IFRS UpdateStandards, IFRIC Interpretations and Amendments

required to be applied for the first time for December 2009 financial year ends

AGENDA

• IAS 1 (revised 2007) Presentation of Financial Statements

• IAS 23 (revised 2007) Borrowing Costs

• IFRS 8 Operating Segments

• IFRICs and amendments to standards effective for 2009

• IFRIC Interpretations – effective in future periods

Presentation of Financial StatementsIAS 1 (Revised 2007)

IAS 1 (Revised)

_

Phase 1

Annual periods commencing on or after 1 January 2009

General purpose financial statements

Interim accounts

Early adoption permitted

IAS 1 (Revised)

No real change:

Minimum content

Consistency and compatibility

Guidelines for structure of financial statements

Fair presentation and compliance

Significant changes:

Components of financial statements

• Eg. statement of comprehensive income

Titles of Primary Financial Statements

IAS 1 IAS 1 (Revised)

Balance sheet Statement of financial position

Income statement

SORIE + notesorSOCIE

Statement of comprehensive income- income statement with SOCI or- single SOCI

SOCIE (including CI)

Titles are not mandatory but IASB “prefers” them to reflect their function

Cash flow statement Statement of cash flows

Comprehensive income and changes in equity

IAS 1 IAS 1(Revised)

Income statement

SORIE + notesorSOCIE

Statement of comprehensive income- single SOCI or- income statement with SOCI

SOCIE (including CI)

SOCI – One statement

£’000Revenue 390,000[………] [……….]Profit for the year 121,250Other CI (net of tax) - itemise (14,000)Total CI for the year 107,250

Profit attributable to:Owners of the parent 97,000Non-controlling interests 24,250

121,250TCI attributable to:Owners of the parent 85,800Non-controlling interests 21,450

107,250

EPS – basic and diluted 0.46p

Illustration only – IAS 1 has minimum content

SOCI – Two statements

£’000Revenue 390,000[………] [……….]Profit for the year 121,250

Profit attributable to:Owners of the parent 97,000Non-controlling interests 24,250

121,250

EPS – basic and diluted 0.46p

Profit for the year 121,250Other CI (net of tax) - itemise (14,000)Total CI for the year 107,250

TCI attributable to:Owners of the parent 85,800Non-controlling interests 21,450

107,250

Illustration only – IAS 1 has minimum content

Statement of Changes in Equity

Includes:

Comprehensive income (non owner changes)

• can show components in separate line items

• show total by reserve (columns)

• August 2009 Improvements ED

Owner changes in equity

• Eg dividends, share purchases

• show total by reserve (columns)

Comparatives for annual accounts

Usually present one comparative for each primary statement

PLUS statement of financial position as at beginning of comparative period when an entity:

• retrospectively applies an accounting policy

• retrospectively restates

• reclassifies items

To avoid re-formatting accounts

• always present 3 Statement of Financial Position whether required or not?

Reclassification adjustments

Small but important changes:

Disclose amounts taken to profit or loss previously recognised in OCI

Show related tax

Dividends

Disclose:

Total and amount per share

In SOCIE or in notes

NOT as footnote to income statement

IAS 23 RevisedBorrowing Costs

IAS 23 (Revised): Borrowing Costs

Placeholder:

•Definitions

•Qualifying assets

•Borrowing costs

•Capitalisation

•Transition

•Disclosure

Definitions

Borrowing Costs

•are interest and other costs that an entity incurs in connection with the borrowing of funds.

Qualifying Asset

•is an asset that necessarily takes a substantial period of time to get ready for intended use or sale

standard is not required to be applied to qualifying assets measured at fair value (eg biological assets, investment properties)

standard is not required to be applied to inventories that are manufactured/produced in large quantities

Qualifying Assets

What is included:

•Inventories

•Manufacturing plants

•Power generation facilities

•Intangible assets

•Investment properties

What is not included:

•Financial assets

•Assets that take a short period of time to complete

•Assets ready for use on acquisition

Borrowing Costs – what is included

•Interest expense calculated using the effective interest method in IAS 39

•Finance charges on finance leases

•Exchange differences arising from foreign exchange borrowings to the extent they are regard as an adjustment to interest costs

Borrowing Costs – what to capitalise

Specific borrowing

Actual borrowing costs capitalised

General borrowing

Apply capitalisation rate to the expenditures on the qualifying asset

Capitalisation – when to start?

Borrowing costs should be capitalised by the entity from the commencement date. This is when the entity meets all of the following:

first incurs expenditure on the asset;

incurs borrowing costs; and

undertakes activities necessary to prepare the asset for its intended use or sale.

