A.F.Ferguson & Co. A member firm of 1 A.F.Ferguson & Co. A member firm of pwc Improvements Project Workshop on latest developments in IAS

1

A.F.Ferguson & Co. A member firm of

A.F.Ferguson & Co. A member firm of pwc

Improvements Project

Workshop on latest developments in IAS

2

A.F.Ferguson & Co.

A member firm of PwC

By: Syed Fahim ul Hasan

Partner

A.F. Ferguson & Co., Karachi

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A.F.Ferguson & Co.


Improvement to IAS• Revised standards applicable to financial

periods beginning on or after January 1, 2005 (except for IAS 38 which is applicable for periods beginning on or after March 31, 2004)

• Earlier application encouraged and the fact should be disclosed

• When adopting requirement of a standard, the entire revised standard must be adopted

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A.F.Ferguson & Co.


IAS 1 Presentation of Financial Statements

True and fair override in very rare circumstances

• If not prohibited by the relevant regulatory framework

• ‘true and fair’ presumes compliance with IFRS Disclose:

• Management concludes FS are fairly presented

• Identify requirement not applied

• Reason why treatment so misleading

• For each period presented, the financial impact of the departure on each item in the FS

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IAS 1 … contd. New disclosures

• Judgements made in applying accounting policies - Most significant effect of measurement of

items • Key assumptions about future and other

estimation uncertainties that risk future material adjustments

• Separate income statement disclosure- Profit or loss for the period- Profit or loss attributable to minority interest- Profit or loss attributable to equity holders of

the parent

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IAS 1 … contd.

New disclosures…contd.

• Statement of change in equity

- Total income and expenses for the period attributable to ‘minority interest’ and ‘equity holders of the parent’

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IAS 1 … contd.

Other changes

• Classified balance sheet presentation required i.e. current and non-current

- Liquidity basis or mixed basis is used only when reliable and more relevant.

- Post balance sheet events (refinancing, correction of defaults) do not affect classification of debt

• Presentation of extraordinary items prohibited

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A.F.Ferguson & Co.


IAS 1 … contd. Other changes

• Capital disclosures (effective from January 1, 2007)

IAS 1 has introduced requirements for all entities to disclose:

- the entity's objectives, policies and processes for managing capital;

- quantitative data about what the entity regards as capital;

- whether the entity has complied with any capital requirements; and

- if it has not complied, the consequences of such non-compliance.

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A.F.Ferguson & Co.


IAS 2 Inventories

Scope changes

• Clarifies the types of inventories exempted from measurement (but not disclosures) requirements

- Commodity broker-traders measured at NRV through profit or loss

- Producers of agricultural and forest products, agricultural produce after harvest and mineral products measured at fair value less costs to sell through profit or loss

• All inventories covered – words ‘held under the historical cost system’ removed

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IAS 2 …contd.

• LIFO method not permitted

• Finance cost of inventories on deferred settlement terms

Other changes

• Exchange differences as inventory cost no longer permitted

• Consistency – same cost formula be used for similar inventories

• Disclosure – Inventories carried at fair vale less cost to sell

- Difference between purchase price for normal credit terms and the amount paid is interest expense over financing period

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Main changes • All voluntary changes in accounting policies and

corrections of errors must be made retrospectively- Allowed alternative method eliminated

- Apply new accounting policy and correction to prior period errors to comparative information for prior periods as far back as practicable

- If impracticable to determine cumulative effect, apply new accounting policy and correction of errors prospectively from earliest period practicable

• Distinction between fundamental errors and other material errors eliminated

• Change in accounting estimate and prior period errors defined

IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors

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Change in accounting estimateChange in accounting estimate is an is an adjustment of the carrying amount of an adjustment of the carrying amount of an asset or a liability, or the amount of the asset or a liability, or the amount of the periodic consumption of an asset, that periodic consumption of an asset, that results from the assessment of the present results from the assessment of the present status of, and expected future benefits and status of, and expected future benefits and obligations associated with, assets and obligations associated with, assets and liabilities. Changes in accounting estimates liabilities. Changes in accounting estimates result from new information or new result from new information or new developments and, accordingly are not developments and, accordingly are not corrections of errorscorrections of errors

IAS 8 …contd.

