving Advertising Services
The objective of IFRS 15 is to establish the principles that an entity shall apply to report useful information
to users of financial statements about the nature, amount, timing, and uncertainty of revenue and cash
flows arising from a contract with a customer. Application of the standard is mandatory for annual
reporting periods starting from 1 January 2017 onwards. Earlier application is permitted.
Scope
IFRS 15 Revenue from Contracts with Customers applies to all contracts with customers except for:
leases within the scope of IAS 17 Leases; financial instruments and other contractual rights or obligations
within the scope of IFRS 9 Financial Instruments, IFRS 10 Consolidated Financial Statements, IFRS 11
Joint Arrangements, IAS 27 Separate Financial Statements and IAS 28 Investments in Associates and
Joint Ventures; insurance contracts within the scope of IFRS 4 Insurance Contracts; and non-monetary
exchanges between entities in the same line of business to facilitate sales to customers or potential
customers.
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A contract with a customer may be partially within the scope of IFRS 15 and partially within the scope of
another standard. In that scenario:
if other standards specify how to separate and/or initially measure one or more parts of the
contract, then those separation and measurement requirements are applied first. The transaction
price is then reduced by the amounts that are initially measured under other standards;
if no other standard provides guidance on how to separate and/or initially measure one or more
parts of the contract, then IFRS 15 will be applied.
Key definitions
Contract
An agreement between two or more parties that creates enforceable rights and obligations.
Customer
A party that has contracted with an entity to obtain goods or services that are an output of the entity’s
ordinary activities in exchange for consideration.
Income
Increases in economic benefits during the accounting period in the form of inflows or enhancements of
assets or decreases of liabilities that result in an increase in equity, other than those relating to
contributions from equity participants.
Performance obligation
A promise in a contract with a customer to transfer to the customer either:
a good or service (or a bundle of goods or services) that is distinct; or
a series of distinct goods or services that are substantially the same and that have the same
pattern of transfer to the customer.
Revenue
Income arising in the course of an entity’s ordinary activities.
Transaction price
The amount of consideration to which an entity expects to be entitled in exchange for transferring
promised goods or services to a customer, excluding amounts collected on behalf of third parties.
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Accounting requirements for revenue
The five-step model framework
The core principle of IFRS 15 is that an entity will recognise revenue to depict the transfer of promised
goods or services to customers in an amount that reflects the consideration to which the entity expects to
be entitled in exchange for those goods or services. This core principle is delivered in a five-step model
framework:
Identify the contract(s) with a customer
Identify the performance obligations in the contract
Determine the transaction price
Allocate the transaction price to the performance obligations in the contract
Recognise revenue when (or as) the entity satisfies a performance obligation.
Application of this guidance will depend on the facts and circumstances present in a contract with a
customer and will require the exercise of judgment.
Step 1: Identify the contract with the customer
A contract with a customer will be within the scope of IFRS 15 if all the following conditions are met: [IFRS
15:9]
the contract has been approved by the parties to the contract;
each party’s rights in relation to the goods or services to be transferred can be identified;
the payment terms for the goods or services to be transferred can be identified;
the contract has commercial substance; and
it is probable that the consideration to which the entity is entitled to in exchange for the goods or
services will be collected.
If a contract with a customer does not yet meet all of the above criteria, the entity will continue to reassess the contract going forward to determine whether it subsequently meets the above criteria. From
that point, the entity will apply IFRS 15 to the contract.
The standard provides detailed guidance on how to account for approved contract modifications. If certain
conditions are met, a contract modification will be accounted for as a separate contract with the customer.
If not, it will be accounted for by modifying the accounting for the current contract with the customer.
Whether the latter type of modification is accounted for prospectively or retrospectively depends on
whether the remaining goods or services to be delivered after the modification are distinct from those
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delivered prior to the modification. Further details on accounting for contract modifications can be found in
the Standard.
Step 2: Identify the performance obligations in the contract
At the inception of the contract, the entity should assess the goods or services that have been promised
to the customer, and identify as a performance obligation:
a good or service (or bundle of goods or services) that is distinct; or
a series of distinct goods or services that are substantially the same and that have the same
pattern of transfer to the customer.
