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INTRODUCTION TO THE PAPER

6

AIM OF THE PAPER

The aim of the paper is to test your understanding of financial reporting and

probably more importantly to test your ability to solve problems in accounting

scenarios that are every bit as messy as real life.

FORMAT OF THE EXAM PAPER

The syllabus is assessed by a three hour and 15 minutes paper-based examination.

ACCA has removed the restriction relating to reading and planning time, so that

while the time considered necessary to complete these exams remains at 3 hours,

candidates may use the additional 15 minutes as they choose. ACCA encourages

students to take time to read questions carefully and to plan answers but once the

exam time has started, there are no additional restrictions as to when candidates

may start writing in their answer books.

Time should be taken to ensure that all the information and exam requirements are

properly read and understood.

Examiner: Graham Holt

Exam Date: 6 December 2016 Tuesday

Section A (Compulsory Case Study)

Q1 The case will be based around a complex group scenario. There will be 35

marks of numbers and 15 marks of narrative.

(50 marks)

Section B (Choice of 2 from 3 questions)

Q2 3 to 5 FRSs will be examined in this question. Each FRS will be separate

from the each other.

(25 marks)

Q3 2 to 6 FRSs will be examined in this question. There will be one “big” case

scenario testing the various standards.

(25 marks)

Q4 Only 1 FRS will be examined. Parts to this question will comprise of technical

areas from the FRS and one or two case scenario to text its application.

(25 marks)

CHAPTER 1 – FRAMEWORK, IFRS FOR SMES, MANAGEMENT COMMENTARY,

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HOW STANDARDS ARE SET

IASB ASC

IASB issues Exposure Draft ASC issues ED at website

Feedback / Feedback and consultation from

Exposure ISCA and stakeholders to ASC

Period

ASC drafts reply to IASB

End of Consultation ASC submits final reply to IASB

IASB reviews comments ASC and ISCA monitors

IASB issues final IFRS ASC considers whether to adopt

in full or adapt with modification

Publication of FRS on website

www.asc.gov.sg

The above process often resulted in a delay in Singapore adopting IAS and IFRS as

FRS.

IASB: International Accounting Standards Board

ASC: Accounting Standards Council

ISCA: Institute of Singapore Chartered Accountants

ED: Exposure Draft

IAS: International Accounting Standards

IFRS: International Financial Reporting Standards

FRS: Financial Reporting Standards


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THE CONCEPTUAL FRAMEWORK FOR FINANCIAL

REPORTING

The IASB’s Framework for the Preparation and Presentation of Financial Statements sets out the concepts underlying the preparation and presentation of financial statements for external users.

The Accounting Standards Council (ASC) in Singapore adopts and adapts accounting standards issued by the iasb as local FRS.

In detail, the intended role (aims and objectives) of the Framework is to:

1. assist the IASB in its development of future accounting standards and in its review of existing accounting standards

2. assist the IASB by providing a basis for reducing the number of alternative

accounting treatments permitted by law and accounting standards

3. assist preparers of financial statements in applying accounting standards and in dealing with topics that do not form the subject of an accounting standard

4. assist auditors in forming an opinion as to whether financial statements conform with accounting standards

5. help users of financial statements to interpret the information contained in financial statements prepared in conformity with accounting standards

6. provide those who are interested in the work of the IASB with information about its approach to the formulation of accounting standards.

The Framework is not itself an accounting standard nor can it override the requirements of any existing accounting standard.

Topics covered by THE FRAMEWORK

1 The objective of Financial Statements (FS)

To provide information about the financial position, performance and changes in financial position of an entity that is useful to a wide range of users in making decisions.

2 Underlying assumptions

a. Accruals basis – the effects of transactions and other events are recognised when they occur and not when cash transfers. They are reported in the financial

statements in the period to which they relate.

b. Going Concern (GC) – the financial statements are prepared on the basis that an entity will continue in operation for the foreseeable future.

- If Business is GC, it will record Assets and Liabilities at Cost or Fair Value (FV)

- If Business is not GC, it will record Assets at Net Realisable Value (NRV = Selling Price less cost before sale) and Liabilities at Settlement Value.


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3 Qualitative characteristics of useful financial statements (Jun 2011)

i. Relevance (FS must be suitable for decision making)

Relevant financial information is capable of making a difference in the

decisions made by users. Information may be capable of making a difference in a decision even if some users choose not to take advantage of it or are already aware of it from other sources.

ii. Materiality (when amount is significant, co. will record in a special manner)

Information is material if omitting it or misstating it could influence decisions

that users make on the basis of financial information about a specific reporting entity. In other words, materiality is an entity-specific aspect of relevance based on the nature or magnitude, or both, of the items to which the information relates in the context of an individual entity’s financial report.