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Prior period errorsPrior period errors are omissions from, and are omissions from, and misstatements in, the entity’s financial statements misstatements in, the entity’s financial statements for one or more prior periods arising from a failure for one or more prior periods arising from a failure to use, or misuse of, reliable information that:to use, or misuse of, reliable information that:a) was available when financial statements for a) was available when financial statements for those periods were authorised for issue; andthose periods were authorised for issue; andb) Could reasonably be expected to have been b) Could reasonably be expected to have been obtained and taken into account in the preparation obtained and taken into account in the preparation and presentation of those financial statements and presentation of those financial statements

Such errors include the effects of mathematical Such errors include the effects of mathematical mistakes, mistakes in applying accounting policies, mistakes, mistakes in applying accounting policies, oversight or misinterpretation of facts, and fraudoversight or misinterpretation of facts, and fraud

IAS 8 …contd.

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New disclosures

• Changes in accounting policy – initial application or voluntary changes

- Identify change

- Whether change is in accordance with transitional provisions and description of transitional provision

- Reasons why new accounting policy reliable and more relevant

- Amount of adjustment to each line item

- Amount of adjustment to basic and diluted EPS

- Amount of adjustment to prior periods

- More disclosures required if application is impracticable

IAS 8 …contd.

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New disclosures … contd.

• When new standard or interpretation not applied but issued and is not yet effective

- The fact and estimate of impact of application now required (was encouraged before)

- Implication regarding the application of IFRS 1 to 7

IAS 8 …contd.

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New disclosures … contd.

• Prior period errors

- Nature

- Amount of correction for each line item

- Amount of correction for basic and diluted EPS

- Amount of correction at the beginning of earliest period

- If retrospective restatement impracticable more disclosures are required

IAS 8 …contd.

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Other changes

• Materiality

- Concept of materiality defined

- IFRS not to be applied if effect of application is immaterial

- FS do not comply with IFRS if they contain material errors

IAS 8 …contd.

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IAS 10 Events after the Balance Sheet Date

Clarifies

• When dividends are declared after the balance sheet date, do not recognise dividends as liability

• Disclosure such dividend in the notes in accordance with IAS 1

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IAS 16 Property, Plant and Equipment

Main change

• All exchange of non-monetary assets measured at fair value whether or not they have similar use and fair value

- unless the transaction lacks commercial substance ; or

- fair value of neither the asset received nor asset given up is reliably measurable

In which case asset will be recorded at cost

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IAS 16 Property, Plant and Equipment

Main change…contd.

• Definition of ‘residual value’ changed

- Amount could receive at the balance sheet date if the asset were in the condition that it will be at expected disposal date

- Does not include expected future inflation

• Residual value, depreciation method and useful life must be reviewed at least annually

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IAS 16 …contd. Clarifies

• Depreciation to continue on idle PPE

• Requirements of components approach

- An item of PPE often a combination of various items with separate useful lives

- Use separate lives calculate depreciation, test for derecognition and replacement or renewal of a component of PPE

• Cost of PPE – initial estimate of costs of dismantlement, removal or restoration of PPE

- Costs recognised and measured under IAS 37

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Other changes • Capitalising subsequent costs

- Use general recognition principle

• Clarifies and gives examples of items not to be included in acquisition costs - Start up costs - Cost of introducing new product or service - Administrative and general overhead costs

No longer test against ‘originally assessed standard of performance’

- Requires derecognition of parts replaced

• No depreciation charged if the residual value of asset exceeds the carrying value

IAS 16 …contd.

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New disclosures

• Depreciation

- Whether recognised in the profit or loss or as part of cost of other assets

- Accumulated depreciation at the end of FY

• Change in estimates of

- Residual value

- Costs of dismantling, removing or restoring of PPE

- Useful lives- Depreciation methods

IAS 16 …contd.