A series of distinct goods or services is transferred to the customer in the same pattern if both of the
following criteria are met:
each distinct good or service in the series that the entity promises to transfer consecutively to the
customer would be a performance obligation that is satisfied over time (see below); and
a single method of measuring progress would be used to measure the entity’s progress towards
complete satisfaction of the performance obligation to transfer each distinct good or service in the
series to the customer.
A good or service is distinct if both of the following criteria are met:
the customer can benefit from the good or services on its own or in conjunction with other readily
available resources; and
the entity’s promise to transfer the good or service to the customer is separately identifiable from
other promises in the contract.
Factors for consideration as to whether a promise to transfer the good or service to the customer is
separately identifiable include, but are not limited to:
the entity does not provide a significant service of integrating the good or service with other goods
or services promised in the contract.
the good or service does not significantly modify or customise another good or service promised
in the contract.
the good or service is not highly interrelated with or highly dependent on other goods or services
promised in the contract.
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Step 3: Determine the transaction price
The transaction price is the amount to which an entity expects to be entitled in exchange for the transfer
of goods and services. When making this determination, an entity will consider past customary business
practices.
Where a contract contains elements of variable consideration, the entity will estimate the amount of
variable consideration to which it will be entitled under the contract. Variable consideration can arise, for
example, as a result of discounts, rebates, refunds, credits, price concessions, incentives, performance
bonuses, penalties or other similar items. Variable consideration is also present if an entity’s right to
consideration is contingent on the occurrence of a future event.
The standard deals with the uncertainty relating to variable consideration by limiting the amount of
variable consideration that can be recognised. Specifically, variable consideration is only included in the
transaction price if, and to the extent that, it is highly probable that its inclusion will not result in a
significant revenue reversal in the future when the uncertainty has been subsequently resolved.
However, a different, more restrictive approach is applied in respect of sales or usage-based royalty
revenue arising from licences of intellectual property. Such revenue is recognised only when the
underlying sales or usage occur.
Step 4: Allocate the transaction price to the performance obligations in the
contracts
Where a contract has multiple performance obligations, an entity will allocate the transaction price to the
performance obligations in the contract by reference to their relative standalone selling prices. [IFRS
15:74] If a standalone selling price is not directly observable, the entity will need to estimate it. IFRS 15
suggests various methods that might be used, including: [IFRS 15:79]
Adjusted market assessment approach
Expected cost plus a margin approach
Residual approach (only permissible in limited circumstances).
Any overall discount compared to the aggregate of standalone selling prices is allocated between
performance obligations on a relative standalone selling price basis. In certain circumstances, it may be
appropriate to allocate such a discount to some but not all of the performance obligations. [IFRS 15:81]
Where consideration is paid in advance or in arrears, the entity will need to consider whether the contract
includes a significant financing arrangement and, if so, adjust for the time value of money. [IFRS 15:60] A
practical expedient is available where the interval between transfer of the promised goods or services and
payment by the customer is expected to be less than 12 months. [IFRS 15:63]
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Step 5: Recognise revenue when (or as) the entity satisfies a performance
obligation
Revenue is recognised as control is passed, either over time or at a point in time.
Control of an asset is defined as the ability to direct the use of and obtain substantially all of the remaining
benefits from the asset. This includes the ability to prevent others from directing the use of and obtaining
the benefits from the asset. The benefits related to the asset are the potential cash flows that may be
obtained directly or indirectly. These include, but are not limited to:
using the asset to produce goods or provide services;
using the asset to enhance the value of other assets;
using the asset to settle liabilities or to reduce expenses;
selling or exchanging the asset;
pledging the asset to secure a loan; and
holding the asset.
An entity recognises revenue over time if one of the following criteria is met:
the customer simultaneously receives and consumes all of the benefits provided by the entity as
the entity performs;
the entity’s performance creates or enhances an asset that the customer controls as the asset is
created; or
the entity’s performance does not create an asset with an alternative use to the entity and the
entity has an enforceable right to payment for performance completed to date.
If an entity does not satisfy its performance obligation over time, it satisfies it at a point in time. Revenue
will therefore be recognised when control is passed at a certain point in time. Factors that may indicate
the point in time at which control passes include, but are not limited to: [IFRS 15:38]
the entity has a present right to payment for the asset;
the customer has legal title to the asset;
the entity has transferred physical possession of the asset;
the customer has the significant risks and rewards related to the ownership of the asset; and
the customer has accepted the asset.
