BLC Insights Into Ifrs
BLC Insights Into Ifrs
BLC Insights Into Ifrs
IFRS ®
An overview
September 2018
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Insights into IFRS: An overview | 1
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Contents
Contents
Embedding and explaining the changes 1
How to navigate this publication 4
1 Background 5
1.1 Introduction 5
1.2 The Conceptual Framework 6
2 General issues 8
2.1 Form and components of financial statements 8
2.2 Changes in equity 10
2.3 Statement of cash flows 11
2.4 Fair value measurement 12
2.5 Consolidation 14
2.6 Business combinations 17
2.7 Foreign currency translation 19
2.8 Accounting policies, errors and estimates 21
2.9 Events after the reporting date 22
2.10 Hyperinflation 23
3 Statement of financial position 24
3.1 General 24
3.2 Property, plant and equipment 25
3.3 Intangible assets and goodwill 27
3.4 Investment property 29
3.5 Associates and the equity method 31
3.6 Joint arrangements 33
3.7 [Not used]
3.8 Inventories 34
3.9 Biological assets 35
3.10 Impairment of non-financial assets 36
3.11 [Not used]
3.12 Provisions, contingent assets and liabilities 38
3.13 Income taxes 40
4 Statement of profit or loss and other comprehensive income 42
4.1 General 42
4.2 Revenue 44
4.3 Government grants 47
4.4 Employee benefits 48
4.5 Share-based payments 50
4.6 Borrowing costs 52
5 Special topics 53
5.1 Leases 53
5.1A Leases 55
5.2 Operating segments 57
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1. IAS 26 Accounting and Reporting by Retirement Benefit Plans and the IFRS for Small and Medium-sized
Entities are excluded.
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1 Background
1.1 Introduction
Currently effective: IFRS Foundation Constitution, IASB and IFRS Interpretations
Committee Due Process Handbook, Preface to IFRSs, IAS 1
IFRS Standards
–– IFRS is a set of globally accepted standards for financial reporting applied primarily by
listed entities in over 160 countries.
–– Individual standards and interpretations are developed and maintained by the IASB and
the IFRS Interpretations Committee.
–– IFRS is designed for use by profit-oriented entities.
–– Any entity claiming compliance with IFRS complies with all standards and
interpretations, including disclosure requirements, and makes an explicit and
unreserved statement of compliance with IFRS.
–– The overriding requirement of IFRS is for the financial statements to give a fair
presentation (or a true and fair view).
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Purpose
–– The Conceptual Framework is a point of reference:
- for the IASB and the IFRS Interpretations Committee in developing and maintaining
standards and interpretations; and
- for preparers of financial statements in the absence of specific guidance in IFRS.
–– The Conceptual Framework does not override any specific IFRS.
–– The Conceptual Framework sets the objective of financial statements, describes their
types and provides the definition of a reporting entity.
–– Financial statements are prepared on a going concern basis, unless management
intends, or has no alternative other than, to liquidate the entity or to stop trading.
–– The Conceptual Framework sets out the definitions of ‘assets’ and ‘liabilities’. The
definitions of ‘equity’, ‘income’ and ‘expenses’ are derived from the definitions of assets
and liabilities.
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Measurement
–– The Conceptual Framework describes two measurement bases and the factors to
consider when selecting a measurement basis.
- Historical cost: Under the historical cost basis, an asset or liability is measured using
information derived from the transaction price and that measurement is not changed
unless it relates to impairment of an asset or a liability becoming onerous.
- Current value: Under the current value basis, an asset or liability is measured using
information that reflects current conditions at the measurement date.
–– Current value measurement bases include fair value, value in use and fulfilment value
that are based on present values of cash flows, and current cost.
–– The Conceptual Framework includes high-level concepts that describe how information
is presented and disclosed in financial statements.
–– The Conceptual Framework also outlines principles for the IASB to follow when
deciding whether an item of income or expense should be included in profit or loss or
other comprehensive income (OCI) and if it should be reclassified from OCI to profit
or loss.
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2 General issues
2.1 Form and components of financial statements
Currently effective: IFRS 10, IFRS 11, IAS 1, IAS 27, IAS 28
Reporting date
Comparative information
–– IFRS sets out the requirements that apply to consolidated, individual and separate
financial statements.
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General
–– A statement of changes in equity (and related notes) reconciles opening to closing
amounts for each component of equity.
–– All owner-related changes in equity are presented in the statement of changes in equity
separately from non-owner changes in equity.
–– Entities that have no equity as defined in IFRS may need to adopt the financial
statement presentation of members’ or unit holders’ interests.
–– Generally, accounting policy changes and corrections of prior-period errors are made by
adjusting opening equity and restating comparatives unless this is impracticable.
–– An entity presents separately in the statement of changes in equity:
- the total adjustment resulting from changes in accounting policies; and
- the total adjustment resulting from the correction of errors.
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–– The statement of cash flows presents cash flows during the period, classified by
operating, investing and financing activities.
–– An entity presents its cash flows in the manner most appropriate to its business.
–– An entity chooses its own policy for classifying each of interest and dividends. It applies
the chosen presentation method consistently.
–– Taxes paid are classified as operating activities unless it is practicable to identify them
with, and therefore classify them as, financing or investing activities.
–– Cash flows from operating activities may be presented under either the direct method
or the indirect method.
–– Foreign currency cash flows are translated at the exchange rates at the dates of the
cash flows (or using averages when appropriate).
Offsetting
–– Generally, all financing and investing cash flows are reported gross. Cash flows are
offset only in limited circumstances.
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Scope
–– The standard applies to most fair value measurements and disclosures (including
measurements based on fair value) that are required or permitted by other IFRSs.
–– Fair value is 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 – i.e. an
exit price.
–– Market participants are independent of each other, they are knowledgeable and have
a reasonable understanding of the asset or liability, and they are willing and able
to transact.
–– Fair value measurement assumes that a transaction takes place in the principal market
(i.e. the market with the greatest volume and level of activity) for the asset or liability
or, in the absence of a principal market, in the most advantageous market for the asset
or liability.
–– There are three general approaches to valuation, with various techniques applied under
those approaches:
- the market approach: e.g. quoted prices in an active market;
- the income approach: e.g. discounted cash flows; and
- the cost approach: e.g. depreciated replacement cost.
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Disclosures
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2.5 Consolidation
Currently effective: IFRS 10
–– An investor controls an investee when the investor is exposed to (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. Control involves power, exposure to
variability of returns and a linkage between the two.
–– Control is assessed on a continuous basis.
–– Control is generally assessed at the level of the legal entity. However, an investor may
have control over only specified assets and liabilities of the legal entity (a ‘silo’), in which
case control is assessed at that level if certain conditions are met.
–– The purpose and design of the investee does not in itself determine whether the
investor controls the investee. However, it plays a role in the judgement applied by
the investor in all areas of the control model. Assessing purpose and design includes
considering the risks that the investee was designed to create and to pass on to the
parties involved in the transaction, and whether the investor is exposed to some or all
of those risks.
–– The ‘relevant activities’ of the investee – i.e. the activities that significantly affect the
investee’s returns – need to be identified. In addition, the investor determines whether
decisions about the relevant activities are made based on voting rights.
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Step 4 – Linkage
–– If the investor (decision maker) is an agent, then the link between power and returns
is absent and the decision maker’s delegated power is treated as if it were held by
its principal(s).