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New disclosures

• Revaluations

- Methods and significant assumptions applied to estimate fair values

• Reconciliation of carrying values at the beginning and end of the period

IAS 16 …contd.

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• Disclosures encouraged

• Carrying amount of temporarily idle property, plant and equipment

• Carrying amount of fully depreciated assets still in use

• Carrying amount of assets retired from active use and not classified as held for sale as per IFRS 5 (IAS-35)

• When the cost model is used, the fair value of assets when it is materially different from the carrying amount

IAS 16 …contd.

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IAS 17 Leases

Main changes

• Lease of land and building to be split into two elements - A lease of land and a lease of building(s)

- Based on the fair value of the components

• A lessee can classify an operating lease as investment property, if it accounts for it as a finance lease

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A.F.Ferguson & Co.


IAS 17 Leases

Main changes

• Eliminates the choice in accounting for initial direct costs (lessors)

- Include in the leased asset and recognise as an expense over the lease term

- Manufacturer or dealer to recognise as expense at the time of recognition of selling profit

• Special transition provisions

• Inception and commencement of lease

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IAS 21 The Effects of Changes in Foreign Exchange Rates

Incorporates SIC-19 and SIC-30• Replaces ‘measurement currency’ with ‘functional

currency’ – two have same meaning and the definition of ‘presentation currency’ added

Approach First step: Translate all the branches and subsidiaries

FC balances into functional currency of the group, exchange differences to go to P&L

Second step: Translate financial statements to presentation currency, exchange differences to go to equity

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A.F.Ferguson & Co.


IAS 21 The Effects of Changes in Foreign Exchange Rates

Incorporates SIC-19 and SIC-30

• No change in accounting practices for many entities except

- Additional guidance on determining the functional currency

Emphasis on the currency that determines the pricing of transactions and in which transactions are denominated

Entities should reassess their functional currency to be consistent with new guidance

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IAS 21 …contd.

Other changes

• Eliminated distinction between foreign operations and foreign entities

- But foreign operations and reporting entity likely to have same functional currency, so no real change

• Goodwill and fair value adjustments to assets/liabilities arising on the acquisition of foreign operations shall be treated as the assets/liabilities of that foreign operations and be re-translated at each balance sheet date - Using closing rate

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IAS 21 …contd.

Other changes

Only prospective application required

Retrospective application encouraged

- Special transition provisions for this change

• Eliminated the allowed alternative of capitalising unexpected severe devaluations

- All other changes resulting from the application of IAS 21 be treated under IAS 8

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Primary Rules

1. All exchange differences to go to P&L with exception:

- When functional currency is different and translation into presentation currency is done, the exchange differences will go to equity

- In case of monetary items forming part of net investment in a foreign operation presented in the consolidated financial statements of reporting entity, the exchange differences will go to equity

IAS 21 …contd.

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2. Foreign currency transactions presented in functional currency

- All FC monetary items at closing balance sheet rate

- FC Non-monetary items measured in terms of historical cost at the rate of transaction date

- FC Non-monetary items measured in terms of fair value at the rate when the fair value was measured

- All exchange differences will go to P&L

IAS 21 …contd. Primary Rules

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3. Foreign currency transactions presented in other than functional currency - Assets and liabilities at closing balance

sheet rate

- P&L items at the rate of transaction date

- All exchange differences will go to equity

4. If gain or loss on a non-monetary item is recognised directly in equity, any exchange component of that gain or loss shall also be recognised directly in equity

IAS 21 …contd. Primary Rules

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New disclosures

• When presentation currency is different from functional currency

- Disclose the fact, functional currency and reason for different presentation currency

- Reason for change of functional currency, if applicable

• Convenience translation also allowed- only can be shown as supplementary

information

- disclose functional currency and the method of translation

IAS 21 …contd.