Consequently, the IASB cannot specify a uniform quantitative threshold for materiality or predetermine what could be material in a particular situation.

iii. Faithful Representation (economic substance over legal form)

Financial reports represent economic phenomena in words and numbers. To be useful, financial information must not only represent relevant phenomena,

but it must also faithfully represent the phenomena that it purports to represent. To be a perfectly faithful representation, a depiction would have three characteristics. It would be complete, neutral and free from error. Of

course, perfection is seldom, if ever, achievable. The ASC’s objective is to maximise those qualities to the extent possible.

iv. Applying the fundamental qualitative characteristics Information must be both relevant and faithfully represented if it is to be useful. The most efficient and effective process for applying the fundamental

qualitative characteristics would usually be as follows (subject to the effects of enhancing characteristics and the cost constraint, which are not considered in this example).

First, identify an economic phenomenon that has the potential to be useful to users of the reporting entity’s financial information.

Second, identify the type of information about that phenomenon that would be most relevant if it is available and can be faithfully represented.

Third, determine whether that information is available and can be faithfully represented. If so, the process of satisfying the fundamental qualitative characteristics

ends at that point. If not, the process is repeated with the next most relevant type of information.


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Enhancing qualitative characteristics i. Comparability (good to have current year and previous year as comparison)

Users’ decisions involve choosing between alternatives, for example, selling or holding an investment, or investing in one reporting entity or another. Consequently, information about a reporting entity is more useful if it can be

compared with similar information about other entities and with similar information about the same entity for another period or another date.

ii. Verifiability (good to have invoices and statements as evidence) Verifiability helps assure users that information faithfully represents the economic phenomena it purports to represent. Verifiability means that different knowledgeable and independent observers could reach consensus,

although not necessarily complete agreement, that a particular depiction is a faithful representation. Quantified information need not be a single point estimate to be verifiable. A range of possible amounts and the related

probabilities can also be verified. iii. Timeliness (good file to FS on-time)

Timeliness means having information available to decision-makers in time to be capable of influencing their decisions. Generally, the older the information is the less useful it is. However, some information may continue to be timely

long after the end of a reporting period because, for example, some users may need to identify and assess trends.

iv. Understandability (good to show breakdown of figures and disclosure notes) Classifying, characterising and presenting information clearly and concisely makes it understandable.

v. Applying the enhancing characteristics

Enhancing qualitative characteristics should be maximised to the extent possible. However, the enhancing qualitative characteristics, either individually or as a group, cannot make information useful if that information is irrelevant or not faithfully represented.

Applying the enhancing qualitative characteristics is an iterative process that does not follow a prescribed order. Sometimes, one enhancing qualitative

characteristic may have to be diminished to maximise another qualitative characteristic. For example, a temporary reduction in comparability as a result of prospectively applying a new financial reporting standard may be worthwhile to improve relevance or faithful representation in the longer term.

Appropriate disclosures may partially compensate for non-comparability.


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4 The elements of financial statements

Asset is a resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise.

Liabilities are an entity’s obligations to transfer economic benefits as a result of

past transactions or events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits.

Equity is the residual amount found by deducting all liabilities of the entity from all of the entity’s assets. Income is increases in economic benefits during the accounting period in the form

of inflows or enhancements of assets or decreases in liabilities that result in increases in equity, other than those relating to contributions from equity participants.

Expenses are decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrence’s of liabilities that result in decreases in equity, other than those relating to distributions to equity participants.

5 Recognition of the elements of financial statements

In order to recognise anything in the statement of financial position and income statement it must meet all three of the following criteria:

- Meet the definition of the element (as above)

- Probable future economic benefit will flow to or from the entity (probability is the uncertainty that benefits will flow to or from the enterprise).

- The item can be measured reliably (reliability is the use of reasonable estimates

in the financial statements)

6 Measurement of the elements of financial statements

Historical cost - Assets are recorded at the amount of cash or cash equivalents paid or the fair value

of the consideration given to acquire them at the time of their acquisition. Liabilities are recorded at the amount of proceeds received in exchange for the obligation, or in some circumstances (for example, income taxes), at the amounts of cash or cash equivalents expected to be paid to satisfy the liability in the normal course of

business. Current cost –

Assets are carried at the amount of cash or cash equivalents that would have to be paid if the same or an equivalent asset was acquired currently. Liabilities are carried at the undiscounted amount of cash or cash equivalents that would be required to settle the obligation currently.

