pwc a practical guide to new ifrs for 2013 en

8/10/2019 Pwc a Practical Guide to New Ifrs for 2013 En

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A practicalguide to new

IFRSs for 2013

March 2013


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A practical guide to capitalisation of borrowing costsGuidance in question and answer format addressing thechallenges of applying IAS 23R, including how to treat specificversus general borrowings, when to start capitalisation andwhether the scope exemptions are mandatory or optional.

A practical guide to segment reportingProvides an overview of the key requirements of IFRS 8,Operating segments, and some points to consider as entitiesprepare for the application of this standard for the first time.

A practical guide to share-based payments

Answers the quest ions we have been asked by entities andincludes practical examples to help management drawsimilarities between the requirements in the standard and theirown share-based payment arrangements. Updated in February2011. Available in PDF format only.

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Financial instruments under IFRS A guide throughthe mazeHigh-level summary of IAS 32, IAS 39 and IFRS 7, updated inJune 2009. For existing IFRS preparers and first-time adopters.

IAS 39 Achieving hedge accounting in practiceCovers in detail the practical issues in achieving hedgeaccounting under IAS 39. It provides answers to frequently askedquestions and step-by-step illustrations of how to apply commonhedging strategies.

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Guide aimed at finance directors, financial controllers anddeal-makers, providing background to the standard, impact onthe financial statements and controls, and summary differenceswith US GAAP.

IFRS disclosure checklist 2012

Outlines the disclosures required for 31 December 2012

year ends.

IFRSdisclosurechecklist

2012

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A practical guide to new IFRSs for 2013A high-level outline of the key requirements of new IFRSstandards and interpretations effective in 2013.

Only available in electronic format. To download visit the Publicationstab onwww.pwc.com/ifrs

IFRS pocket guide 2012Provides a summary of the IFRS recognition and measurementrequirements. Including currencies, assets, liabilities, equity,income, expenses, business combinations and interimfinancial statements.

Preparing your first IFRS financial statements:Adopting IFRS

Outlines how companies should address the process of selectingtheir new IFRS accounting policies and applying the guidance inIFRS 1. Provides specific considerations for US market.

Manual of accounting Interim financial reporting 2013

Guidance on preparing interim financial reports under IAS 34,including illustrative financial statements and disclosurechecklist. Update due April 2013.

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Guidance includes:

Questions and answers on impairment of nonfinancialassets in the current crisis.

Top 10 tips for impairment testing.

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IFRS and US GAAP: similarities and differences

A comparison of the similar ities and differences between thereporting methods and the subsequent impact on entities. Todownload visitwww.pwc.com/usifrsor order hard copies [email protected]

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Illustrative consolidated financial statements Investment propert y, 2012 Private equity, 2011 Investment funds, 2012 Insurance, 2011

Realistic sets of financial statements for existing IFRSpreparers in the above sectors illustrating the requireddisclosure and presentation.

PwCs IFRS and corporate governance publications and tools 2012/2013

Manual of accounting IFRS 2013Global guide to IFRS providing comprehensive practicalguidance on how to prepare financial statements in accordancewith IFRS. Includes hundreds of worked examples, extractsfrom company accounts and guidance on financial instruments.The Manual is a three-volume set comprising:

Manual of accounting IFRS 2013 volume 1 Manual of accounting IFRS 2013 volume 2 Illustrative IFRS consolidated financial statements

for 2012 year ends

Manual ofaccountingIFRS 2013

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Illustrative IFRS consolidated financial statementsfor 2012 year ends

Illustrative set of consolidated financial statements for an existingpreparer of IFRS. Includes appendices with illustrative disclosures

of standards available for early adoption. Included with Manual ofaccounting IFRS 2013; also available separately.

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IllustrativeIFRS

consolidatedfinancialstatementsfor 2012 year ends

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IFRS technical publications

Practical guide to IFRS Financial reporting inhyperinflationary economiesGuidance describing concepts of IAS 29, including detailedillustrative examples.

PracticalguidetoIFRSFinancial reporting inhyperinflationaryeconomies

September2012

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Executive guide to IFRS Topic summaries 2013

Key information on the major accounting topic areas. Eachsummary includes an explanation of current requirements alongwith a resources table showing exter nal source material as wellas PwC guidance and publications that relate to the topic. Updatedue April 2013.

Executive

guide

to IFRS

Topic summaries

2012

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2 PwC A practical guide to new IFRSs for 2013


5/373PwC A practical guide to new IFRSs for 2013

Introduction

This publication is a practical guide to the newIFRS standards and interpretations that comeinto effect for 2013 year ends.

An amendment to IAS 1, Presentation offinancial statements, applies from 1 July 2012and changes the disclosure of items presented inother comprehensive income.

The revisions made to IAS 19, Employeebenefits, are significant, will impact most

entities and come into effect from 1 January 2013.The revisions change the recognition andmeasurement of defined benefit pensionsexpense and termination benefits and thedisclosures required. In particular, actuarialgains and losses can no longer be deferred usingthe corridor approach.

A group of five new and revised standards werepublished in May 2011, dealing with control andthe scope of the reporting entity. IFRS 10,Consolidated financial statements, changes thedefinition of control; IFRS 11, Joint

arrangements, reduces the types of jointarrangement to joint operations and joint

ventures, and prohibits the use of proportionalconsolidation. IFRS 12, Disclosure of interests inother entities, brings together in one standardthe disclosure requirements that apply toinvestments in subsidiaries, associates, joint

ventures, structured entities and unconsolidatedstructured entities. As part of this overhaul of theconsolidation standards, IAS 27 (revised) nowdeals only with separate financial statements,and IAS 28 (revised) covers equity accounting

for joint ventures as well as associates. Thesenew standards have to be implemented togetherand apply from 1 January 2013, although theyhave been adopted by the EU from 1 January2014. They can be adopted with immediateeffect, but only if they are all applied at the sametime. A further amendment to these standardssets out the accounting for investment entitiesand this comes into effect from 1 January 2014.

A number of current IFRSs require entities tomeasure or disclose the fair value of assets,liabilities or their own equity instruments. Thefair value measurement requirements and thedisclosures about fair value in those standardsdo not always articulate a clear measurement ordisclosure objective. IFRS 13, Fair valuemeasurement, published in May 2011, deals

with this issue. The new requirements applyfrom 1 January 2013, but can be adopted with

immediate effect.

IFRS 9, Financial instruments, was reissued in2010 and includes guidance on the classificationand measurement of financial assets andfinancial liabilities and the derecognition offinancial instruments. The standard is beingadded to as the IASB endorses different phases ofthe project to replace IAS 39. The reissued IFRS 9applies to 2015 year ends, but can be adopted

with immediate effect (subject to EU endorsementfor European entities).

One interpretation IFRIC 20, Stripping costsin the production phase of a surface mine, waspublished in 2011. It sets out the accounting foroverburden waste removal costs in the productionphase of a mine. It applies from 1 January 2013but can be early adopted (subject to EUendorsement for European entities).

Amendments were also made to: IFRS 1First-time adoption of International AccountingStandards concerning government loans andsevere hyperinflation; IFRS 7, Financialinstruments: Disclosure, and IAS 32, Financial

instruments: Presentation, on offsetting; andIAS 12, Income taxes on deferred taxaccounting for investment properties.

The 2011 improvements project contained sevenamendments affecting five standards, which areall effective from 1 January 2013.

The 2012 improvements had yet to be issued bythe IASB at the time this publication went to print.