–– To determine whether it is an agent, the decision maker considers:
- substantive removal and other rights held by a single or multiple parties;
- whether its remuneration is on arm’s length terms;
- its other economic interests; and
- the overall relationship between itself and other parties.
–– An entity takes into account the rights of parties acting on its behalf in assessing
whether it controls an investee.
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Non-controlling interests
Intra-group transactions
Loss of control
–– On the loss of control of a subsidiary, the assets and liabilities of the subsidiary and
the carrying amount of the NCI are derecognised. The consideration received and any
retained interest (measured at fair value) are recognised. Amounts recognised in OCI
are reclassified as required by other standards. Any resulting gain or loss is recognised
in profit or loss.
–– Changes in the parent’s ownership interest in a subsidiary without a loss of control are
accounted for as equity transactions and no gain or loss is recognised.
Disclosures
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Scope
–– Business combinations are accounted for under the acquisition method (acquisition
accounting), with limited exceptions.
–– The acquirer in a business combination is the combining entity that obtains control of
the other combining business or businesses.
–– The date of acquisition is the date on which the acquirer obtains control of the acquiree.
Consideration transferred
–– Any items that are not part of the business combination transaction are accounted for
outside the acquisition accounting.
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–– Transactions that are not denominated in an entity’s functional currency are foreign
currency transactions. They are translated at actual rates or appropriate averages;
exchange differences arising on translation are generally recognised in profit or loss.
–– An entity may present its financial statements in a currency other than its functional
currency (presentation currency). An entity that translates its financial statements into
a presentation currency other than its functional currency uses the same method as for
translating the financial statements of a foreign operation.
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–– If an entity disposes of its entire interest in a foreign operation, or loses control over
a foreign subsidiary or retains neither joint control nor significant influence over an
associate or joint arrangement as a result of a partial disposal, then the cumulative
exchange differences recognised in OCI are reclassified to profit or loss.
–– A partial disposal of a foreign subsidiary without the loss of control leads to a
proportionate reclassification of the cumulative exchange differences in OCI to NCI.
–– A partial disposal of a joint arrangement or an associate with retention of either
joint control or significant influence results in a proportionate reclassification of the
cumulative exchange differences recognised in OCI to profit or loss.
Convenience translations
–– An entity may present supplementary financial information in a currency other than its
presentation currency if certain disclosures are made.
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–– Disclosure is required for judgements that have a significant impact on the financial
statements and for key sources of estimation uncertainty.
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Adjusting events
–– The financial statements are adjusted to reflect events that occur after the reporting
date, but before the financial statements are authorised for issue by management, if
those events provide evidence of conditions that existed at the reporting date.
Non-adjusting events
–– Financial statements are not adjusted for events that are a result of conditions that
arose after the reporting date, except when the going concern assumption is no
longer appropriate.
–– Earnings per share is restated to include the effect on the number of shares of certain
share transactions that happen after the reporting date.
Going concern
–– If management determines that the entity is not a going concern after the reporting
date but before the financial statements are authorised for issue, then the financial
statements are not prepared on a going concern basis.
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2.10 Hyperinflation
Currently effective: IAS 21, IAS 29, IFRIC 7
General requirements
–– If an entity’s functional currency is hyperinflationary, then its financial statements are
restated to express all items in the measuring unit current at the reporting date.
Indicators of hyperinflation
–– Step 1: Restate the statement of financial position at the beginning of the reporting
period by applying the change in the price index during the current period to all items.
–– Step 2: Restate the statement of financial position at the end of the reporting period by
adjusting non-monetary items to current purchasing power terms.
–– Step 3: Restate the statement of profit or loss and other comprehensive income.
–– Step 4: Calculate the gain or loss on the net monetary position.
–– If an entity presents financial statements restated for hyperinflation, then in our view it
is not appropriate to present additional supplementary financial information prepared on
a historical cost basis.
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Current vs non-current
Offsetting
–– A financial asset and a financial liability are offset if the criteria are met. Similarly,
income tax balances are offset under certain circumstances. Other non-financial assets
and non-financial liabilities cannot be offset.
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Initial recognition
–– Property, plant and equipment is initially recognised at cost.
–– Cost includes all expenditure directly attributable to bringing the asset to the location
and working condition for its intended use.
–– Cost includes the estimated cost of dismantling and removing the asset and restoring
the site.
Subsequent measurement
Depreciation
–– Property, plant and equipment is depreciated over its expected useful life.
–– Estimates of useful life and residual value, and the method of depreciation, are
reviewed as a minimum at each reporting date. Any changes are accounted for
prospectively as a change in estimate.
–– No specific depreciation method is required. Possible methods include the straight-line
method, the diminishing-balance (or reducing-balance) method, the sum-of-the-units (or
units-of-production) method, the annuity method and renewals accounting. The use of
the revenue-based depreciation method is prohibited.
Component accounting
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Revaluations
–– Property, plant and equipment may be revalued to fair value if fair value can be
measured reliably. All items in the same class are revalued at the same time, and the
revaluations are kept up to date.
–– When the revaluation model is chosen, changes in fair value are generally recognised in
other comprehensive income.
–– The gain or loss on disposal is the difference between the net proceeds received and
the carrying amount of the asset.
–– The date of disposal is the date on which the recipient obtains control of the asset
(see 4.2), unless the disposal is by sale-and-leaseback (see 5.1).
–– Compensation for the loss or impairment of property, plant and equipment is
recognised in profit or loss when it is receivable.
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Definitions
–– An intangible asset is an identifiable non-monetary asset without physical substance.
–– An intangible asset is ‘identifiable’ if it is separable or arises from contractual or
legal rights.
–– Acquired goodwill and other intangible assets with indefinite useful lives are not
amortised, but instead are subject to impairment testing at least annually.
–– Intangible assets with finite useful lives are amortised over their expected useful lives.
–– No specific amortisation method is required. Possible methods include the straight-
line method, the diminishing (or reducing-balance) method and the units-of-production
method. The use of the revenue-based amortisation method is restricted.
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Subsequent expenditure
–– Subsequent expenditure on an intangible asset is capitalised only if the definition of an
intangible asset and the recognition criteria are met.
Revaluations
–– Intangible assets cannot be revalued to fair value unless there is an active market.
–– The gain or loss on disposal is the difference between the net proceeds received and
the carrying amount of the asset.
–– The date of disposal is the date on which the recipient obtains control of the asset
(see 4.2).
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Scope
–– Investment property is property (land or building) held to earn rentals or for capital
appreciation, or both.
–– Property held by a lessee under an operating lease may be classified as investment
property if:
- the rest of the definition of investment property is met; and
- the lessee measures all of its investment property at fair value.
–– A portion of a dual-use property is classified as investment property only if the portion
could be sold or leased out under a finance lease. Otherwise, the entire property is
classified as property, plant and equipment, unless the portion of the property used for
own use is insignificant.
–– If a lessor provides ancillary services and those services are a relatively insignificant
component of the arrangement as a whole, then the property is classified as
investment property.
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Reclassification
–– Transfers to or from investment property are made only if there has been a change in
the use of the property.
–– The intention to sell an investment property without redevelopment does not justify
reclassification from investment property into inventory; the property continues to be
classified as investment property until disposal unless it is classified as held-for-sale.
Disclosures
–– Disclosure of the fair value of all investment property is required, regardless of the
measurement model used.
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–– Generally, associates and joint ventures are accounted for under the equity method in
the consolidated financial statements.
–– Venture capital organisations, mutual funds, unit trusts and similar entities may elect
to account for investments in associates and joint ventures at fair value through profit
or loss on an investment-by-investment basis.