Realisable (settlement) value - Assets are carried at the amount of cash or cash equivalents that could currently be

obtained by selling the asset in an orderly disposal. Liabilities are carried at their settlement values; that is, the undiscounted amounts of cash or cash equivalents expected to be paid to satisfy the liabilities in the normal course of business.


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Present value (PV) –

Assets are carried at the present discounted value of the future net cash inflows that the item is expected to generate in the normal course of business. Liabilities are carried at the present discounted value of the future net cash outflows that are

expected to be required to settle the liabilities in the normal course of business. i.e. Present Value of Future Cash Flows (PVFCF)

Present Value = Future Value x 1__

(1 + r)n

compounded present values, often known as, “Unwinding of Finance Cost” in F7 and

“Amortised Cost” in P2

Future Value = Present Value x (1 + r)n

where: r = discount rate or effective interest rate (EIR)

n = number of compounding periods


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7 Concepts of capital and capital maintenance

Concepts of capital A financial concept of capital is adopted by most entities in preparing their financial

statements. Under a financial concept of capital, such as invested money or invested purchasing power, capital is synonymous with the net assets or equity of the entity. Under a physical concept of capital, such as operating capability, capital

is regarded as the productive capacity of the entity based on, for example, units of output per day. The selection of the appropriate concept of capital by an entity should be based on

the needs of the users of its financial statements. Thus, a financial concept of capital should be adopted if the users of financial statements are primarily concerned with the maintenance of nominal invested capital or the purchasing power of invested capital. If, however, the main concern of users is with the

operating capability of the entity, a physical concept of capital should be used. The concept chosen indicates the goal to be attained in determining profit, even though there may be some measurement difficulties in making the concept operational.

Concepts of capital maintenance and the determination of profit The concepts of capital give rise to the following concepts of capital maintenance:

(a) Financial capital maintenance.

Under this concept a profit is earned only if the financial (or money) amount of the net assets at the end of the period exceeds the financial (or money) amount of net assets at the beginning of the period, after excluding any distributions to, and contributions from, owners during the period. Financial capital maintenance can be

measured in either nominal monetary units or units of constant purchasing power. (b) Physical capital maintenance.

Under this concept a profit is earned only if the physical productive capacity (or operating capability) of the entity (or the resources or funds needed to achieve that capacity) at the end of the period exceeds the physical productive capacity at the

beginning of the period, after excluding any distributions to, and contributions from, owners during the period.


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What is an SME?

There is no universally agreed definition of an SME. No single definition can capture all the dimensions of a small- or medium-sized enterprise, nor can it be expected to reflect the differences between firms, sectors, or countries at different levels of development. Most definitions based on size use measures such as number of

employees, balance sheet total, or annual turnover. However, none of these measures apply well across national borders. IFRS for SMEs is intended for use by entities that have no public accountability (ie, their debt or equity instruments are not publicly traded).

Ultimately, the decision regarding which entities should use IFRS for SMEs stays

with national regulatory authorities and standard-setters. These bodies will often specify more detailed eligibility criteria. If an entity opts to use IFRS for SMEs, it must follow the standard in its entirety – it cannot cherry pick between the requirements of IFRS for SMEs and the full set.

The IASB makes it clear that the prime users of IFRS are the capital markets. This means that IFRS are primarily designed for quoted companies and not SMEs. The vast majority of the world's companies are small and privately owned, and it could be argued that full International Financial Reporting Standards are not relevant to

their needs or to their users. It is often thought that small business managers perceive the cost of compliance with accounting standards to be greater than their benefit. Because of this, the IFRS for SMEs makes numerous simplifications to the recognition, measurement and disclosure requirements in full IFRS. Examples of these simplifications are:

1. Goodwill and other indefinite-life intangibles are amortised over their useful lives, but if useful life cannot be reliably estimated, then 10 years.

2. A simplified calculation is allowed if measurement of defined benefit pension plan

obligations (under the projected unit credit method) involve undue cost or effort. 3. The cost model is permitted for investments in associates and joint ventures. The main argument for separate SME accounting standards is the undue cost

burden of reporting, which is proportionately heavier for smaller firms. The cost of applying the full set of IFRS may simply not be justified on the basis of user needs. Further, much of the current reporting framework is based on the needs of large business, so SMEs perceive that the full statutory financial statements are less

relevant to the users of SME accounts. SMEs also use financial statements for a narrower range of decisions, as they have less complex transactions and therefore less need for a sophisticated analysis of financial statements. Therefore, the disclosure requirements in the IFRS for SMEs are also substantially reduced.