6/374 PwC A practical guide to new IFRSs for 2013

Introduction

Standard Adopted

by EU

Early-adoption

status

Page

Changes that apply from 1 July 2012

Amendment to IAS 1, Presentation of financial

statements presentation of items of othercomprehensive income

Early adoption is

permitted

6

Changes that apply from 1 January 2013

Amendment to IFRS 1, First-time adoption

government loans

Early adoption is

permitted

12

Amendment to IFRS 1, First time adoption

exemption for severe hyperinflation and fixed

dates for EU entities

Early adoption is

permitted

10

Amendment to IFRS 7, Financial instruments:

Disclosures on offsetting

Early adoption is

permitted

13

Amendment to IAS 12 Income taxes deferred

tax accounting for investment properties for EU

entities

Early adoption is

permitted

7

IAS 19 (revised), Employee benefits Early adoption is

permitted

8

IAS 27 (revised), Separate financial statements

for non EU entities

1/14 Early adoption is

permitted

22

IAS 28 (revised), Associates and joint ventures

for non EU entities


permitted

24

IFRS 10, Consolidated financial statements, for

non EU entities


permitted

22

IFRS 11, Joint arrangements, for non EU

entities


permitted

24

IFRS 12, Disclosure of interests in other

entities, for non EU entities


permitted

26

IFRS 13, Fair value measurement Early adoption is

permitted

28

Amendments to IFRS 10, 11, 12 Transition

guidance for non EU entities

Early adoption is

permitted

14

IFRIC 20, Stripping costs in the productionphase of a surface mine

Early adoption ispermitted

30

Annual improvements 2011


applying IFRS 1 more than once

Early adoption is

permitted

32


adoption of IAS 23

Early adoption is

permitted

32

Amendment to IAS 1, Presentation of financial

statements

Early adoption is

permitted

33

Amendment to IFRS 1 First-time adoption, as a

result of amendment to IAS 1

Early adoption is

permitted

33



Introduction

Standard Adopted

by EU

Early-adoption

status

Page

Amendment to IAS 16, Property, plant and

equipment

Early adoption is

permitted

33

Amendment to IAS 32, Financial instruments:Presentation


33

Amendment to IAS 34, Interim financial

reporting

Early adoption is

permitted

34


IAS 27 (revised), Separate financial statements

for EU entities

Early adoption is

permitted

22

IAS 28 (revised), Associates and joint ventures

for EU entities

Early adoption is

permitted

24

IFRS 10, Consolidated financial statements, for

EU entities

Early adoption is

permitted

22

IFRS 11, Joint arrangements, for EU entities Early adoption is

permitted

24

IFRS 12, Disclosure of interests in other

entities, for EU entities

Early adoption is

permitted

26

Amendments to IFRS 10, 11, 12 Transition

guidance for EU entities

Early adoption is

permitted

14

Amendments to IAS 32, Offsetting financial

instruments asset and liability

Early adoption is

permitted

13

Amendments to IFRS 10, 12 and IAS 27Investment entities


15


IFRS 9, Financial instruments classification

of financial assets and financial liabilities

Early adoption is

permitted

17


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6 PwC A practical guide to new IFRSs for 2013

Amended standards

Presentation of items of other comprehensive

income IAS 1 amendment

The IASB has issued an amendment to IAS 1,Presentation of financial statements. Theamendment changes the disclosure of itemspresented in other comprehensive income (OCI)in the statement of comprehensive income.

The IASB originally proposed that all entitiesshould present profit or loss and OCI together ina single statement of comprehensive income.

The proposal has been withdrawn, and IAS 1will still permit profit or loss and OCI to bepresented in either a single statement or in twoconsecutive statements.

The amendment does not address which itemsshould be presented in OCI and the option topresent items of OCI either before tax or net oftax has been retained.

What are the key provisions?

The amendment requires entities to separateitems presented in OCI into two groups,

based on whether or not they may be recycledto profit or loss in the future. Items that will notbe recycled such as revaluation gains onproperty, plant and equipment will bepresented separately from items that may berecycled in the future such as deferred gainsand losses on cash flow hedges. Entities thatchoose to present OCI items before tax will berequired to show the amount of tax related tothe two groups separately.

The title used by IAS 1 for the statement ofcomprehensive income has changed to

statement of profit or loss and othercomprehensive income. However, IAS 1 stillpermits entities to use other titles.

Who is affected?

All entities with gains and losses presented inOCI are affected by the change to thepresentation of OCI items.

What do affected entities needto do?

Management should confirm that reportingsystems can capture the information needed toimplement the revised presentation of OCIitems, and update the systems where necessary.

Effective date

Annual periods beginning on or after 1 July 2012. Early adoption is permitted.

EU adoption status

Adopted by the European Commission on 6 June 2012.



Amended standards

Deferred tax accounting for investment

property at fair value IAS 12 amendment

Effective date

Annual periods beginning on or after 1 January 2012. Early adoption is permitted.

EU adoption status

Adopted by the European Commission 29 December 2012 for annual periods on or after

1 January 2013.

Why was this amendment needed?The current principles in IAS12 requires themeasurement of deferred tax assets or liabilitiesto reflect the tax consequences that would followfrom the way that management expects torecover or settle the carrying amount of theentitys assets or liabilities. For example,management may expect to recover an asset byusing it, by selling it or by a combination of useand sale. Managements expectations can affectthe measurement of deferred taxes whendifferent tax rates or tax bases apply to the profits

generated from using and selling the asset.The IASB believes that entities holdinginvestment properties that are measured atfair value sometimes find it difficult orsubjective to estimate how much of thecarry ing amount will be recovered throughrental income (that is, through use) and howmuch will be recovered through sale,particularly when there is no specific plan fordisposal at a particular time.

Key provisions

The IASB has added another exception to theprinciples in IAS 12: the rebuttable presumptionthat investment property measured at fair valueis recovered entirely by sale. The rebuttablepresumption also applies to the deferred taxliabilities or assets that arise from investmentproperties acquired in a business combination, ifthe acquirer subsequently uses the fair valuemodel to measure those investment properties.

The presumption of recovery entirely by sale isrebutted if the investment property isdepreciable (for example, buildings, and land

held under a lease) and is held within a businessmodel whose objective is to consumesubstantially all of the economic benefitsembodied in the investment property over time,rather than through sale. The presumption

cannot be rebutted for freehold land that is aninvestment property, because land can only berecovered through sale.

The amendments also incorporate SIC 21,Income taxes Recovery of revalued non-depreciable assets, into IAS 12, although thisguidance will not be applied to investmentproperty measured at fair value. The SIC 21guidance has been included because it is appliedby analogy in a number of situations.

What are the transition

implications?The amendment is effective for annual periodsbeginning on or after 1 January 2012.Management can elect to early adopt theamendment for financial years ending 31December 2010. Entities should apply theamendment retrospectively in accordance withIAS 8, Accounting policies, changes inaccounting estimates and errors.

Who does the amendment affect?

All entities holding investment properties

measured at fair value in territories where thereis no capital gains tax or where the capital gainsrate is different from the income tax rate (forexample, Singapore, New Zealand, Hong Kongand South Africa) will be significantly affected.The amendment is likely to reduce significantlythe deferred tax assets and liabilities recognisedby these entities. It will also mean that, in

jurisdictions where there is no capital gains tax,there will often be no tax impact of changes inthe fair value of investment properties. It mightbe necessary for management to reconsiderrecoverability of an entitys deferred tax assetsbecause of the changes in the recognition ofdeferred tax liabilities on investment properties,and to consider the impact of the amendment onprevious business combinations.

The IASB amended IAS 12, Income taxes, tointroduce an exception to the existing principlefor the measurement of deferred tax assets or

liabilities arising on investment propertymeasured at fair value.



Amended standards

Employee benefits IAS 19 revised

Effective date

The amendment is effective for periods beginning on or after 1 January 2013. Early adoption

is permitted. The amendment should be applied retrospectively in accordance with IAS 8,

Accounting policies, changes in accounting estimates and errors, except for changes to the

carrying value of assets that include employee benefit costs in the carrying amount.

EU adoption status

Adopted by the European Commission on 6 June 2012.

The IASB has revised IAS 19, Employeebenefits, making significant changes to therecognition and measurement of defined benefitpension expense and termination benefits, andto the disclosures for all employee benefits.