–– Equity accounting is not applied to an investee that is acquired with a view to its
subsequent disposal if the criteria are met for classification as held-for-sale.
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–– On the loss of significant influence or joint control, the fair value of any retained
investment is taken into account in calculating the gain or loss on the transaction that
is recognised in profit or loss. Amounts recognised in other comprehensive income are
reclassified to profit or loss or transferred within equity as required by other standards.
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–– In a joint operation, the parties to the arrangement have rights to the assets and
obligations for the liabilities related to the arrangement.
–– In a joint venture, the parties to the arrangement have rights to the net assets of
the arrangement.
–– A joint arrangement not structured through a separate vehicle is a joint operation.
–– A joint arrangement structured through a separate vehicle may be either a joint
operation or a joint venture. Classification depends on the legal form of the vehicle,
contractual arrangements and an assessment of ‘other facts and circumstances’.
–– A joint venturer accounts for its interest in a joint venture in the same way as an
investment in an associate – i.e. generally under the equity method (see 3.5).
–– A joint operator recognises its assets, liabilities and transactions – including its share
in those arising jointly – in both its consolidated and separate financial statements.
These assets, liabilities and transactions are accounted for in accordance with the
relevant standards.
–– A party to a joint venture that does not have joint control accounts for its interest as a
financial instrument, or under the equity method if significant influence exists (see 3.5).
–– A party to a joint operation that does not have joint control recognises its assets,
liabilities and transactions – including its share in those arising jointly – if it has rights to
the assets and obligations for the liabilities of the joint operation.
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3.8 Inventories
Currently effective: IAS 2
Definition
–– Inventories are assets:
- held for sale in the ordinary course of business (finished goods);
- in the process of production for sale (work in progress); or
- in the form of materials or supplies to be consumed in the production process or in
the rendering of services (raw materials and consumables).
Measurement
–– Generally, inventories are measured at the lower of cost and net realisable value.
–– Cost includes all direct expenditure to get inventory ready for sale, including
attributable overheads.
–– The cost of inventory is generally determined under the first-in, first-out (FIFO) or
weighted-average method. The use of the last-in, first-out (LIFO) method is prohibited.
–– Inventory costing methods – e.g. the standard cost or retail methods – may be used
when the results approximate the actual cost.
–– If the net realisable value of an item that has been written down subsequently
increases, then the write-down is reversed.
Recognition as an expense
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Scope
–– Living animals or plants, except for bearer plants, are in the scope of the standard if they
are subject to a process of management of biological transformation.
Measurement
–– Biological assets in the scope of the standard are measured at fair value less costs
to sell unless it is not possible to measure fair value reliably, in which case they are
measured at cost.
–– Gains and losses from changes in fair value less costs to sell are recognised in profit
or loss.
Agricultural produce
–– Agricultural produce harvested from a biological asset is measured at fair value less
costs to sell at the point of harvest. After harvest, the inventories standard generally
applies (see 3.8).
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Scope
–– The impairment standard covers a variety of non-financial assets, including:
- property, plant and equipment;
- intangible assets and goodwill; and
- investments in subsidiaries, associates and joint ventures.
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–– An impairment loss for a CGU is allocated first to any goodwill and then pro rata to other
assets in the CGU that are in the scope of the standard.
–– An impairment loss is generally recognised in profit or loss.
Reversal of impairment
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Definitions
–– A provision is a liability of uncertain timing or amount that arises from a past event that
is expected to result in an outflow of the entity’s resources.
–– A contingent liability is a present obligation with uncertainties about either the
probability of outflows of resources or the amount of the outflows, or a possible
obligation whose existence is uncertain.
–– A contingent asset is a possible asset whose existence is uncertain.
Recognition
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Measurement
–– A provision is measured at the ‘best estimate’ of the expenditure to be incurred.
–– Provisions are discounted if the effect of discounting is material.
Reimbursements
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Scope
–– Income taxes are taxes based on taxable profits, and taxes that are payable by a
subsidiary, associate or joint arrangement on distribution to investors.
Current tax
–– Current tax is the amount of income taxes payable (recoverable) in respect of the
taxable profit (loss) for a period.
Deferred tax
–– Deferred tax is the amount of income taxes payable (recoverable) in future periods as a
result of past transactions or events.
–– Deferred tax is recognised for the estimated future tax effects of temporary differences,
unused tax losses carried forward and unused tax credits carried forward.
–– A deferred tax liability is not recognised if it arises from the initial recognition
of goodwill.
–– A deferred tax asset or liability is not recognised if:
- it arises from the initial recognition of an asset or liability in a transaction that is not a
business combination; and
- at the time of the transaction, it affects neither accounting profit nor taxable profit.
–– Deferred tax is not recognised in respect of temporary differences associated with
investments in subsidiaries, associates and joint arrangements if certain conditions
are met.
–– A deferred tax asset is recognised to the extent that it is probable that it will be realised.
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Measurement
–– Current and deferred taxes are measured based on rates that are enacted or
substantively enacted at the reporting date.
–– Deferred tax is measured based on the expected manner of settlement (liability)
or recovery (asset). There is a rebuttable presumption that the carrying amount of
investment property measured at fair value will be recovered through sale.
–– Deferred tax is not discounted.
–– The total income tax expense (income) recognised in a period is the sum of current
tax plus the change in deferred tax assets and liabilities during the period, excluding
tax recognised outside profit or loss – i.e. in other comprehensive income or directly in
equity – or arising from a business combination.
–– Income tax related to items recognised outside profit or loss is itself recognised outside
profit or loss.
–– Deferred tax is classified as non-current in a classified statement of financial position.
–– An entity offsets current tax assets and current tax liabilities only when it has a
legally enforceable right to set off current tax assets against current tax liabilities,
and it intends either to settle on a net basis or to realise the asset and settle the
liability simultaneously.
–– An entity offsets deferred tax assets and deferred tax liabilities only when it has a
legally enforceable right to set off current tax assets against current tax liabilities,
and the deferred tax assets and deferred tax liabilities relate to income taxes levied
by the same taxation authority on the same taxable entity, or different taxable
entities that intend either to settle on a net basis or to realise the asset and settle the
liability simultaneously.
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–– In our view, use of the terms ‘unusual’ or ‘exceptional’ should be infrequent and
reserved for items that justify a greater prominence.
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Extraordinary items
–– The presentation or disclosure of items of income and expense characterised as
‘extraordinary items’ is prohibited.
Offsetting
–– Items of income and expense are not offset unless this is required or permitted by
another standard, or when the amounts relate to similar transactions or events that are
individually not material.
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4.2 Revenue
Currently effective: IFRS 15
Forthcoming: IFRS 16
Overall approach
–– The core principle of the standard is that revenue is recognised in the way that depicts
the transfer of the goods or services to the customer at the amount to which the
entity expects to be entitled. An entity implements the core principle by applying a
five‑step, contract-based model to recognise and measure revenue from contracts with
customers.
–– An entity accounts for a contract in accordance with the model when the contract is
legally enforceable and all of the following criteria are met:
- the contract is approved and the parties are committed to their obligations;
- rights to goods or services and payment terms can be identified;
- the contract has commercial substance; and
- collection of the consideration is considered probable.
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–– Except for distinct licences of intellectual property, which are subject to specific
guidance in the standard, revenue is recognised over time if one of the following criteria
is met.
- The customer simultaneously receives and consumes the benefits provided by the
entity’s performance as the entity performs.