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Contract costs
The incremental costs of obtaining a contract must be recognised as an asset if the entity expects to
recover those costs. However, those incremental costs are limited to the costs that the entity would not
have incurred if the contract had not been successfully obtained (e.g. ‘success fees’ paid to agents). A
practical expedient is available, allowing the incremental costs of obtaining a contract to be expensed if
the associated amortisation period would be 12 months or less.
Costs incurred to fulfil a contract are recognised as an asset if and only if all of the following criteria are
met: [IFRS 15:95]
the costs relate directly to a contract (or a specific anticipated contract);
the costs generate or enhance resources of the entity that will be used in satisfying performance
obligations in the future; and
the costs are expected to be recovered.
These include costs such as direct labour, direct materials, and the allocation of overheads that relate
directly to the contract. [IFRS 15:97]
The asset recognised in respect of the costs to obtain or fulfil a contract is amortised on a systematic
basis that is consistent with the pattern of transfer of the goods or services to which the asset relates.
[IFRS 15:99]
Further useful implementation guidance in relation to applying IFRS 15
These topics include:
Performance obligations satisfied over time
Methods for measuring progress towards complete satisfaction of a performance obligation
Sale with a right of return
Warranties
Principal versus agent considerations
Customer options for additional goods or services
Customers’ unexercised rights
Non-refundable upfront fees
Licensing
Repurchase arrangements
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Consignment arrangements
Bill-and-hold arrangements
Customer acceptance
Disclosures of disaggregation of revenue
These topics should be considered carefully when applying IFRS 15.
Presentation in financial statements
Contracts with customers will be presented in an entity’s statement of financial position as a contract
liability, a contract asset, or a receivable, depending on the relationship between the entity’s performance
and the customer’s payment. [IFRS 15:105]
A contract liability is presented in the statement of financial position where a customer has paid an
amount of consideration prior to the entity performing by transferring the related good or service to the
customer. [IFRS 15:106]
Where the entity has performed by transferring a good or service to the customer and the customer has
not yet paid the related consideration, a contract asset or a receivable is presented in the statement of
financial position, depending on the nature of the entity’s right to consideration. A contract asset is
recognised when the entity’s right to consideration is conditional on something other than the passage of
time, for example future performance of the entity. A receivable is recognised when the entity’s right to
consideration is unconditional except for the passage of time.
Contract assets and receivables shall be accounted for in accordance with IFRS 9. Any impairment
relating to contracts with customers should be measured, presented and disclosed in accordance with
IFRS 9. Any difference between the initial recognition of a receivable and the corresponding amount of
revenue recognised should also be presented as an expense, for example, an impairment loss. [IFRS
15:107-108]
Disclosures
The disclosure objective stated in IFRS 15 is for an entity to disclose sufficient information to enable users
of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash
flows arising from contracts with customers. Therefore, an entity should disclose qualitative and
quantitative information about all of the following: [IFRS 15:110]
its contracts with customers;
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the significant judgments, and changes in the judgments, made in applying the guidance to those
contracts; and
any assets recognised from the costs to obtain or fulfil a contract with a customer.
Entities will need to consider the level of detail necessary to satisfy the disclosure objective and how
much emphasis to place on each of the requirements. An entity should aggregate or disaggregate
disclosures to ensure that useful information is not obscured. [IFRS 15:111]
In order to achieve the disclosure objective stated above, the Standard introduces a number of new
disclosure requirements. Further detail about these specific requirements can be found at IFRS 15:113129.
Effective date and transition
The standard should be applied in an entity’s IFRS financial statements for annual reporting periods
beginning on or after 1 January 2017. Earlier application is permitted. An entity that chooses to apply
IFRS 15 earlier than 1 January 2017 should disclose this fact in its relevant financial statements. [IFRS
15:C1]
When first applying IFRS 15, entities should apply the standard in full for the current period, including
retrospective application to all contracts that were not yet complete at the beginning of that period. In
respect of prior periods, the transition guidance allows entities an option to either: [IFRS 15:C3]
apply IFRS 15 in full to prior periods (with certain limited practical expedients being available); or
retain prior period figures as reported under the previous standards, recognising the cumulative
effect of applying IFRS 15 as an adjustment to the opening balance of equity as at the date of
initial application (beginning of current reporting period).
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