The changes will affect most entities thatapply IAS 19. They could significantly changea number of performance indicators andmight also significantly increase the volumeof disclosures.

The key changes are as follows:

Recognition of actuarial gains and losses(remeasurements):Actuarial gains andlosses are renamed remeasurements and

will be recognised immediately in othercomprehensive income (OCI). Actuarialgains and losses will no longer be deferredusing the corridor approach or recognised in

profit or loss; this is likely to increase balancesheet and OCI volatility. Remeasurementsrecognised in OCI will not be recycledthrough profit or loss in subsequent periods.

Recognition of past service cost/curtailment:Past-service costs will be recognised in theperiod of a plan amendment; unvestedbenefits will no longer be spread over afuture-service period. A curtailment nowoccurs only when an entity reducessignificantly the number of employees.Curtailment gains/losses are accounted for

as past- service costs.

Measurement of pension expense:Annualexpense for a funded benefit plan will includenet interest expense or income, calculated byapplying the discount rate to the net definedbenefit asset or liability. This will replace thefinance charge and expected return on planassets, and will increase benefit expense formost entities. There will be no change in thediscount rate, which remains a high-qualitycorporate bond rate where there is a deepmarket in such bonds, and a government bond

rate in other markets.

Presentation in the income statement: Therewill be less flexibility in income statementpresentation. Benefit costs will be splitbetween (i) the cost of benefits accrued inthe current period (service cost) and benefitchanges (past-service cost, settlements andcurtailments); and (ii) finance expense orincome. This analysis can be in the income

statement or in the notes. Disclosure requirements:Additional

disclosures are required to present thecharacteristics of benefit plans, the amountsrecognised in the financial statements, andthe risks arising from defined benefit plansand multi-employer plans. The objectivesand principles underlying disclosures areprovided; these are likely to require moreextensive disclosures and more judgement todetermine what disclosure is required.

Distinction between short-term and other

long-term benefits: The distinction betweenshort- and long-term benefits formeasurement purposes is based on whenpayment is expected, not when payment canbe demanded. However, the amendmentdoes not alter the balance sheet classificationof the liabilities recorded in respect of thebenefit obligation. Such classification isdetermined in accordance with IAS 1 andreflects whether an entity has theunconditional ability to defer payment formore than a year, regardless of when the

obligation is expected to be settled.



Amended standards

Treatment of expenses and taxes relating toemployee benefit plans:Taxes related tobenefit plans should be included either in thereturn on assets or the calculation of thebenefit obligation, depending on their nature.Investment management costs should berecognised as part of the return on assets;other costs of running a benefit plan shouldbe recognised as period costs when incurred.This should reduce diversity in practicebut might make the actuarial calculationsmore complex.

Termination benefits:Any benefit that has afuture-service obligation is not a terminationbenefit. This will reduce the number ofarrangements that meet the definition oftermination benefits. A liability for atermination benefit is recognised when the

entity can no longer withdraw the offer of thetermination benefit or recognises any relatedrestructuring costs. This might delay therecognition of voluntary termination benefits.

Risk or cost sharing features:Themeasurement of obligations should reflect thesubstance of arrangements where theemployers exposure is limited or where theemployer can use contributions fromemployees to meet a deficit. This mightreduce the defined benefit obligation in somesituations. Determining the substance of such

arrangements will require judgement andsignificant disclosure.

Am I affected?

These changes will affect most entities that applyIAS 19. The changes could significantly change anumber of performance indicators, includingEBITDA, EPS and balance sheet ratios. They

might also significantly increase the volume ofdisclosures.

What do affected entities need to do?

Management should determine the impact of therevised standard and, in particular, any changesin benefit classification and presentation.

Management should consider the effect of thechanges on any existing employee benefitarrangements and whether additional processesare needed to compile the information requiredto comply with the new disclosure requirements.

Management should also consider the choicesthat remain within IAS 19, including thepossibility of early adoption, the possible effectof these changes on key performance ratios andhow to communicate these effects to analystsand other users of the accounts.



Amended standards

Exemption for severe hyperinflation and

removal of fixed dates IFRS 1 amendment

Effective date

Annual periods beginning on or after 1 July 2011. Earlier adoption is permitted.

EU adoption status

Adopted by the European Commission on 29 December 2012 for annual periods on or after

1 January 2013.

The IASB made two amendments to anexemption for severe IFRS 1, First-time adoption

of IFRS, hyperinflation; and in December 2010:Removal of fixed dates.

Severe hyperinflationWhat is the issue?

The amendment creates an additional exemptionwhen an entity that has been subject to severehyperinflation resumes presenting, or presentsfor the first time, financial statements inaccordance with IFRSs. The exemption allows anentity to elect to measure certain assets andliabilities at fair value; and to use that fair valueas the deemed cost in the opening IFRSstatement of financial position.

An entity might be unable to prepare financialstatements in accordance with IFRSs for a periodof time because it could not comply with IAS 29,Financial reporting in hyperinflationaryeconomies, due to severe hyperinflation. Theexemption applies where the entity is able tobegin reporting in accordance with IFRS.


The amendment states that the currency of ahyperinflationary economy is subject to severehyperinflation when:

a reliable general price index is not availableto all entities with transactions andbalances in the currency; and

exchangeability between the currency and arelatively stable foreign currency does not exist.

An entitys functional currency ceases to besubject to severe hyperinflation on the functionalcurrency normalisation date, which occurs:

when one or both of the characteristics ofsevere hyperinflation no longer exist; or

when the first-time adopter changes its

functional currency to a currency that is notsubject to severe hyperinflation.

The exemption applies to entities that weresubject to severe hyperinflation and areadopting IFRS for the first time or havepreviously applied IFRS.

When an entity s date of transition to IFRS is onor after the functional currency normalisationdate, it may elect to measure assets and liabilitiesacquired before that date at fair value and usethat fair value as deemed cost in the openingIFRS statement of financial position.

IFRS 1 defines the date of transition as thebeginning of the earliest period for which an

entity presents comparative information underIFRS in its first IFRS financial statements. Whenthe functional currency normalisation date falls

within the comparative period, that period maybe less than 12 months, provided that a completeset of financial statements (as required by IAS 1)is provided for that shorter period.

The entity cannot comply with IFRS due to thesevere hyperinflation in periods before the dateof transition to IFRS, so the comparativeinformation for this period cannot be preparedin accordance with IFRS. The entity should

therefore consider whether disclosure of non-IFRS comparative information and historicalsummaries in accordance with IFRS 1 wouldprovide useful information to the users of thefinancial statements.

If an entity applies the new exemption tocomply with IFRS, it should explain thetransition to IFRS, and why and how the entityceased to have a functional currency subject tosevere hyperinflation.



Amended standards


The amendment is expected to have a limitedimpact, as it is only available to entities whosefunctional currency was subject to severehyperinflation. The Zimbabwean economy has

been identified as an economy that was subjectto severe hyperinflation until early 2009; theamendment is unlikely to apply in otherterritories at the time of going to print.

The amendment would not change or allowany additional IFRS 1 exemptions for areporting entity that has control, joint controlor significant influence over an entity subject tosevere hyperinflation, except to the extent thatthe reporting entity is also a first-time adopter.


Management of entities in Zimbabwe andfirst-time adopters that have interests inZimbabwe should consider:

their functional currency normalisation date;

their proposed date of transition to IFRS;

whether the comparative period will bepresented for a period shorter than12 months; and

the assets and liabilities they wish tomeasure at fair value on transition to IFRS.

What is the issue?

The IASB amended IFRS 1 to eliminatereferences to fixed dates for one exception andone exemption, both dealing with financialassets and liabilities.

The first change requires first-time adoptersto apply the derecognition requirements ofIFRS prospectively from the date of transition,rather than from 1 January 2004.