- The entity’s performance creates or enhances an asset that the customer controls as
the asset is created or enhanced.
- 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 a performance obligation is not satisfied over time, then the entity recognises
revenue at the point in time at which it transfers control of the goods or services to the
customer.
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Costs
–– The standard includes guidance on accounting for incremental costs to obtain and costs
to fulfil a contract that are not in the scope of another standard.
Presentation
–– An entity recognises a contract asset when it transfers goods or services before it has
an unconditional right to payment, and a contract liability when the customer makes a
payment before it receives the goods or services.
Disclosures
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Definition
–– Government grants are transfers of resources to an entity by a government entity in
return for compliance with certain conditions.
–– Unconditional government grants related to biological assets measured at fair value less
costs to sell are recognised in profit or loss when they become receivable; conditional
grants for such assets are recognised in profit or loss when the required conditions
are met.
–– Government grants that relate to the acquisition of an asset, other than a biological
asset measured at fair value less costs to sell, are recognised in profit or loss as the
related asset is depreciated or amortised.
–– Other government grants are recognised in profit or loss when the entity recognises as
expenses the related costs that the grants are intended to compensate.
–– If a government grant is in the form of a non-monetary asset, then both the asset
and the grant are recognised either at the fair value of the non-monetary asset or at a
nominal amount.
–– Forgivable or low-interest loans from a government may include components that need
to be treated as government grants.
Presentation
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Overall approach
–– The standard specifies the accounting for various types of employee benefits, including:
- benefits provided for services rendered – e.g. pensions, lump-sum payments on
retirement, paid absences and profit-sharing arrangements; and
- benefits provided on termination of employment.
–– Post-employment plans are classified as:
- defined contribution plans: plans under which an entity pays a fixed contribution into
a fund and will have no further obligation; and
- defined benefit plans: all other plans.
–– Liabilities and expenses for employee benefits that are provided in exchange for
services are generally recognised in the period in which the services are rendered.
–– The costs of providing employee benefits are recognised in profit or loss or other
comprehensive income (OCI), unless other standards permit or require capitalisation.
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Multi-employer plans
–– If insufficient information is available for a multi-employer defined benefit plan to be
accounted for as a defined benefit plan, then it is treated as a defined contribution plan
and additional disclosures are required.
–– If an entity applies defined contribution plan accounting to a multi-employer defined
benefit plan and there is an agreement that determines how a surplus in the plan would
be distributed or a deficit in the plan funded, then an asset or a liability that arises from
the contractual agreement is recognised.
Group plans
–– If there is a contractual agreement or stated policy for allocating a group’s net defined
benefit cost, then participating group entities recognise the cost allocated to them.
–– If there is no agreement or policy in place, then the net defined benefit cost is
recognised by the entity that is the legal sponsor, and other participating entities
expense their contribution payable for the period.
–– Short-term employee benefits – i.e. those that are expected to be settled wholly within
12 months after the end of the annual reporting period in which the employees render
the related service – are expensed as they are incurred, except for termination benefits.
–– The expense for long-term employee benefits, calculated on a discounted basis, is
usually accrued over the service period.
Termination benefits
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Basic principles
–– Goods or services received in a share-based payment transaction are measured at
fair value.
–– Equity-settled transactions with employees are generally measured based on the grant-
date fair value of the equity instruments granted.
–– Equity-settled transactions with non-employees are generally measured based on the
fair value of the goods or services obtained.
–– Grants in which the counterparty has the choice of equity or cash settlement are
accounted for as compound instruments. Therefore, the entity accounts for a liability
component and a separate equity component.
–– The classification of grants in which the entity has the choice of equity or cash
settlement depends on whether the entity has the ability and intent to settle in shares.
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–– A share-based payment transaction in which the receiving entity, the reference entity
and the settling entity are in the same group from the perspective of the ultimate parent
is a group share-based payment transaction and is accounted for as such by both the
receiving and the settling entities.
–– A share-based payment that is settled by a shareholder external to the group is also in
the scope of the standard from the perspective of the receiving entity, as long as the
reference entity is in the same group as the receiving entity.
–– A receiving entity that has no obligation to settle the transaction accounts for the share-
based payment transaction as equity-settled.
–– A settling entity classifies a share-based payment transaction as equity-settled if it is
obliged to settle in its own equity instruments; otherwise, it classifies the transaction as
cash-settled.
–– Goods are recognised when they are obtained and services are recognised over the
period in which they are received.
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Overall approach
–– Borrowing costs that are directly attributable to the acquisition, construction or
production of a qualifying asset generally form part of the cost of that asset.
Qualifying assets
–– A ‘qualifying asset’ is one that necessarily takes a substantial period of time to be made
ready for its intended use or sale.
–– Borrowing costs may include interest calculated under the effective interest method,
certain finance charges and certain foreign exchange differences.
–– Borrowing costs are reduced by interest income from the temporary investment
of borrowings.
Period of capitalisation
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5 Special topics
5.1 Leases
Currently effective: IAS 17, IFRIC 4, SIC‑15, SIC‑27
Forthcoming: IFRS 16
Definition
–– An arrangement that at its inception can be fulfilled only through the use of a specific
asset or assets, and that conveys a right to use that asset or those assets, is a lease or
contains a lease.
Classification
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–– Under an operating lease, both parties treat the lease as an executory contract. The
lessor and the lessee recognise the lease payments as income/expense over the lease
term. The lessor recognises the leased asset in its statement of financial position; the
lessee does not.
–– Lessors and lessees recognise incentives granted to a lessee under an operating lease
as a reduction in lease rental income/expense over the lease term.
Sale-and-leaseback transactions
Linked transactions
–– A series of linked transactions in the legal form of a lease is accounted for based on the
substance of the arrangement; the substance may be that the series of transactions is
not a lease.
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5.1A Leases
Forthcoming: IFRS 16
IFRS 16 Leases is effective for annual periods beginning on or after 1 January 2019. Early
adoption is permitted if IFRS 15 is also adopted (see 4.2).
Scope
– The new standard applies to leases of property, plant and equipment and other
assets, with only limited exclusions.
– A contract is, or contains, a lease if the contract conveys the right to control the use
of an identified asset for a period of time in exchange for consideration.
Accounting model
– There are different accounting models for lessees and lessors.
- Lessees apply a single on-balance sheet lease accounting model, unless they use
the recognition exemptions for short-term leases and leases of low-value assets.
- Lessors apply a dual model and classify leases as either finance or operating
leases.
Lessee accounting
– A lessee recognises a right-of-use asset representing its right to use the underlying
asset and a lease liability representing its obligation to make lease payments.
– A lessee measures the right-of-use asset at cost less accumulated depreciation and
accumulated impairment losses.
Lessor accounting
– Lease classification by lessors – i.e. as a finance or operating lease – is made at
inception of the lease and is reassessed only if there is a lease modification. The
classification depends on whether substantially all of the risks and rewards incidental
to ownership of the leased asset have been transferred from the lessor to the lessee.
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– Under a finance lease, a lessor derecognises the leased asset and recognises a
finance lease receivable.
– Under an operating lease, the lessor treats the lease as an executory contract and
recognises the lease payments as income over the lease term. The lessor recognises
the leased asset in its statement of financial position.
Sale-and-leaseback transactions
– In a sale-and-leaseback transaction, the seller-lessee first determines if the
buyer-lessor obtains control of the asset based on the new revenue recognition
requirements (see 4.2). If the transaction does not qualify for sale accounting, then it
is accounted for as a financing transaction.