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IAS 24 Related Party Disclosures

Definition of related party expanded to include - Parties with joint control over the entity

- Joint ventures in which the entity is a venturer

- Post employment benefit plans for the benefit of employees of an entity or entity or entity’s related party

• Expanded scope includes close family members of - Individuals with direct, joint or indirect control or

significant influence

- Key management personnel of the entity or its parent

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- Parent companies, investors or ventures in separate financial statements

- Profit oriented state-controlled enterprises

Requires new disclosures including

No exemption

- Terms and conditions of related party balances

- Whether outstanding balances are secured

- The nature of the consideration to be provided in settlement

- Details of guarantees given or received

IAS 24 … contd.

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IAS 24 … contd. Requires new disclosures including …contd.

- The expense recognised during the period in respect of bad and doubtful debts due from related parties

- Classification of amounts payable to, and receivable from, related parties into different categories of related parties

- The name of the entity’s parent and, if different the ultimate controlling party. If neither of these two parties produce financial statements available for public use, the name of the next most senior parent that does so, is required

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Disclosure required separately for each of Disclosure required separately for each of the following categoriesthe following categories The parentThe parent Entities with joint control or significant Entities with joint control or significant

influenceinfluence SubsidiariesSubsidiaries AssociatesAssociates JVsJVs Key management personnelKey management personnel Other RPsOther RPs

IAS 24 … contd.

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IAS 24 … contd.

Disclosure not required (Significant Change)

- Pricing of transactions – Discussions on the

pricing of transactions and related disclosures

between RP have been removed because the

Standard does not apply to the measurement of

RP transactions. Further, the Standard clarifies

that an entity discloses that the terms of related

party transactions are equivalent to those that

prevail in arm’s length transactions only if such

terms can be substantiated

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IAS 27 Consolidated and Separate Financial Statements

Conditions changed for exemption not to prepare Consolidated Financial Statements (All to be met)

- The parent is a wholly owned subsidiary, or a partially owned subsidiary and all owners (including those not otherwise entitled to vote) do not object

- No debt or equity instruments traded in a public market

- Not in process of filing its FS with a regulatory authority (eg SECP) to issue any class of instruments to public and

- The ultimate or any intermediate parent of the parent produces consolidated FS that comply with IFRS and are available for public use

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IAS 27 … contd.

Main changes

- Venture capital organisations

- Mutual funds

- Unit trusts and similar entities

• Clarifies – no exemption from consolidation

- Impracticability exemption removed

• Uniform accounting policies to be used in the group

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IAS 27 … contd.

Main changes

- Within equity but separately from the parent shareholders’ equity

- Separately in income statement

• Prohibits equity method of accounting by a parent in separate Financial Statements

• New presentation of minority interests

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Other changes…contd.

- To be disposed of within 12 months from acquisition

- Management actively seeking a buyer

• Limited exemption – a newly acquired subsidiary excluded from consolidation only when

• Eliminates explicit exemption for a subsidiary operating under severe long-term restrictions (control must be lost)

• Incorporates SIC-33 – potential voting rights

IAS 27 … contd.

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Other changes

• More disclosures required - Summarised information of subsidiaries not

consolidated

- Nature of relationship when parent does not own more than half of the voting power

- Reasons why no control when the company owns more than half (potential) voting power

- Reporting date of the FS of a subsidiary if different dates from parent

IAS 27 … contd.

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IAS 28 Investments in Associates

Main changes

- For some types of investors

• Scope exclusion

- Must be held for trading under IAS 39

- Similar exemptions in IAS 31

Venture capital organisations

Mutual funds

Unit trusts and similar entities

Investment limited insurance funds

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IAS 28 Investments in Associates

Main changes

Equity Method for associates with significant control must be used whether the investor also has investments in subsidiaries and prepares Consolidated Financial Statements or not. However, the investor should not apply Equity method when preparing separate Financial Statements under IAS 27

The Standard does not permit not to use Equity method when associate with significant influence operates under severe long-term restrictions (Significant influence must be lost)

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IAS 28 ...contd.