The second amendment relates to financialassets or liabilities at fair value on initialrecognition where the fair value is establishedthrough valuation techniques in the absenceof an active market. The amendment allowsthe guidance in IAS 39 AG76 and IAS 39

AG76A to be applied prospectively from thedate of transition to IFRS rather than from25 October 2002 or 1 January 2004. Thismeans that a first-time adopter does not needto determine the fair value of financial assetsand liabilities for periods prior to the date oftransition. IFRS 9 has also been amended toreflect these changes.


Entities that had derecognised financial assetsor liabilities before the date of transition toIFRS will need to apply the derecognitionguidance from the date of transition, as itis a mandatory exception. The second change

will only be relevant for entities that elect touse the exemption for fair value establishedby valuation techniques.

Removal of fixed dates requirement



Amended standards

Government loans IFRS 1 amendment

Effective date


EU adoption status

Adopted by the European Commission on 5 March 2013.

The IASB has amended IFRS 1, First- timeadoption of International Financial ReportingStandards, to provide relief from theretrospective application of IFRSs in relation togovernment loans.

The new exception requires first-time adoptersto apply the requirements in IFRS 9, Financial

instruments, and IAS 20, Accounting forgovernment grants and disclosure ofgovernment assistance, prospectively togovernment loans that exist at the date oftransition to IFRS. This will give first-timeadopters the same relief as existing preparers.

What is the issue?

The amendment aligns IFRS 1 with the IAS 20requirements (after its revision in 2008) toprospectively fair value government loans witha below-market rate of interest.

The general requirement in IFRS 1 for first- timeadopters to apply IFRS retrospectively at thedate of transition to IFRSs could mean someentities have to measure such government loansat fair value at a date before the date oftransition to IFRS. This might meanmanagement has to apply hindsight in order toderive a fair value that has significantunobservable inputs. So the Board has added anexception that allows a first-time adopter to useits previous GAAP carrying amount for suchloans on transition to IFRS. The exceptionapplies to recognition and measurement only.

Management should use the requirements ofIAS 32, Financial instruments: Presentation, todetermine whether government loans are

classified as equity or as a financial liability.

Who is affected?

The amendment affects first-time adopterswith government loans with a below-marketrate of interest.

What do affected entitiesneed to do?

First-time adopters should classify allgovernment loans as a financial liability oran equity instrument in accordance with IAS32. They should apply the IFRS 9 and IAS 20requirements prospectively to governmentloans existing at the date of transition toIFRS; they should not recognise thecorresponding benefit of the government

loan at a below-market rate of interest as agovernment grant.

Management may apply the IFRS 9 and IAS20 requirements retrospectively to anygovernment loan originated before the dateof transition to IFRS, provided that theinformation needed to do so had beenobtained at the time of initially accountingfor that loan. This is available on a loan-by-loan basis.

Management can use the exemptions in IFRS1, paragraphs D19-D19D relating to thedesignation of previously recognisedfinancial instruments at fair value throughprofit or loss in conjunction with thegovernment loan exception.



Amended standards

Offsetting requirements and converged

disclosures IAS 32 and IFRS 7 amendments

Effective date

IFRS 7: annual periods beginning on or after 1 January 2013, restrospectively applied. Earlyadoption is permitted.

IAS 32: annual periods beginning on or after 1 January 2014, restrospectively applied. Early

adoption is permitted.

EU adoption status

Adopted by the European Commission on 29 December 2012.

The IASB has issued an amendment to theapplication guidance in IAS 32, Financialinstruments: Presentation, to clarify some ofthe requirements for offsetting financial assetsand financial liabilities on the statement offinancial position. However, the clarifiedoffsetting requirements for amounts presentedin the statement of financial position continue tobe different from US GAAP. As a result, the IASB

has also published an amendment to IFRS 7,Financial instruments: Disclosures, reflectingthe joint requirements with the FASB toenhance current offsetting disclosures.These new disclosures are intended to facilitatecomparison between those entities that prepareIFRS financial statements to those that preparefinancial statements in accordance withUS GAAP.

What is the issue?

The amendments do not change the currentoffsetting model in IAS 32, which requires an

entity to offset a financial asset and financialliability in the statement of financial position only

when the entity currently has a legally enforceableright of set-off and intends either to settle the assetand liability on a net basis or to realise the assetand settle the liability simultaneously.

The amendments clarify that the right of set-offmust be available today that is, it is notcontingent on a future event. It also must belegally enforceable for all counterparties in thenormal course of bus iness, as well as in theevent of default, insolvency or bankruptcy.

The amendments also clarify that grosssettlement mechanisms (such as through aclearing house) with features that both

(i) eliminate credit and liquidity risk; and

(ii) process receivables and payables in a singlesettlement process, are effectively equivalentto net settlement; they would thereforesatisfy the IAS 32 criterion in these instances.

Master netting agreements where the legalright of offset is only enforceable on theoccurrence of some future event, such as

default of the counterparty, continue not tomeet the offsetting requirements.

Disclosures

The amendments require more extensivedisclosures than are currently required under

IFRS and US GAAP. The disclosures focus onquantitative information about recognisedfinancial instruments that are offset in thestatement of financial position, as well as thoserecognised financial instruments that are subjectto master netting or similar arrangementsirrespective of whether they are offset.

Who is affected?

These amendments primarily affect financialinstitutions, as they will be required to provideadditional disclosures described above.

However, other entities that hold financialinstruments that may be subject to offsettingrules will also be affected.

What do affected entities need to do?

Management should begin gathering theinformation necessary to prepare for the newdisclosure requirements. They will also need toinvestigate whether the clarifications of theoffsetting principle in IAS 32 result in anychanges to what they offset in the statement offinancial position today. Management may needto work with the clearing houses they use todetermine whether their settlement processescomply with the new requirements.



Amended standards

Transition guidance for IFRSs 10, 11 and 12

amendments to IFRS 10, 11 and 12

Effective date

IFRS 10, 11 and 12: annual periods beginning on or after 1 January 2013, restrospectively

applied. Early adoption is permitted.

EU adoption status

Not adopted by the European Commission at the time of going to print.

The IASB has issued an amendment to thetransition requirements in IFRS 10,Consolidated financial statements, IFRS 11,

Joint Arrangements, and IFRS 12, Disclosureof interests in other entities.

Whats the issue?It clarifies that the date of initial application isthe first day of the annual period in which IFRS10 is adopted for example, 1 January 2013 fora calendar-year entity that adopts IFRS 10 in2013. Entities adopting IFRS 10 should assesscontrol at the date of initial application; thetreatment of comparative figures depends onthis assessment.

The amendment also requires certain comparativedisclosures under IFRS 12 upon transition.

The key changes in the amendment are: if the consolidation conclusion under IFRS 10

differs from IAS 27/SIC 12 as at the date ofinitial application, the immediatelypreceding comparative period (that is, 2012for a calendar-year entity that adopts IFRS 10in 2013) is restated to be consistent with theaccounting conclusion under IFRS 10,unless impracticable;

any difference between IFRS 10 carryingamounts and previous carrying amounts atthe beginning of the immediately preceding

annual period is adjusted to equity;

adjustments to previous accounting are notrequired for investees that will beconsolidated under both IFRS 10 and theprevious guidance in IAS 27/SIC 12 as at

the date of initial application, or investeesthat will be unconsolidated under bothsets of guidance as at the date of initialapplication; and

comparative disclosures will be required forIFRS 12 disclosures in relation tosubsidiaries, associates, and jointarrangements. However, this is limitedonly to the period that immediatelyproceeds the first annual period of IFRS 12application. Comparative disclosures are notrequired for interests in unconsolidated

structured entities.The amendment is effective for annual periodsbeginning on or after 1 January 2013, consistent

with IFRS 10, 11 and 12.

Am I affected?

The amendment will affect all reporting entities(investors) who need to adopt IFRSs 10, 11 or 12.