Sub-lease transactions
– In a sub-lease transaction, the intermediate lessor accounts for the head lease and
the sub-lease as two separate contracts. An intermediate lessor classifies a sub-
lease with reference to the right-of-use asset arising from the head lease.
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Scope
–– An entity presents segment disclosures if its debt or equity instruments are traded in
a public market or it files, or is 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.
Management approach
–– Segment disclosures are provided about the components of the entity that
management monitors in making decisions about operating matters – i.e. they follow a
‘management approach’.
–– Such components (operating segments) are identified on the basis of internal reports
that the entity’s chief operating decision maker (CODM) regularly reviews in allocating
resources to segments and in assessing their performance.
–– The aggregation of operating segments is permitted only when the segments have
‘similar’ economic characteristics and meet a number of other specified criteria.
–– The amounts disclosed for each reportable segment are the measures reported to
the CODM, which are not necessarily based on the same accounting policies as the
amounts recognised in the financial statements.
–– Because segment profit or loss, segment assets and segment liabilities are disclosed
as they are reported to the CODM, rather than as they would be reported under
IFRS, disclosure of how these amounts are measured for each reportable segment is
also required.
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–– Reconciliations between total amounts for all reportable segments and financial
statement amounts are disclosed with a description of all material reconciling items.
–– General and entity-wide disclosures include information about products and services,
geographical areas – including country of domicile and individual foreign countries, if
they are material – major customers, and factors used to identify an entity’s reportable
segments. These disclosures are required even if an entity has only one segment.
Comparative information
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Scope
–– An entity presents basic and diluted earnings per share (EPS) if its ordinary shares or
potential ordinary shares are traded in a public market, or it files, or is in the process of
filing, its financial statements with a securities commission for the purpose of issuing
any class of ordinary shares in a public market.
Basic EPS
–– Basic EPS is calculated by dividing the earnings attributable to holders of ordinary equity
of the parent by the weighted-average number of ordinary shares outstanding during
the period.
Diluted EPS
–– To calculate diluted EPS, an entity adjusts profit or loss attributable to ordinary equity
holders, and the weighted-average number of shares outstanding for the effects of all
dilutive potential ordinary shares.
–– Potential ordinary shares are considered dilutive only if they decrease EPS or
increase loss per share from continuing operations. In determining whether potential
ordinary shares are dilutive, each issue or series of potential ordinary shares is
considered separately.
–– Contingently issuable ordinary shares are included in basic EPS from the date on which
all necessary conditions are satisfied and, when they are not yet satisfied, in diluted EPS
based on the number of shares that would be issuable if the reporting date were the
end of the contingency period.
–– If a contract may be settled in either cash or shares at the entity’s option, then it is
presumed that it will be settled in ordinary shares and the resulting potential ordinary
shares are used to calculate diluted EPS.
–– If a contract may be settled in either cash or shares at the holder’s option, then the more
dilutive of cash and share settlement is used to calculate diluted EPS.
–– For diluted EPS, diluted potential ordinary shares are determined independently for
each period presented.
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Retrospective adjustment
–– If the number of ordinary shares outstanding changes without a corresponding change
in resources, then the weighted-average number of ordinary shares outstanding during
all periods presented is adjusted retrospectively for both basic and diluted EPS.
–– Basic and diluted EPS for both continuing and total operations are presented in
the statement of profit or loss and other comprehensive income (OCI) with equal
prominence, for each class of ordinary shares that has a differing right to share in the
profit or loss for the period.
–– Separate EPS information is disclosed for discontinued operations, either in the
statement of profit or loss and OCI or in the notes to the financial statements.
–– Adjusted basic and diluted EPS based on alternative earnings measures may be
disclosed and explained in the notes to the financial statements.
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Disclosures
–– The disclosure of related party relationships between a parent and its subsidiaries is
required, even if there have been no transactions between them.
–– No disclosure is required in consolidated financial statements of intra-group
transactions eliminated in preparing those statements.
–– Comprehensive disclosures of related party transactions are required for each category
of related party relationship.
–– Key management personnel compensation is disclosed in total and is analysed
by component.
–– In certain instances, government-related entities are allowed to provide less detailed
disclosures on related party transactions.
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Overall approach
–– A qualifying investment entity is required to account for investments in controlled
entities – as well as investments in associates and joint ventures – at fair value through
profit or loss.
–– As an exception, an investment entity consolidates a subsidiary that provides
investment-related services or engages in permitted investment-related activities
with investees.
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Definition
–– A non-monetary transaction is an exchange of non-monetary assets, liabilities or
services for other non-monetary assets, liabilities or services with little or no monetary
consideration involved.
–– Exchanges of assets held for use are generally measured at fair value and result in the
recognition of gains or losses.
–– As exceptions, exchanged assets held for use are recognised based on historical cost
if the exchange lacks commercial substance or if fair value cannot be measured reliably
for either the asset received or the asset given up.
Barter transactions
–– Revenue is recognised for barter transactions unless the transaction is incidental to the
entity’s main revenue-generating activities or is with a counterparty in the same line of
business to facilitate sales to customers or potential customers.
Donated assets
–– Donated assets may be accounted for in a manner similar to government grants unless
the transfer is, in substance, an equity contribution.
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General
–– An entity considers its legal or regulatory requirements in assessing what information is
disclosed in addition to that required by IFRS.
–– Financial and non-financial information in addition to that required by IFRS is generally
presented outside the financial statements as accompanying information, but may be
presented within the financial statements if appropriate.
–– Although they are not required by IFRS, corporate governance disclosures may need to
be provided under local legal or regulatory requirements.
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Accounting policies
–– Generally, the accounting policies applied in the interim financial statements are those
that will be applied in the next annual financial statements.
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Overall approach
–– An entity that holds interests in other entities (including those classified as held-for-sale)
provides users with information that enables them to evaluate the nature and risks of
holding those interests, as well as the effects of the interests on the entity’s financial
position, performance and cash flows.
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Investment entities
–– An investment entity (see 5.6) discloses quantitative data about its exposure to risks
arising from unconsolidated subsidiaries.
–– To the extent that an investment entity does not have ‘typical’ characteristics, it
discloses the significant judgements and assumptions made in concluding that it is an
investment entity.
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Scope
–– Entities identify and account for pre-exploration expenditure, exploration and evaluation
(E&E) expenditure and development expenditure separately.
–– There is no industry-specific guidance on the recognition or measurement of pre-
exploration expenditure or development expenditure. Pre-exploration expenditure is
generally expensed as it is incurred.
E&E expenditure
Stripping costs
–– Stripping costs incurred in the production phase of surface mining activities that
improve access to ore to be mined in future periods are capitalised if certain criteria
are met.
Impairment
–– Some relief is provided from the general requirements of IFRS (see 3.10) in assessing
whether there is any indication of impairment of E&E assets.
–– The test for recoverability of E&E assets can combine several cash-generating units, as
long as the combination is not larger than an operating segment (see 5.2).
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Scope
–– IFRS provides specific guidance on the accounting by private sector entities (operators)
for public-to-private service concession arrangements.
–– The interpretation applies only to those service concession arrangements in which
the public sector (the grantor) controls or regulates the services provided, prices to be
charged and any significant residual interest in the infrastructure.
–– If the grantor provides other items to the operator that the operator may retain or sell
at its option, then the operator recognises those items as its assets, with a liability for
unfulfilled obligations.