Conditions changed for exemption for application of Equity method similar to those provided to parents not to prepare Consolidated Financial Statements in IAS 27- The investor is a wholly owned subsidiary, or a partially owned

subsidiary and all owners (including those not otherwise entitled to vote) do not object to the investor not to apply Equity method



- The ultimate or any intermediate parent of the investor produces consolidated FS that comply with IFRS and are available for public use

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- Investor’s net investment now includes other long-term interest except trade receivables, trade payables or any long-term receivables with adequate collateral (secured loans)

• Modifies guidance in SIC-20 Equity Accounting Method – Recognition of Losses

IAS 28 … contd.

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Other changes

- To be disposed within twelve months from acquisition

- Management is actively seeking a buyer

• Similar exemption as in IAS 27 that an investee treated as financial asset if

• Uniform accounting policies to be use

- Impractically exemption eliminated

IAS 28 … contd.

Extensive disclosure requirements similar to IAS 27

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IAS 31 Interests in Joint Ventures

Main changes

- For some types of investors

• Scope exclusion

- Must be held for trading under IAS 39

- Similar exemptions in IAS 28

Venture capital organisations

Mutual funds

Unit trusts and similar entities

Investment limited insurance funds

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The Standard does not permit not to use Proportionate Consolidation or Equity method when the JV with operates under severe long-term restrictions (Joint control must be lost)

IAS 31…contd.

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IAS 31 Interests in Joint Ventures Conditions changed for exemption for application of

Proportionate Consolidation or Equity method similar to those provided to parents not to prepare Consolidated Financial Statements in IAS 27- The venturer is a wholly owned subsidiary, or a partially owned

subsidiary and all owners (including those not otherwise entitled to vote) do not object to the investor not to apply Proportionate Consolidation or Equity method



- The ultimate or any intermediate parent of the venturer produces consolidated FS that comply with IFRS and are available for public use

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- To be disposed off within 12 months of acquisition

- Management is actively seeking a buyer

• Joint venture treated as a financial asset if

• Prohibits Proportionate Consolidation or Equity methods in separate financial statements of a venture

Disclosure

• Method used to recognised interest in Joint Venture that is proportion consolidation or equity

IAS 31…contd.

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IAS 32 Financial Instruments Disclosure and Presentation

Covers • Classification as debt or equity

• Compound financial instruments

• Offsetting in the balance sheet

• Disclosure

Standard was originally issued 1995

Major changes in Dec 2003:

• All disclosures from old IAS 39 moved to IAS 32

• Many new disclosures added

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Definition • Expands definition of financial asset and

financial liability- Includes some contracts that will or may be

settled in the entity’s own equity instruments • Derivative

- Provides new guidance on when a derivative contract on an entity’s own equity is a liability

- With settlement option is classified as FA or FL unless all settlement options result in being an equity instrument

- Past practice or the intended settlement method no longer considered

IAS 32…contd.

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Definition … contd.

• Financial liability - Holder has a right to put it back to the issuer

for cash or another financial assets- Even if the amount of cash or other financial

asset is determined on the basis of an index- Includes puttable equity that gives the holder

right to a residual interest Significant impact on open-ended mutual funds,

unit trust, partnerships and co-operative entities

IAS 32…contd.

- Contingent settlement provisions exist

- Considers all terms and conditions agreed between members of the group and the holders of the instrument

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• The Standard provides guidance on

measurement of the components of

compound financial instruments

• Incorporates SIC-16 Share Capital –

Reacquired Own Equity Instruments

(Treasury Shares)

IAS 32…contd.

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Equity or liability (non-derivative)

Contractual obligation to deliver cash or financial asset

Instrument to be settled in the issuer’s own equity is a non-derivative with a

fixed value obligation to deliver a variable number of its own shares

Equity

NO

Liability Yes

Yes

NO

Liability

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Equity or liability (derivative) Does the issuer potentially have an obligation to settle gross in cash?

Will settlement be exchange of fixed number of shares for fixed amount?