What do I need to do?

IFRS preparers should start considering thetransition amendment, and how they can

use the exemptions granted to minimiseimplementation costs of IFRSs 10, 11 and 12.IFRS preparers should also start collating thecomparative disclosure information requiredby the amendment.



Amended standards

Exception from consolidation for investment

entities amendment to IFRS 10, IFRS 12

and IAS 27

Effective date

Annual periods beginning on or after 1 January 2014, restrospectively applied. Early adoption

is permitted.EU adoption status


Whats new?

Many funds and similar entities will beexempted from consolidating controlledinvestees under amendments to IFRS 10,Consolidated financial statements. This is aresult of the IASB issuing amendments to IFRS

10, IFRS 12, Disclosure of interests in otherentities and IAS 27, Separate financialstatements, on 31 October 2012. This willparticularly benefit private equity funds, asthose that qualify will fair-value all of theirinvestments, including those that are controlled.

The guidance applies to an investment entity.The amendment to IFRS 10 defines aninvestment entity and introduces an exceptionfrom consolidation. The amendments to IFRS 12also introduce disclosures that an investmententity needs to make.

The amendments apply for annual periods

beginning on or after 1 January 2014; earlierapplication is permitted.

Definit ion of an investment entity

You will need to make an assessment ofwhether your business meets the investmententity definition.

An investment entity is an entity that:

obtains funds from one or more investors forthe purpose of providing those investor(s)

with investment management services;

commits to its investor(s) that its businesspurpose is to invest funds solely for returnsfrom capital appreciation, investmentincome or both; and

measures and evaluates the performance ofsubstantially all of its investments on a fair

value basis.

You will also need to consider a set of typicalcharacteristics. These, combined with thedefinition, are intended to allow for anappropriate balance between creating a clearscope and allowing judgement in assessing

whether you are an investment entity.

The characteristics are: holding more than oneinvestment, having more than one investor,having investors that are not related parties ofthe entity, and having ownership interests in theform of equity or similar interests. The absenceof one or more of these characteristics does notprevent the entity from qualifying as aninvestment entity.

You will not be disqualified from being aninvestment entity where you carry out any of thefollowing activities:

provision of investment-related services tothird parties and to your investors, even

when substantial; and

providing management services andfinancial support to your investees, but only

when these do not represent separatesubstantial business activity and are carriedout with the objective of maximising theinvestment return from your investees.

Exception from consolidation and measurementof investees

You are required to account for your subsidiariesat fair value through profit or loss in accordance

with IFRS 9, Financial instruments (or IAS 39,Financial instruments: recognition andmeasurement, where applicable), where youqualify as an investment entity. The onlyexception is for subsidiaries that provideservices to you that are related to your

investment activities, which are consolidated.



Amended standards

Accounting by a non-investment entity parent forthe controlled investments of an investment entity

subsidiary

You may be an investment entity but your parentis not. For example, your investment entity fund

is controlled by an insurance company. Yournon-investment entity parent is required toconsolidate all entities it controls includingthose controlled through an investment entity.The insurance group will have to consolidate thesubsidiaries of your fund in the insurancegroups financial statements, even though in

your funds own financial statements you willfair value your subsidiaries. Therefore, what isknown as the fair value roll-up is not permittedto a non-investment parent entity.

Disclosure

Required disclosures, where you qualify as aninvestment entity, include the following:

significant judgements and assumptionsmade in determining that you have met thedefinition of an investment entity;

reasons for concluding that you are aninvestment entity even though you dont haveone or more of the typical characteristics;

information on each unconsolidatedsubsidiary (name, country of incorporation,proportion of ownership interest held);

restrictions on unconsolidated subsidiariestransferring funds to the investment entity;

financial or other support provided tounconsolidated subsidiaries during the year,

where there wasnt any contractual

obligation to do so; and information about any structured entities

you control (for example, any contractualarrangements to provide any financial orother support).

Am I affected?

You will be affected if you are a fund or a similarentity. Some may qualify as investment entities,and some may not.

What do I need to do?

You should look closely at the guidance todetermine whether or not you are an investmententity. If you are, for example, a property fundthat actively develops properties, you areunlikely to qualify, as your objective is not solelycapital appreciation or investment income. Onthe other hand, if you are a limited life fund setup to buy and sell or list a range ofinfrastructure subsidiaries, you might qualify asan investment entity.

You should start collating comparativeinformation where you qualify as an investment

entity, as the change in accounting has to beapplied retrospectively in most cases.


19/37PwC A practical guide to new IFRSs for 2013 17

New standards

Financial instruments IFRS 9

Effective date

Annual periods starting 1 January 2015. Early adoption is permitted from 12 November 2009

(see detail below).

EU adoption status


IFRS 9, Financial instruments, replaces IAS 39,Financial instruments:

Recognition and measurement. It generallyapplies retrospectively, with some exceptions.Comparative information is not required tobe adjusted retrospectively for adoptionsbefore 2012.

If an entity early adopts IFRS 9, it will not berequired to early adopt subsequent stages in theIAS 39 replacement project that is, impairment

and hedging. This is to facilitate early adoptionof IFRS 9. However, if an entity chooses to earlyadopt any of the subsequent stages, it will berequired to early adopt all preceding stages fromthe same date.

Classification and measurement of financial assets

How are financial assets to bemeasured?IFRS 9 requires all financial assets to bemeasured at either amortised cost or full fair

value. Amortised cost provides decision- useful

information for financial assets that are heldprimarily to collect cash flows that represent thepayment of principal and interest. For all otherfinancial assets, including those held fortrading, fair value is the most relevantmeasurement basis.

What determines classification?IFRS 9 introduces a two-step classificationapproach. First, an entity considers its businessmodel that is, whether it holds the financialasset to collect contractual cash flows ratherthan to sell it prior to maturity to realise fair

value changes. If the latter, the instrument ismeasured at fair value through profit or loss(FVTPL). If the former, an entity furtherconsiders the contractual cash flowcharacteristics of the instrument.

What is a contractual cash flowcharacteristics test?

A financial asset within a qualifying businessmodel will be eligible for amortised costaccounting if the contractual terms of thefinancial asset give rise on specified dates tocash flows that are solely payments of principaland interest on the principal amountoutstanding. Interest is defined as considerationfor the time value of money and for the creditrisk associated with the principal amountoutstanding during a particular period of time.

Any leverage feature increases the variability ofthe contractual cash flows with the result thatthey do not have the economic characteristics ofinterest. If a contractual cash flow characteristic

is not genuine, it does not affect theclassification of a financial asset. A cash flowcharacteristic is not genuine if it affects theinstruments contractual cash flows only on theoccurrence of an event that is extremely rare,highly abnormal and very unlikely to occur.



New standards

What are common features thatwould generally pass the cash flowcharacteristics test?

unleveraged linkage to an inflation indexin the currency in which the financial asset

is denominated; multiple extension options (for example, a

perpetual bond);

call and put options if they are not contingenton future events, and the pre-paymentamount substantially represents unpaidamounts of principal and interest on theprincipal amount outstanding, which mayinclude reasonable additional compensationfor the early termination of the contract;

interest rate caps, floors and collars thateffectively switch the interest rate from fixedto variable and vice versa; and

in a variable rate financial asset, a borroweroption to choose a rate at each interest ratereset day as long as the rate compensates thelender for the time value of money (forexample, an option to pay three-monthLIBOR for a three-month term or one-monthLIBOR for a one- month term).

What are common features thatwould generally fail the cash flowcharacteristics test?

linkage to equity index, borrowers netincome or other variables;

inverse floating rate;

call option at an amount not reflective ofoutstanding principal and interest;

issuer is required or can choose to deferinterest payments and additional interestdoes not accrue on those deferred amounts;

in a variable rate financial asset, a borroweroption to choose a rate at each interest ratereset day such that the rate does not

compensate the lender for the time value ofmoney (for example, an option to pay one-month LIBOR for a three-month term andone-month LIBOR is not reset each month);

a variable rate that is reset periodically butalways reflects a five-year maturity in afive-year constant maturity bond (that is, therate is disconnected with the term of theinstrument except at origination); and

an equity conversion option in a debt host(from a holder perspective).