–– The operator recognises revenue and costs for services provided by applying the
guidance in the revenue standard (see 4.2).
–– The operator recognises consideration receivable from the grantor for construction or
upgrade services – including upgrades of existing infrastructure – as a financial asset
and/or an intangible asset.
–– The operator recognises a financial asset to the extent that it has an unconditional right
to receive cash (or another financial asset) irrespective of the use of the infrastructure.
–– The operator recognises an intangible asset to the extent that it has a right to charge for
use of the infrastructure.
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Borrowing costs
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Newco formations
–– Newco formations generally fall into one of two categories: to effect a business
combination involving a third party; or to effect a restructuring among entities under
common control.
–– In a Newco formation to effect a business combination involving a third party,
acquisition accounting generally applies.
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General requirements
–– IFRS sets out specific transition requirements and exemptions available on the first-
time adoption of IFRS.
–– An opening statement of financial position is prepared at the date of transition, which is
the starting point for accounting in accordance with IFRS.
–– The date of transition is the beginning of the earliest comparative period presented on
the basis of IFRS.
–– At least one year of comparatives is presented on the basis of IFRS, together with the
opening statement of financial position.
–– The transition requirements and exemptions on the first-time adoption of IFRS apply to
both annual and interim financial statements.
–– Accounting policies are chosen from IFRS effective at the first annual IFRS
reporting date.
–– Generally, those accounting policies are applied retrospectively in preparing the
opening statement of financial position and in all periods presented in the first IFRS
financial statements.
Mandatory exceptions
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Optional exemptions
–– A number of exemptions are available from the general requirement for retrospective
application of IFRS accounting policies.
Disclosures
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Disclosures
–– An entity provides disclosures that enable users of the financial statements to evaluate
the nature of, risks associated with and effects of rate regulation on an entity’s financial
position, financial performance and cash flows.
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2. An entity that chooses to continue to apply the hedge accounting requirements in IAS 39 is subject to
the hedge accounting disclosure requirements in IFRS 7, as updated by IFRS 9.
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7 Financial instruments
7.1 Scope and definitions
Currently effective: IFRS 7, IFRS 9, IFRS 15, IAS 32
Forthcoming: IFRS 16
Scope
–– The standards on financial instruments generally apply to all financial instruments. They
also apply to a contract to buy or sell a non-financial item if the contract can be settled
net in cash – including if the non-financial item is readily convertible into cash – unless
the contract is held for delivery of the item in accordance with the entity’s expected
purchase, sale or usage requirements (‘own-use exemption’).
–– However, an entity can, at inception, irrevocably designate a contract that meets the
own-use exemption as measured at fair value through profit or loss (FVTPL) if certain
criteria are met.
–– Financial instruments subject to scope exclusions include certain loan commitments
and financial guarantee contracts, as well as financial instruments in the scope of
other specific standards – e.g. investments in subsidiaries and associates, insurance
contracts and employee benefits. However, certain investments in subsidiaries,
associates and joint ventures are in the scope of the financial instruments standards.
Definition
–– A financial instrument is any contract that gives rise to both a financial asset of one
entity and a financial liability or equity instrument of another entity.
–– Financial instruments include a broad range of financial assets and financial liabilities.
They include both primary financial instruments (e.g. cash, receivables, debt, shares
in another entity) and derivative financial instruments (e.g. options, forwards, futures,
interest rate swaps, currency swaps).
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Derivatives
–– A derivative is a financial instrument or other contract in the scope of the financial
instruments standard, the value of which changes in response to some underlying
variable (other than a non-financial variable that is specific to a party to the contract),
that has an initial net investment smaller than would be required for other instruments
that have a similar response to the variable and that will be settled at a future date.
Embedded derivatives
–– An embedded derivative is a component of a hybrid contract that affects the cash flows
of the hybrid contract in a manner similar to a stand-alone derivative instrument.
–– A hybrid instrument also includes a non-derivative host contract that may be a financial
or a non-financial contract.
–– An embedded derivative with a host contract that is a financial asset in the scope of
IFRS 9 is not separated; instead, the hybrid financial instrument is assessed as a whole
for classification under IFRS 9.
–– A hybrid instrument with host contract that is not a financial asset in the scope of
IFRS 9 is assessed to determine whether the embedded derivative(s) is required to be
separated from the host contract.
–– An embedded derivative is not accounted for separately from the host contract if it is
closely related to the host contract, if a separate instrument with the same terms as
the embedded derivative would not meet the definition of a derivative or if the entire
contract is measured at fair value through profit or loss. In other cases, an embedded
derivative is accounted for separately as a derivative.
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Classification
–– An instrument, or its components, is classified on initial recognition as a financial
liability, a financial asset or an equity instrument in accordance with the substance of
the contractual arrangement and the definitions of a financial liability, a financial asset
and an equity instrument.
–– If a financial instrument has both equity and liability components, then they are
classified separately.
–– Gains and losses on transactions in an entity’s own equity instruments are recognised
directly in equity.
–– Dividends and other distributions to the holders of equity instruments are recognised
directly in equity.
–– Incremental costs that are directly attributable to equity transactions such as issuing or
buying back own equity instruments or distributing dividends are recognised directly in
equity.
Presentation
–– An entity takes into account its legal environment when choosing how to present its
own shares within equity.
–– Non-controlling interests are presented in the consolidated statement of financial
position within equity separately from the parent shareholders’ equity.
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Classification
–– Financial assets are classified into one of three measurement categories:
- amortised cost;
- fair value through other comprehensive income (FVOCI); or
- fair value through profit or loss (FVTPL).
–– The categorisation determines whether and where any remeasurement to fair value
is recognised.
–– Financial assets classified as at FVTPL are further subcategorised as mandatorily
measured at FVTPL (which includes derivatives) or designated as at FVTPL on
initial recognition.
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Classification
–– Financial liabilities are generally classified into two measurement categories:
- amortised cost; or
- fair value through profit or loss (FVTPL).
–– The categorisation determines whether and where any remeasurement to fair value
is recognised.
–– Financial liabilities classified as at FVTPL are further subcategorised as held-for-trading
(which includes derivatives) or designated as at FVTPL on initial recognition.
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Initial recognition
–– Financial assets and financial liabilities, including derivative instruments, are recognised
in the statement of financial position when the entity becomes a party to the contract.
However, ‘regular-way’ purchases and sales of financial assets are recognised either at
trade date or at settlement date.
–– A financial asset is derecognised only when the contractual rights to the cash flows
from the financial asset expire or when the financial asset is transferred and the transfer
meets certain specified conditions.
–– An entity derecognises a transferred financial asset if it transfers substantially all of the
risks and rewards of ownership. An entity does not derecognise a transferred financial
asset if it retains substantially all of the risks and rewards of ownership.
–– An entity continues to recognise a transferred financial asset to the extent of its
continuing involvement if it has neither retained nor transferred substantially all of the
risks and rewards of ownership, and it has retained control of the financial asset.
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7.7 Measurement
Currently effective: IFRS 9
Related standards: IFRS 13, IFRS 15, IAS 21
Subsequent measurement
–– Financial assets are subsequently measured at fair value or amortised cost. If a financial
asset is measured at fair value, then changes in its fair value are recognised as follows.
- Debt financial assets measured at fair value through other comprehensive income
(FVOCI): Changes in fair value are recognised in other comprehensive income (OCI),
except for foreign exchange gains and losses and expected credit losses, which are
recognised in profit or loss. On derecognition, any gains or losses accumulated in
OCI are reclassified to profit or loss.