Derivative (note that any net cash or net share settlement feature even at issuer’s

discretion, will lead to derivative treatment)

Liability

Equity

Yes

Yes

NO

NO

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New disclosures for fair value estimates - Method and significant assumptions applied for each

class of financial asset and liability

- Whether determined in full or in part by reference to published price quotations in an active market or by valuation technique

- Whether fair values determined in full or in part using valuation technique based on assumptions not supported by observable market prices or rates

- If change in assumptions would change the fair value and a range of reasonable possible alternative assumptions

- Amount of the change in fair value estimated using a valuation technique and recognised in P&L

IAS 32…contd.

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IAS 33 Earnings per Share

Significant redrafting (FAS 128)

Additional disclosure requirements

- Separate presentation on the face of income statements of basic and diluted EPS from continuing and discontinuing operations

Incorporates SIC-24 Earnings per Share – Financial Instruments and Other Contracts that May be Settled in Shares without changes

Requires adjustment to earnings (numerator) for redemption of preferred shares

Provides additional guidance and illustrative examples

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IAS 38 Intangible Assets

Subsequent expenditure

- To capitalise on rare occasions

If residual value > or = carrying amount

- Amortisation ceases Amortisation resumes when

- Residual value < carrying amount

All exchanges involving non-monetary assets- At fair value - unless

Transaction lacks commercial substance

Fair value not measurable

Cost and revaluation model (same as IAS 16)

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IAS 38 …contd.

Useful life - Indefinite / definite life

Disclosure

- Indefinite useful life assets

- Aggregate research and development expenditure

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IAS 39 Financial Instrument Recognition and Measurement

Scope

- If cannot be settled net and are not measured at fair value with changes recognised in P&L

• New guidance on calculation of effective interest rates

• Loan commitments excluded from IAS 39

- When specified payments to be made to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due under the original or modified terms

• Financial guarantee contracts excluded

- Provide for payments to be made in response to a variable e.g. changes in specified interest rate, financial instrument price

• Financial guarantee contracts are included in IAS 39 if

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IAS 39 …contd. Main change

- Derecognition rules rewritten to clarify their application

- Concepts of control and risks and rewards of ownership determine derecognition of a financial asset

- Abandoned ED proposal to use solely continuing involvement, however, continuing involvement considered if not substantially all the risks transferred

- Provides guidance when a part of financial asset should be derecognised

• Derecognition

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IAS 39 …contd. Main change

- Option to classify loans and receivable as available for sale (AFS)

- Securities quoted in an active market can be classified as available for sale, held for trading or held to maturity

- Option available to designate at inception any financial instrument as measured at fair value with changes in P&L

- Loans and receivables category expanded to include purchased loans and receivables not quoted in an active market

• Classification

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IAS 39 …contd. Main change …contd.

- Requires the use of estimated cash flows to calculate effective yield

- Exception in rare cases when reliable estimate of cash flow is not possible, in such cases use contractual cash flows instead of estimated cash flows

• Effective interest rate definition amended

• Expands guidance on measurement of fair values and clarifies fair value measurement hierarchy

• Confirms that impairment follow an ‘incurred loss’ model rather than an ‘expected loss’ model

• Option removed to show changes in available for sale through P&L

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IAS 39 …contd.

Hedge accounting • Apply fair value model for hedging firm

commitments

• Option to account for firm commitment in a

foreign currency as a cash flow hedge

• Option to apply cost basis adjustments for

hedging non financial assets or liabilities

• Removal of cost basis adjustment for hedging

financial assets or liabilities

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IAS 40 Investment Property

Investment property may include property interest held by a lessee under an operating lease - If accounted for at Fair Value under IAS 40

- IAS 40 overrides IAS 17 for classification of lease and the lease be recorded as finance lease

Special transition rules

Disclosures required - Model used (Cost or Fair Value)

- If Fair Value model is applied state whether, and in what circumstances, property interest held under operating lease is classified and accounted for as investment property

- Reconciliation between the valuation obtained for investment property and the amounts disclosed in the financial statements

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Thank youThank you

Documents

A.F.Ferguson & Co. A member firm of 1 A.F.Ferguson & Co. A member firm of pwc Improvements Project Workshop on latest developments in IAS