Are reclassifications permitted?

Classification of financial assets is determinedon initial recognition. Subsequentreclassification is permitted only in those rarecircumstances when there is a change to the

business model within which the financial assetis held. In such cases, all affected financialassets are reclassified.

IFRS 9 specifies that changes in business modelare expected to be very infrequent, should bedetermined by the entitys senior managementas a result of external or internal changes,should be significant to the entitys operationsand demonstrable to external parties. Forexample, an entity has a portfolio of commercialloans that it holds to sell in the short term. Theentity acquires a company that manages

commercial loans and has a business model thatholds the loans in order to collect thecontractual cash flows. The portfolio ofcommercial loans is no longer for sale, and theportfolio is now managed together with theacquired commercial loans; all are held tocollect the contractual cash flows.

Another example of a change in the businessmodel is where an entity decides to shut down aline of service (for example, a retail mortgagebusiness). The line of service does not acceptnew business, and the affected portfolio is being

actively marketed for sale.Changes in intentions with respect to individualinstruments, temporary disappearance of aparticular market or transfers of instrumentbetween business models do not represent achange in business model.

What does this mean for equityinvestments?

Equity investments do not demonstratecontractual cash flow characteristics of principaland interest; they are therefore accounted for at

fair value. However, IFRS 9 provides an optionto designate a non-trading equity investment atFVTPL or at fair value through othercomprehensive income. The designation isavailable on an instrument-by-instrument basisand only on initial recognition. Once made, thedesignation is irrevocable.

All realised and unrealised fair value gains andlosses follow the initial designation, and there isno recycling of fair value gains and lossesrecognised in other comprehensive income toprofit or loss. Dividends that represent a return

on investment from equity investments continueto be recognised in profit or loss regardless ofthe designation.



New standards

Can an equity investment bemeasured at cost where no reliable

fair value measure is available?

IFRS 9 removes the cost exemption for unquotedequities and derivatives on unquoted equities but

stipulates that, in certain circumstances, costmay be an appropriate estimate of fair value.This may be the case where insufficient recentinformation is available or where there is a widerange of possible fair value measurements. Cost

will not be an appropriate estimate of fair valueif there are changes in investee circumstances,markets or wider economy, or if there is evidencefrom external transactions or for investments inquoted equity instruments. To the extent factorsexist that indicate cost might not berepresentative of fair value, the entity shouldestimate fair value.

What does this mean for hybridcontracts?

IFRS 9 requires financial assets to be classified intheir entirety. Hybrid contracts are thoseinstruments that contain a financial or non-financial host and an embedded derivative.

Hybrid contracts within the scope of IFRS 9 that is, hybrid contracts with financial asset hosts are assessed in their entirety against the twoclassification criteria. Hybrid contracts outsidethe scope of IFRS 9 are assessed for bifurcationunder IAS 39. In many cases, hybrid contractsmay fail the contractual cash flow characteristictest and should therefore be measured at FVTPL.

Is a fair value option available?

Two of the existing three fair value optioncriteria currently in IAS 39 become obsoleteunder IFRS 9, as a fair-value-driven businessmodel requires fair value accounting, and hybridcontracts are classified in their entirety. Theremaining fair value option condition in IAS 39 iscarried forward to the new standard that is,management may still designate a financial asset

as at FVTPL on initial recognition if thissignificantly reduces recognition or measurementinconsistency, commonly referred to as anaccounting mismatch. The designation at FVTPLcontinues to be irrevocable.

Classification and measurement of financial liabilities

How are financial liabilities to be

measured?Financial liabilities are measured at amortisedcost unless they are required to be measured atfair value through profit or loss or an entity haschosen to measure a liability at fair valuethrough profit or loss.

What determines classification?

The classification and measurement of financialliabilities under IFRS 9 remains unchanged fromthe guidance in IAS 39 except where an entityhas chosen to measure a liability at fair value

through profit or loss. There continue to be twomeasurement categories for financial liabilities:fair value and amortised cost. Certain liabilitiesare required to be at fair value through profit orloss, such as liabilities held for trading andderivatives. Other liabilities are measured atamortised cost unless the entity elects the fair

value option; however, if the liability containsembedded derivatives, the embedded derivativesmight be required to be separated and measuredat fair value through profit or loss.

What is the accounting for financial

liabilities that are required to be atfair value through profit and loss?

Financial liabilities that are required to bemeasured at fair value through profit or loss (asdistinct from those that the entity has chosen tomeasure at fair value through profit or loss)continue to have all fair value movementsrecognised in profit or loss, with none of the fair

value movement recognised in othercomprehensive income (OCI). This includes allderivatives (such as foreign currency forwards orinterest rate swaps), or an entitys own liabilities

that are held for trading. Similarly, financialguarantees and loan commitments that entitieschoose to measure at fair value through profit orloss will have all fair value movements in profitor loss.



New standards

What is the accounting for financialliabilities that an entity chooses toaccount for at fair value?

IFRS 9 changes the accounting for financialliabilities that an entity chooses to account for at

fair value through profit or loss, using the fairvalue option. For such liabilities, changes in fairvalue related to changes in own credit risk arepresented separately in OCI.

However, if presenting the changes in owncredit of a financial liability in OCI would createan accounting mismatch in profit or loss, all fair

value movements are recognised in profit or loss.

The accounting mismatch must arise due to aneconomic relationship between the financialliability and a financial asset that results in theliabilitys credit risk being offset by a change in

the fair value of the asset.

The accounting mismatch:

is required to be determined when theliability is first recognised;

is not reassessed subsequently; and

must not be caused solely by the measurementmethod that an entity uses to determine thechanges in a liabilitys credit risk.

Use of this exemption from the requirement topresent movements in the own credit risk of a

liability in OCI is expected to be rare.

What are the eligibility criteria forthe fair value option?

The eligibility criteria for the fair value optionremain the same; they are based on whether:

the liability is managed on a fair value basis;

electing fair value will eliminate or reduce anaccounting mismatch; or

the instrument is a hybrid contract (that is, itcontains a host contract and an embeddedderivative) for which separation of anembedded derivative would be required.

What might be a common reason forelecting the fair value option?

A common reason is where entities haveembedded derivatives that they do not wish toseparate from the host liability. In addition,entities may elect the fair value option forliabilities that give rise to an accountingmismatch with assets that are required to beheld at fair value through profit or loss.

Have there been any changes in theaccounting for embeddedderivatives?

The existing guidance in IAS 39 for embeddedderivatives has been retained in this new part of

IFRS 9. Entities are still required to separatederivatives embedded in financial liabilitieswhere they are not closely related to the hostcontract for example, a structured note wherethe interest is linked to an equity index. Theseparated embedded derivative continues to bemeasured at fair value through profit or loss,and the residual debt host is measured atamortised cost. The accounting for embeddedderivatives in non-financial host contracts alsoremains unchanged.

Is the treatment of derivatives

embedded in financial liabilitiessymmetrical to the treatment ofderivatives embedded in financialassets?

No. The existing embedded derivative guidancein IAS 39 is retained in IFRS 9 for financialliabilities and non-financial instruments. Thisresults in some embedded derivatives still beingseparately accounted for at fair value throughprofit or loss. However, embedded derivativesare no longer separated from financial assets.Instead, they are part of the contractual terms

that are considered in determining whether theentire financial asset meets the contractual cashflow test (that is, the instrument has solelypayments of principal and interest) to bemeasured at amortised cost or whether it shouldbe measured at fair value through profit or loss.

How are financial liabilities at fairvalue to be measured?