- Equity financial assets measured at FVOCI: All changes in fair value are recognised in
OCI. The amounts in OCI are not reclassified to profit or loss.
- Financial assets at FVTPL: All changes in fair value are recognised in profit or loss.
–– Financial liabilities, other than those classified as at FVTPL, are generally measured at
amortised cost.
–– If a financial liability is mandatorily measured at FVTPL, then all changes in fair value are
recognised in profit or loss.
–– If a financial liability is designated as at FVTPL, then a split presentation of changes in
fair value is generally required. The portion of the fair value changes that is attributable
to changes in the financial liability’s credit risk is recognised directly in OCI. The
remainder is recognised in profit or loss. The amount presented in OCI is never
reclassified to profit or loss.
–– All derivatives (including separated embedded derivatives) are subsequently measured
at fair value with changes in fair value recognised in profit or loss.
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7.8 Impairment
Currently effective: IFRS 9
Related standards: IFRS 3, IFRS 15
Scope
–– The impairment model covers debt instruments measured at amortised cost and fair
value through other comprehensive income (FVOCI), certain loan commitments and
financial guarantee contracts, lease receivables and contract assets.
–– Investments in equity instruments are outside the scope of IFRS 9’s impairment
requirements.
Measurement
–– Expected credit losses of a financial instrument are measured in a way that reflects:
- a probability-weighted amount determined by evaluating a range of possible
outcomes;
- the time value of money; and
- reasonable and supportable information about past events, current conditions and
forecasts of future economic conditions.
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Introduction
–– Hedge accounting allows an entity to measure assets, liabilities and firm commitments
selectively on a basis different from that otherwise stipulated in IFRS or to defer the
recognition in profit or loss of gains or losses on derivatives.
–– Hedge accounting is voluntary. However, it is permitted only when strict requirements
related to documentation and effectiveness are met.
–– Hedge accounting is required to be closely aligned with an entity’s actual risk
management objectives. As an alternative to hedge accounting, an entity may elect a
fair value option for certain credit exposures.
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Effectiveness testing
–– The IASB has a separate active project to address macro hedge accounting.
–– In the meantime, for a fair value hedge of the interest rate exposure of a portfolio of
financial instruments, an entity may apply the hedge accounting requirements of IAS 39
rather than IFRS 9.
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Offsetting
–– A financial asset and a financial liability are offset only when an entity:
- currently has a legally enforceable right to set off; and
- has an intention to settle net or to settle both amounts simultaneously.
Disclosure objectives
–– An entity is required to disclose information that enables users to evaluate:
- the significance of financial instruments for the entity’s financial position and
performance; and
- the nature and extent of risks arising from financial instruments and how the entity
manages those risks.
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–– Information is provided about financial assets that are not derecognised in their entirety.
–– Information is provided about financial assets that are derecognised in their entirety but
in which the entity has a continuing involvement.
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Introduction
–– IFRS 9 is effective for annual periods beginning on or after 1 January 2018, with early
adoption permitted.
–– Transition is as follows:
– for classification and measurement, including impairment: generally retrospective,
but with significant exemptions; and
– for hedge accounting: generally prospective, but with limited exceptions.
–– There is no requirement to restate comparatives, except in limited circumstances
related to hedge accounting.
–– The date of initial application is the date on which an entity first applies IFRS 9. It is
the beginning of the reporting period in which an entity adopts IFRS 9, and not the
beginning of the comparative period.
–– This date is relevant to several assessments necessary to apply IFRS 9, including:
– the business model assessment;
– an election to present changes in fair value of an equity instrument in other
comprehensive income (OCI);
– designations or revocation of designations of financial instruments as at fair value
through profit or loss (FVTPL);
– the determination of a significant increase in credit risk since initial recognition when
assessing impairment; and
– the assessment of compliance with qualifying hedge accounting criteria.
–– IFRS 9 is not applied to financial instruments that have already been derecognised at
the date of initial application.
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Disclosure
–– Specific quantitative and qualitative disclosures are required in the reporting period in
which IFRS 9 is initially applied.
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Scope
–– The standards on financial instruments generally apply to all financial instruments. They
also apply to a contract to buy or sell a non-financial item if the contract can be settled
net in cash – including if the non-financial item is readily convertible into cash – unless
the contract is held for delivery of the item in accordance with the entity’s expected
purchase, sale or usage requirements (‘own-use exemption’).
–– Financial instruments that are excluded from the scope include certain loan
commitments and financial guarantee contracts as well as financial instruments
in the scope of other specific standards – e.g. investments in subsidiaries and
associates, insurance contracts and employee benefits. However, certain investments
in subsidiaries, associates and joint ventures are in the scope of the financial
instruments standards.
Definition
–– A financial instrument is any contract that gives rise to both a financial asset of one
entity and a financial liability or equity instrument of another entity.
–– Financial instruments include a broad range of financial assets and financial liabilities.
They include both primary financial instruments (e.g. cash, receivables, debt, shares
in another entity) and derivative financial instruments (e.g. options, forwards, futures,
interest rate swaps, currency swaps).
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Derivatives
–– A derivative is a financial instrument or other contract in the scope of the financial
instruments standards, the value of which changes in response to some underlying
variable (other than a non-financial variable that is specific to a party to the contract),
that has an initial net investment smaller than would be required for other instruments
that have a similar response to the variable and that will be settled at a future date.
Embedded derivatives
–– An embedded derivative is a component of a hybrid contract that affects the cash flows
of the hybrid contract in a manner similar to a stand-alone derivative instrument.
–– A hybrid instrument also includes a non-derivative host contract that may be a financial
or a non-financial contract.
–– A hybrid instrument is assessed to determine whether the embedded derivative(s) has
to be separated from the host contract.
–– An embedded derivative is not accounted for separately from the host contract if it is
closely related to the host contract, if a separate instrument with the same terms as
the embedded derivative would not meet the definition of a derivative or if the entire
contract is measured at fair value through profit or loss. In other cases, an embedded
derivative is accounted for separately as a derivative.
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Classification
–– An instrument, or its components, is classified on initial recognition as a financial
liability, a financial asset or an equity instrument in accordance with the substance of
the contractual arrangement and the definitions of a financial liability, a financial asset
and an equity instrument.
–– If a financial instrument has both equity and liability components, then they are
classified separately.
–– Gains and losses on transactions in an entity’s own equity instruments are recognised
directly in equity.
–– Dividends and other distributions to the holders of equity instruments are recognised
directly in equity.
–– Incremental costs that are directly attributable to equity transactions such as issuing or
buying back own equity instruments or distributing dividends are recognised directly
in equity.
Presentation
–– An entity takes into account its legal environment when choosing how to present its
own shares within equity.
–– Non-controlling interests are presented in the consolidated statement of financial
position within equity separately from the parent shareholders’ equity.
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Classification
–– Financial assets are classified into one of four categories: at fair value through profit
or loss (FVTPL); loans and receivables; held-to-maturity; or available-for-sale. Financial
liabilities are categorised as either at FVTPL or other liabilities. The categorisation
determines whether and where any remeasurement to fair value is recognised.
–– Financial assets and financial liabilities classified as at FVTPL are further subcategorised
as held-for-trading (which includes derivatives) or designated as at FVTPL on
initial recognition.
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Initial recognition
–– Financial assets and financial liabilities, including derivative instruments, are recognised
in the statement of financial position when the entity becomes a party to the contract.
However, ‘regular-way’ purchases and sales of financial assets are recognised either at
trade date or at settlement date.