Capitalisation – when to stop

Thing:

•Suspend capitalising borrowing costs during extended periods where development of the qualifying asset has been suspended

•Capitalisation of borrowing costs should cease when substantially all activities to get asset ready for use have been completed

Transition

If the application of IAS 23 Revised constitutes a change in accounting policy for the entity:

commence capitalising borrowing costs for qualifying assets where the commencement date for capitalisation is on or after the effective date (latest date to apply standard is periods beginning 1 January 2009)

If the entity designates an earlier application date for the standard it should commence capitalising borrowing costs for qualifying assets where the commencement date for capitalisation is on or after the application date

Disclosure

The entity should disclose:

•the amount of borrowing costs capitalised during the period

•the capitalisation rate used to determine the amount of borrowing costs eligible for capitalisation

Also consider IAS 1

•policies

•judgements

IFRS 8Operating Segments

IFRS 8 Operating Segments

• Scope • Definitions• Operating segments• Reportable segments• Measurement• Disclosure• Other considerations

Scope

• Separate and individual financial statements of an entity; and • The consolidated financial statements of a group with a parent:

- whose debt or equity instruments are traded in a public market- that files or is in the process of filing financial statements with a

securities commission or other regulatory organisation for the purpose of issuing any class of instrument in a regulated market

Definitions

Operating segmentAn operating segment is a component of an entity:a) that engages in business activities from which it may earn

revenues and incur expenses (including inter group transactions),b) whose operating results are regularly reviewed by the entity’s

chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance, and

c) for which discrete financial information is available.

Operating segments

__• Not necessary to be generating revenue or incurring

expenses• Not all parts of entities must fall into category of

operating segment (i.e. corporate headquarters)• The ‘chief operating decision maker’ refers to a

function- Responsible for the allocation of resources and monitoring of

performance

• Identification of segments not necessarily straightforward, considerations may include: - existence of manager(s) responsible for segment- Information presented to not only the chief operating decision

maker but also the board

Reportable segments

An entity needs to report information about each operating segment that:

• has been separately identified as an operating segment or results from aggregating two or more of the identified operating segments that meet certain aggregation criteria, and

• exceeds certain quantitative thresholds

Reportable segments – aggregation criteria

Two or more operating segments can be combined where:• the segments have similar economic characteristics; and • the segments are similar in each of the following respects:

- the nature of the products and services;- the nature of the production processes;- the type or class of customer for their product and service;- the methods used to distribute their products or provide their services; and- the nature of the regulatory environment

Reportable segments – quantitative thresholds

Where the following quantitative thresholds are met, the entity must separately disclose information about an operating segment:

• its reported revenue is 10% or more of the combined revenue of all operating segments (revenue includes internal and external sales or transfers)

• the absolute amount of its reported profit or loss is 10% or more of the- Combined reported profit of all segments that did not report a loss- Combined reported loss of all segments that reported a loss

• its assets are 10% of more of the combined assets of all operating segments

Measurement

__• The amount of each segment item reported will be the amount

reported to the chief operating decision maker for the purpose of making decisions about allocating resources to the segment and assessing its performance

• This is a significant change from how segment revenue/results/assets/liabilities were reported under IAS 14 as the amount reported does NOT need to be reported using any GAAP measures.

Disclosure

Disclose information that enables the user to evaluate the nature and financial effect of the business activities in which it engages, and the economic environment that the entity operates in, by disclosing:

• general information• information about reported segment profit or loss, including

revenues, expenses, assets, liabilities and the basis of measurement

• reconciliations of total segment revenues, profit or loss, assets, liabilities (and other material segment items) to relevant totals for the entity

Disclosure - entity wide

• Revenues from external customers for each product / service

• Analysis of revenue by geographic location of customer

• Geographic analysis of location of non-current assets

• Extent of reliance on major customers (>10% of revenue)

Other considerations

Impairment• IAS 36 requires identification of cash generating units for impairment

testing• cash generating unit must not be larger than an operating segment

(i.e. it cannot be a reportable segment unless these are the same as operating segments)

IFRIC Interpretations

IFRIC 12 Service Concession Arrangements• IASB effective date: annual periods beginning on/after 1 January 2008

• EU-endorsed IFRS: annual periods beginning on/after 30 March 2009

IFRIC 13 Customer Loyalty Programmes• Annual periods beginning on/after 1 July 2008

IFRIC 15 Agreements for the Construction of Real Estate• Annual periods beginning on/after 1 January 2009

IFRIC 16 Hedges of a Net Investment in a Foreign Operation• Annual periods beginning on/after 1 October 2008

IFRIC 18 Transfers of Assets from Customers• IASB effective date: transfers from customers received on or after 1 July 2009

• EU-endorsed IFRS: annual periods beginning on/after 31 October 2009

IFRIC 12 Service Concession Arrangements

Scope

•Accounting by private sector entities (Operator)

•Public to private service concession arrangements

•Public sector controls/regulates services provided and residual

interest in infrastructure

Accounting

•Construction/upgrade services – IAS 11 or IAS 18

•Other obligations to maintain/restore infrastructure – IAS 37

•Operator recognises financial asset or intangible asset – IFRIC 12

•Capitalise borrowing costs as appropriate (IAS 23)

IFRIC 13 Customer Loyalty Programmes

Scope

•Seller grants award credits as part of a sales transaction

•Award credits can be redeemed for discounted/free goods or services

Revenue recognition by seller

• Allocate and defer revenue from original transaction• Fair value of the award credits

• Take into account expected level of redemption

• Recognise deferred revenue as free/discounted goods provided

• ‘True up’ for changes in estimates of the redemption rate• Do not adjust amount of revenue deferred at time of original sale

IFRIC 15 Agreements for the Construction of Real Estate

Scope

• Accounting for construction of real estate• Directly or through subcontractors

• Relevant by analogy to other arrangements

Revenue recognition• Agreement within the scope of IAS 11 or IAS 18?