Entities will need to calculate the amount of thefair value movement that relates to the creditrisk of the liability. IFRS 7 already requiresdisclosure of the amount of fair value changes

that are attributable to own credit risk forliabilities designated at fair value through profitor loss. The existing guidance on how tocalculate own credit risk in IFRS 7 is retainedbut has been relocated to IFRS 9, and someaspects have been clarified.



New standards

How can own credit risk bedetermined?

This can be determined as either:

the amount of fair value change notattributable to changes in market risk

(for example, benchmark interest rates) thisis often referred to as the default method; or

an alternative method that the entitybelieves more faithfully represents thechanges in fair value due to own credit(for example, a method that calculates creditrisk based on credit default swap rates).

IFRS 9 clarifies that if the changes in fair valuearising from factors other than changes in theliabilitys credit risk or changes in observedinterest rates (that is, benchmark rates such asLIBOR) are significant, an entity is required touse an alternative method and may not use thedefault method. For example, changes in the fair

value of a liability might arise due to changes invalue of a derivative embedded in that liabilityrather than changes in benchmark interestrates. In that situation, changes in the value ofthe embedded derivative should be excluded indetermining the amount of own credit risk thatis presented in OCI.

The expanded guidance in IFRS 9 confirms thatthe credit risk of a l iability with collateral is

likely to be different from the credit risk of anequivalent liability without collateral issued bythe same entity.

It also clarifies that unit-linking features usuallygive rise to asset performance risk rather thancredit risk that is, the value of the liabilitychanges due to changes in value of the linkedasset(s) and not because of changes in the owncredit risk of the liability. This means thatchanges in the fair value of a unit-linked liabilitydue to changes in the fair value of the linkedasset will continue to be recognised in theincome statement: they are not regarded asbeing part of the own credit risk of the liabilitythat is recognised in OCI.

What is the impact of the changes onthe presentation of financialliabilities?

Elements of the fair value movement of theliability are presented in different parts of the

performance statement; changes in own creditrisk are presented in OCI, and all other fair

value changes are presented in profit or loss.This means that the amount of the overall fair

value movement does not change, but it ispresented in separate sections of the statementof comprehensive income.

Amounts in OCI relating to own credit are notrecycled to the income statement even when theliability is derecognised and the amounts arerealised. However, the standard does allowtransfers within equity.



New standards

Consolidated financial statements IFRS 10

The IASB has issued IFRS 10, Consolidatedfinancial statements, as part of the group of five

new standards that address the scope of thereporting entity. IFRS 10 replaces all of theguidance on control and consolidation in IAS 27,Consolidated and separate financial statements,and SIC-12, Consolidation special purposeentities. IAS 27 is renamed Separate financialstatements; it continues to be a standard

dealing solely with separate financialstatements. The existing guidance for separate

financial statements is unchanged.

The rest of the package includes IFRS 11, Jointarrangements; IFRS 12, Disclosure of interestsin other entities; and consequential amendmentsto IAS 28, Investments in associates.


IFRS 10 changes the definition of control so thatthe same criteria are applied to all entities todetermine control. This definition is supportedby extensive application guidance that addressesthe different ways in which a reporting entity(investor) might control another entity(investee). The changed definition andapplication guidance is not expected to resultin widespread change in the consolidationdecisions made by IFRS reporting entities,although some entities could see significantchanges.

All entities will need to consider the newguidance. The core principle that a consolidatedentity presents a parent and its subsidiaries as ifthey are a single entity remains unchanged, asdo the mechanics of consolidation.

IFRS 10 excludes guidance specifically forinvestment companies, as the IASB continues to

work on a project on accounting by investmentcompanies for controlled entities.

The revised definition of control focuses on theneed to have both power and variable returnsbefore control is present. Power is the currentability to direct the activities that significantlyinfluence returns. Returns must vary and can bepositive, negative or both.

The determination of power is based on currentfacts and circumstances and is continuouslyassessed. The fact that control is intended to betemporary does not obviate the requirement toconsolidate any investee under the control of theinvestor. Voting rights or contractual rights maybe evidence of power, or a combination of thetwo may give an investor power. Power does nothave to be exercised. An investor with more

than half the voting rights would meet thepower criteria in the absence of restrictions orother circumstances.

The application guidance includes examplesillustrating when an investor may have control

with less than half of the voting rights. Whenassessing if it controls the investee, an investorshould consider potential voting rights,economic dependency and the size of itsshareholding in comparison to other holdings,together with voting patterns at shareholdermeetings. This last consideration will bring the

notion of de facto control firmly within theconsolidation standard.

Effective date


EU adoption status

Adopted by the European Commission on 29 December 2012 for annual periods beginningon or after 1 January 2014.



New standards

IFRS 10 also includes guidance on participatingand protective rights. Participating rights give aninvestor the ability to direct the activities of aninvestee that significantly affect the returns.Protective rights (often known as veto rights)

will only give an investor the ability to blockcertain decisions outside the ordinary courseof business.

The new standard includes guidance on agent/principal relationships. An investor (the agent)may be engaged to act on behalf of a single partyor a group of parties (the principals). Certainpower is delegated to the agent for example, tomanage investments. The investor may or maynot have control over the pooled investmentfunds. IFRS 10 includes a number of factors toconsider when determining whether the investorhas control or is acting as an agent.

The revised definition of control and associatedguidance replaces not only the definition andguidance in IAS 27 but also the four indicators ofcontrol in SIC 12.

Who is affected?

IFRS 10 has the potential to affect all reportingentities (investors) that control one or moreinvestees under the revised definition of control.The determination of control and consolidation

decisions may not change for many entities.However, the new guidance will need to beunderstood and considered in the context of eachinvestors business.


Management should consider whether IFRS 10will affect their control decisions andconsolidated financial statements.



New standards

The IASB has issued the long awaited IFRS 11,Joint arrangements, as part of a package offive new standards that address the scope of thereporting.

Changes in the definitions have reduced thetypes of joint arrangements to two: jointoperations and joint ventures. The existing

policy choice of proportionate consolidationfor jointly controlled entities has beeneliminated. Equity accounting is mandatory forparticipants in joint ventures. Entities thatparticipate in joint operations will followaccounting much like that for joint assets or

joint operations today.


Underlying principles

A joint arrangement is defined as being anarrangement where two or more partiescontractually agree to share control. Jointcontrol exists only when the decisions aboutactivities that significantly affect the returns ofan arrangement require the unanimous consentof the parties sharing control.

All parties to a joint arrangement shouldrecognise their rights and obligations arisingfrom the arrangement. The focus is no longer onthe legal structure of joint arrangements, butrather on how rights and obligations are sharedby the parties to the joint arrangement.

The structure and form of the arrangement isonly one of the factors to consider in assessingeach party s rights and obligations. The termsand conditions agreed by the parties (forexample, agreements that may modify the legalstructure or form of the arrangement) and other

relevant facts and circumstances should also beconsidered.

If the facts and circumstances change, aventurer needs to reassess:

whether it has joint control; and/or

the type of joint arrangement in which itis involved.

Types of joint arrangement andtheir measurement

IFRS 11 classifies joint arrangements as eitherjoint operations or joint ventures. The jointlycontrolled assets classification in IAS 31,Interests in joint ventures, has been mergedinto joint operations, as both types ofarrangements generally result in the sameaccounting outcome.

A joint operation is a joint arrangement thatgives parties to the arrangement direct rights tothe assets and obligations for the liabilities. A

joint operator will recognise its interest basedon its involvement in the joint operation (that is,based on its direct rights and obligations) ratherthan on the participation interest it has in the

joint arrangement.

A joint operator in a joint operation will thereforerecognise in its own financial statements:

its assets, including its share of any assetsheld jointly;

its liabilities, including its share of anyliabilities incurred jointly;

its revenue from the sale of its share of theoutput of the joint operation;

its share of the revenue from the sale of theoutput by the joint operation; and

its expenses, including its share of anyexpenses incurred jointly.