–– A financial asset is derecognised only when the contractual rights to the cash flows
from the financial asset expire or when the financial asset is transferred and the transfer
meets certain specified conditions.
–– An entity derecognises a transferred financial asset if it transfers substantially all of the
risks and rewards of ownership. An entity does not derecognise a transferred financial
asset if it retains substantially all of the risks and rewards of ownership.
–– An entity continues to recognise a transferred financial asset to the extent of its
continuing involvement if it has neither retained nor transferred substantially all of the
risks and rewards of ownership, and it has retained control of the financial asset.
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Subsequent measurement
–– Financial assets are subsequently measured at fair value, except for loans and
receivables and held-to-maturity investments (which are measured at amortised cost)
and investments in unlisted equity instruments in the rare circumstances that fair value
cannot be measured reliably (which are measured at cost).
–– Changes in the fair value of available-for-sale financial assets are recognised in other
comprehensive income (OCI), except for impairment losses and foreign exchange gains
and losses on available-for-sale monetary items, which are recognised in profit or loss.
On derecognition, any gains or losses accumulated in OCI are reclassified to profit
or loss.
–– Financial liabilities, other than those classified at FVTPL, are generally measured at
amortised cost.
–– Changes in the fair value of financial assets and financial liabilities at FVTPL are
recognised in profit or loss.
–– All derivatives (including separated embedded derivatives) are measured at fair value
with changes in fair value recognised in profit or loss.
Recognition of interest
–– Interest income and interest expense are calculated using the effective interest
method. The effective interest rate is calculated on initial recognition based on
estimated cash flows considering all of the contractual terms of the financial instrument
but excluding future credit losses. For floating rate instruments, the effective interest
rate is updated to reflect movements in market rates of interest.
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Introduction
–– Hedge accounting allows an entity to measure assets, liabilities and firm commitments
selectively on a basis different from that otherwise stipulated in IFRS or to defer the
recognition in profit or loss of gains or losses on derivatives.
–– Hedge accounting is voluntary. However, it is permitted only when strict requirements
on documentation and effectiveness are met.
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Effectiveness testing
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Offsetting
–– A financial asset and a financial liability are offset only when the entity:
- currently has a legally enforceable right to set off; and
- has an intention to settle net or to settle both amounts simultaneously.
Disclosure objectives
–– An entity is required to disclose information that enables users to evaluate:
- the significance of financial instruments for the entity’s financial position and
performance; and
- the nature and extent of risks arising from financial instruments and how the entity
manages those risks.
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–– Information is provided about financial assets that are not derecognised in their entirety.
–– Information is provided about financial assets that are derecognised in their entirety but
in which the entity has a continuing involvement.
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8 Insurance contracts
8.1 Insurance contracts
Currently effective: IFRS 4
Forthcoming: IFRS 17
Scope
–– An insurance contract is a contract that transfers significant insurance risk. Insurance
risk is ‘significant’ if an insured event could cause an insurer to pay significant additional
benefits in any scenario, excluding those that lack commercial substance.
–– A financial instrument that does not meet the definition of an insurance contract
(including investments held to back insurance liabilities) is accounted for under the
general recognition and measurement requirements for financial instruments (see
sections 7 and 7I).
–– Financial instruments that include discretionary participation features are in the scope
of the standard – i.e. existing accounting policies may be applied, although these are
subject to the general financial instrument disclosures (see 7.10 and 7I.8).
–– Generally, entities that issue insurance contracts are required to continue their existing
accounting policies with respect to insurance contracts except when the standard
requires or permits changes in accounting policies.
–– Changes in existing accounting policies for insurance contracts are permitted only if the
new policy, or a combination of new policies, results in information that is more relevant
or reliable, or both, without reducing either relevance or reliability.
–– The recognition of catastrophe and equalisation provisions is prohibited for contracts
not in existence at the reporting date.
–– A liability adequacy test is required to ensure that the measurement of an entity’s
insurance liabilities considers all contractual cash flows, using current estimates.
–– The application of ‘shadow accounting’ for insurance liabilities is permitted for
consistency with the treatment of unrealised gains or losses on assets.
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–– Significant disclosures are required of the terms, conditions and risks related to
insurance contracts, consistent in principle with those required for financial assets and
financial liabilities.
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IFRS 17 Insurance Contracts is effective for annual periods beginning on or after 1 January
2021. Early adoption is permitted if IFRS 9 (see section 7) and IFRS 15 (see 4.2) are
also adopted.
Scope
– An insurance contract is a contract that transfers significant insurance risk. Insurance
risk is ‘significant’ if an insured event could cause an insurer to pay significant
additional benefits in any scenario, excluding those that lack commercial substance.
– A financial instrument that does not meet the definition of an insurance contract
(including investments held to back insurance liabilities) is accounted for under the
general recognition and measurement requirements for financial instruments (see
section 7).
– Investment contracts that include discretionary participation features are in the
scope of the standard, provided that the entity also issues insurance contracts.
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– The fulfilment cash flows are remeasured at each reporting date to reflect current
estimates. Generally, the changes in the fulfilment cash flows are treated in a
number of ways:
- changes in the effect of the time value of money and financial risk are reflected in
the statement of profit and loss and OCI;
- changes related to past and current service are recognised in profit or loss; and
- changes related to future service adjust the CSM.
Presentation
– Insurance revenue is derived from the changes in the liability for remaining coverage
for each reporting period that relate to services for which the entity expects to
receive consideration.
– Insurance service results are presented separately from insurance finance income
or expense.
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Transition
– Full retrospective application is required – however, if it is impracticable, a modified
retrospective approach and a fair value approach are available.
– Limited ability to redesignate some financial assets on initial application of IFRS 17.
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Appendix I
New standards or amendments for 2018 and
forthcoming requirements
Since the September 2017 edition of this overview, a number of standards, amendments
to or interpretations of standards have been issued. This Appendix lists these new
pronouncements in issue at 1 August 2018, which were not yet effective for periods
beginning on 1 January 2017 and therefore may need to be considered for the first
time when preparing IFRS financial statements for an annual period beginning on
1 January 2018.
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Forthcoming requirements
8.1A
1 January 2021 IFRS 17 Insurance Contracts 2
Web article (with links to in-depth
analysis)
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1. Early application of IFRS 16 Leases is permitted only for companies that also apply IFRS 15 Revenue
from Contracts with Customers.
2. Early application of IFRS 17 Insurance Contracts is permitted only for companies that also apply IFRS 9
Financial Instruments and IFRS 15 Revenue from Contracts with Customers.
3. The effective date for these amendments was deferred indefinitely. Early adoption continues to be
permitted.
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Keeping in touch
Follow ‘KPMG IFRS’ on LinkedIn or visit
kpmg.com/ifrs for the latest on IFRS. Delivering insight,
analysis and
Whether you are new to IFRS or a current
practical guidance
user, you can find digestible summaries of
on IFRS
recent developments, detailed guidance on
complex requirements, and practical tools
such as illustrative disclosures and checklists.
IFRS toolkit
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statements
Business Presentation
combinations and
and disclosures
consolidation
Revenue Financial
instruments
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… and beyond
Leases Insurance
contracts
For access to an extensive range of accounting, auditing and financial reporting guidance
and literature, visit KPMG’s Accounting Research Online. This web-based subscription
service is a valuable tool for anyone who wants to stay informed in today’s dynamic
environment. For a free 30-day trial, go to aro.kpmg.com and register today.
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