• Definition of construction contract in IAS 11

- Is buyer able to specify major structural elements of the real estate before construction begins and/or specify major structural changes once it has started

- Yes = IAS 11

- No (including selecting from a range of limited options) = IAS 18

- Is the builder required to source construction materials?

- No = Contract for services within the scope of IAS 18

IFRIC 16 Hedges of a Net Investment in a Foreign Operation

Scope

•Entity that hedges fx risk arising from net investment in foreign

operations

•Wishes to qualify for hedge accounting (IAS 39)

Guidance

•Hedge accounting can only be applied for foreign exchange risk

•Derivative or non derivative qualifies as hedging instrument

•Hedging instruments may be held by any entity in the group

•Recycling required on disposal of foreign operation

•Prohibition on application by analogy to any other arrangement

IFRIC 18 Transfers of Assets from Customers

Scope

Property plant and equipment (or cash to acquire /construct ppe) that an entity must use to either:

•Connect the customer to a network; and / or

•Provide the customer supply of goods or services

Excluded: Government grants (IAS 20) and service concessions (IFRIC 12)

Guidance

•Recognise an asset with reference to definitions in the Framework

•Cost on initial recognition is fair value

•Revenue recognised for service (or services) as these are provided

Amendments to Standards

Improvements to IFRSs (May 2008)

Amendments to IFRS 2: Vesting Conditions and Cancellations

Amendments to IAS 32 and IAS 1: Puttable Financial Instruments and Obligations Arising on Liquidation

Amendments to IFRS 7: Improving Disclosures about Financial Instruments

Amendments to IFRS 1 and IAS 27: Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate

Improvements to IFRSs

Amendments to 20 IFRSs including:

• IFRS 5 – loss of control of a subsidiary

• IAS 18 & IAS 7 – sale of assets held for rental to third parties

• IAS 20 – loans from governments at below-market rates of interest

• IAS 23 - definition of borrowing costs

• IAS 28 – reversal of impairment losses

• IAS 38 – clarification of requirement to expense advertising/marketing costs as incurred

• IAS 40 – extension of scope to include property under development/construction

Amendments to IFRS 2: Vesting Conditions and Cancellations

Non-vesting conditions

Must be satisfied to become entitled to share-based compensation

Do not relate to receipt of goods or services by the entity

Examples

Employee keeps up SAYE subscription

Employer keeps the scheme open

Target based on commodity index

If non vesting condition is not met- Entity or counterparties choice

- Treat as cancellation (example, SAYE sub or keeping scheme open)

- Not the choice of entity or counter-party

- Continue to expense over the remainder of the vesting period

- Example, failure to meet commodity index target

IAS 32 and IAS 1: Puttable Financial Instruments and Obligations Arising on LiquidationExemption from liability classification

• Puttable financial instruments that meet certain conditions

• Instruments that contain an obligation to deliver a share of net assets only on liquidation

Conditions for puttable instruments include:

• Pro rata share of net assets only

• Most subordinated class and identical features

• No other obligation to deliver cash/other financial asset

• Total expected cash flows over life based on profit or loss

• No other instrument with cash flows based on profit or loss, or net assets which fixes or restricts the returns to the puttables holders

Puttable on liquidation – only the first two conditions need to be met

Amendments to IFRS 7: Improving Disclosures on Financial InstrumentsValuation ‘levels’

• Level 1: quoted prices for identical assets/liabilities

• Level 2: prices derived from observable inputs

• Level 3: inputs not based on observable market data

For each class of financial instruments recognised at fair value

• Fair value level

• Significant transfers between levels 1 and 2

• Level 3 – gains/losses on purchases/sales/settlements, transfers in/out

• Level 3 – effect on values of a reasonably possible change in measurement input

Liquidity risk

• Derivatives and non-derivatives

Amendments to IFRS 1 and IAS 27: Cost of an Investment in a Subsidiary, Jointly Controlled Entity or AssociateIFRS 1

• Record investment at transition date at cost (IAS 27) or deemed cost

• Deemed cost• Fair value in accordance with IAS 39

• Carrying amount under previous GAAP at transition date

IAS 27

• Dividends from subsidiaries – pre/post acquisition distinction removed

• Formation of new parent on group restructure – cost = share of equity

Related amendment to IAS 36

• Indicators requiring impairment test extended to include:• Carrying amount in individual financial statements exceeds consolidated net assets

• Dividend exceeds comprehensive income in the period in which dividend declared

IFRIC Interpretations – effective in future periods

IFRIC 17 Distributions of Non-cash Assets to Owners• Annual periods beginning on/after 1 July 2009

IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments

• Annual periods beginning on/after 1 July 2010

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