Joint arrangements IFRS 11

Effective date


EU adoption status

Adopted by the European Commission on 29 December 2012 for accounting periods on or

after 1 January 2014.



New standards

A joint venture, in contrast, gives the partiesrights to the net assets or outcome of thearrangement. A joint venturer does not haverights to individual assets or obligations forindividual liabilities of the joint venture.Instead, joint venturers share in the net assetsand, in turn, the outcome (profit or loss) of theactivity undertaken by the joint venture. Joint

ventures are accounted for using the equitymethod in accordance with IAS 28, Investmentsin associates. Entities can no longer account foran interest in a joint venture using theproportionate consolidation method.

The standard also provides guidance for partiesthat participate in joint arrangements but do nothave joint control.

Who is affected?

Entities with existing joint arrangements or thatplan to enter into new joint arrangements will beaffected by the new standard. These entities willneed to assess their arrangements to determine

whether they have invested in a joint operationor a joint venture upon adoption of the newstandard or upon entering into the arrangement.

Entities that have been accounting for theirinterest in a joint venture using proportionateconsolidation will no longer be allowed to usethis method; instead they will account for the

joint venture using the equity method oraccount for their share of assets and liabilities ifit is assessed as a joint operation. In addition,there may be some entities that previouslyequity- accounted for investments that mayneed to account for their share of assets andliabilities now that there is less focus on thestructure of the arrangement.

The transition provisions of IFRS 11 requireentities to apply the new rules at the beginningof the earliest period presented upon adoption.When transitioning from the proportionateconsolidation method to the equity method,entities should recognise their initial investmentin the joint venture as the aggregate of thecarrying amounts that were previouslyproportionately consolidated. In transitioningfrom the equity method to accounting for assetsand liabilities, entities should recognise theirshare of each of the assets and liabilities in the

joint operation, with specific rules detailing howto account for any difference from the previouscarrying amount of the investment.


Management of entities that are party to jointarrangements should evaluate how therequirements of the new standard will affect the

way they account for their existing or new jointarrangements. The accounting may have asignificant impact on entities financial resultsand financial position, which should beclearly communicated to stakeholders as soonas possible.

Management should also carefully consider theplanned timing of their adoption. If they wish toretain the current accounting for existing

arrangements, now is the time to consider howthe terms of these arrangements can bereworked or restructured to achieve this.



New standards

The IASB has issued IFRS 12, Disclosure ofinterests in other entities, as part of the group of

five new standards that address the scope of thereporting entity.

IFRS 12 sets out the required disclosures forentities reporting under the two new standards,IFRS 10, Consolidated financial statements,

and IFRS 11, Joint arrangements; it replacesthe disclosure requirements currently found in

IAS 28, Investments in associates. IAS 27 isrenamed Separate financial statements andnow deals solely with separate financialstatements. The existing guidance anddisclosure requirements for separate financialstatements are unchanged.

Disclosure of interests in other entities IFRS 12

Effective date


EU adoption status

Adopted by the European Commission on 29 December 2012 for accounting periods on or

after 1 January 2014.


IFRS 12 requires entities to disclose informationthat helps financial statement readers toevaluate the nature, risks and financial effectsassociated with the entitys interests insubsidiaries, associates, joint arrangements andunconsolidated structured entities.

To meet this objective, disclosures are requiredin the following areas.

Significant judgements and assumptionsSignificant judgements and assumptions madein determining whether the entity controls,

jointly controls, significantly influences or hassome other interests in other entities include:

an assessment of principal-agentrelationships in consolidation;

determination of the type of jointarrangement; and

any override of presumptions of significantinfluence and control when voting rights

range from 20% to 50%, and exceed 50%,respectively.

Interests in subsidiaries

This includes information about:

group composition;

interests of non-controlling interests (NCI) ingroup activities and cash flows, andinformation about each subsidiary that hasmaterial NCI, such as name, principal placeof business and summarised financialinformation;

significant restrictions on access to assetsand obligations to settle liabilities;

risks associated with consolidated structuredentities, such as arrangements that couldrequire the group to provide financialsupport;

accounting for changes in the ownershipinterest in a subsidiary without a loss ofcontrol? a schedule of the impact on parentequity is required;

accounting for the loss of control detail of

any gain/loss recognised and the line item inthe statement of comprehensive income in

which it is recognised; and

subsidiaries that are consolidated usingdifferent year ends.



New standards

Interests in joint arrangements andassociates

Detailed disclosures include:

the name, country of incorporation andprincipal place of business;

proportion of ownership interest andmeasurement method;

summarised financial information;

fair value (if published quotations areavailable);

significant restrictions on the ability totransfer funds or repay loans;

year-ends of joint arrangements or associatesif different from the parents; and

unrecognised share of losses, commitments

and contingent liabilities.

Interests in unconsolidated structuredentities

Detailed disclosures include:

the nature, purpose, size, activities andfinancing of the structured entity;

the policy for determining structured entitiesthat are sponsored;

a summary of income from structuredentities;

the carrying amount of assets transferred tostructured entities;

the recognised assets;

liabilities relating to structured entities andline items in which they are recognised;

the maximum loss arising from suchinvolvement; and

information on financial or other supportprovided to such entities, or currentintentions to provide such support.

Who is affected?

All entities that have interests in subsidiaries,associates, joint ventures or unconsolidatedstructured entities are likely to face increaseddisclosure requirements.


Management should consider whether it needs toimplement additional processes to be able tocompile the required information.



New standards

IFRS 13, Fair value measurement, explains howto measure fair value and aims to enhance fair

value disclosures; it does not say when tomeasure fair value or require additional fair

value measurements.

The project converges IFRS and US GAAP onhow to measure fair value, but there willcontinue to be differences in certain respects,including when fair value measurements arerequired and when day 1 gains and losses canbe recognised.

What are the key provisions?The guidance in IFRS 13 does not apply totransactions within the scope of IFRS 2, Share-based payment, or IAS 17, Leases, or to certainother measurements that are required by otherstandards and are similar to, but are not, fair

value (for example, value in use in IAS 36,Impairment of assets).

Definition of fair value

Fair value is the price that would be received tosell an asset or paid to transfer a liability in an

orderly transaction between market participantsat the measurement date (an exit price). The fairvalue of a liability therefore reflects non-performance risk (that is, own credit risk).

Principal or most advantageous market

A fair value measurement assumes that thetransaction to sell the asset or transfer theliability takes place in the principal market forthe asset or liability or, in the absence of aprincipal market, in the most advantageousmarket for the asset or liability.

The principal market is the market with thegreatest volume and level of activity for the assetor liability that can be accessed by the entity.

Market participant assumptions

Fair value is measured using the sameassumptions and taking into account the samecharacteristics of the asset or liability as marketparticipants would. Fair value is a market-based,not entity- specific measurement.

Highest and best useFor non-financial assets only, fair value isdetermined based on the highest and best use ofthe asset as determined by a market participant.

Bid and ask prices

The use of bid prices for asset positions and askprices for liability positions is permitted if thoseprices are most representative of fair value inthe circumstances, but it is not required.

Fair value hierarchy

Fair value measurements are categorised into athree-level hierarchy, based on the type ofinputs to the valuation techniques used, asfollows:

level 1 inputs are quoted prices in activemarkets for items identical to the asset orliability being measured. Consistent withcurrent IFRS, if there is a quoted price in anactive market (that is, a Level 1 input), anentity uses that price without adjustment

when measuring fair value;

level 2 inputs are other observable inputs;

and level 3 inputs are unobservable inputs, but

that nevertheless must be developed toreflect the assumptions that marketparticipants would use when determining anappropriate price for the asset or liability.

Each fair value measurement is categorisedb

pwc a practical guide to new ifrs for 2013 en

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