Differing approaches Those who argue against different reporting requirements for SMEs say the system could lead to a two-tier system of reporting. Entities should not be subject to different rules, which could give rise to different 'true and fair views'.

There were a number of approaches that could have been taken to developing

standards for SMEs. An alternative could have been for generally accepted accounting principles for SMEs to have been developed on a national basis, with IFRS focusing on accounting for listed company activities. However, the main issue here would be that the practices developed for SMEs may not have been consistent

and may have lacked comparability across national boundaries. Also, if an SME wished to later list its shares on a capital market, the transition to IFRS could be harder.

Under another approach, the exemptions given to smaller entities would have been prescribed in the mainstream accounting standard. For example, an appendix could


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SOCIAL RESPONSIBILITY

Financial statements have been criticised that it is not comprehensive enough and does not present information about corporate social responsibility, health and well being of employees as well as other less measurable areas such as the

environment. Companies in certain jurisdiction may be directly contributing to environmental pollution (such as forest fires, river pollution, air pollution, irresponsibile methods of

discharging of toxic wastes) is not legally obliged for their actions. Their financial statements do not account for such environmental pollution costs, damage to the environment and society. Thus, such companies will often choose the low cost

method of operation / discharging pollutants into the environment in order to improve their profit margins. However, stakeholders are becoming more involved and interested in both financial

and non-financial performance and would demand social responsibility to reward companies who behave responsibly and punish those with poor environmental practices.

Reacting to this, companies are focusing on improving coporate social responsibility and transparency in their reporting. This is because good corporate reporting will attract good investors and regain investor confidence following the Financial Crisis.

The adoption of internationally recognised accounting standard – International Financial Reporting Standards (IFRS) promotes consistency and comparability among companies from different countires. This helps to enhance transparency in

corporate reporting and the emergence of non-financial reporting standards which is the focus on Environmental Management Accounting in recent years.

More recently, there is much focus on Integrated reporting <IR>. The following is extracted from The International Integrated Reporting Council (IIRC) (www.theiirc.org)

The International Integrated Reporting Council (IIRC)

The International Integrated Reporting Council (IIRC) is a global coalition of regulators, investors, companies, standard setters, the accounting profession and NGOs. Together, this coalition shares the view that communication about value creation should be the next step in the evolution of corporate reporting.

The IIRC is the global authority on <IR>. Its mission is clear: to enable Integrated Reporting to be embedded into mainstream business practice in the public and private sectors.

The long-term vision is a world in which integrated thinking is embedded within mainstream business practice in the public and private sectors, facilitated by <IR>

as the corporate reporting norm. The cycle of integrated thinking and reporting, resulting in efficient and productive capital allocation, will act as forces for financial stability and sustainability.


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The integrated report aims to provide an insight into the company's resources and

relationships which are known as the capitals and how the company interacts with the external environment and the capitals to create value. These capitals can be financial, manufactured, intellectual, human, social and relationship, and natural capital, but companies need not adopt these classifications. The purpose of this

framework is to establish principles and content that governs the report, and to explain the fundamental concepts that underpin them. The report should be concise, reliable and complete, including all material matters, both positive and

negative, and presented in a balanced way without material error.

Key components

Integrated reporting is built around the following key components:

1. Organisational overview and the external environment under which it

operates.

2. Governance structure and how this supports its ability to create value. 3. Business model. 4. Risks and opportunities and how they are dealing with them and how they

affect the company's ability to create value.

5. Strategy and resource allocation. 6. Performance and achievement of strategic objectives for the period and

outcomes.

7. Outlook and challenges facing the company and their implications. 8. The basis of presentation needs to be determined, including what matters

are to be included in the integrated report and how the elements are quantified or evaluated.

The framework does not require discrete sections to be compiled in the report, but

there should be a high-level review to ensure that all relevant aspects are included. The linkage across the above content can create a key storyline and can determine the major elements of the report, such that the information relevant to each company would be different.

An integrated report should provide insight into the nature and quality of the organisation's relationships with its key stakeholders, including how and to what extent the organisation understands, takes into account and responds to their

needs and interests. Furthermore, the report should be consistent over time to enable comparison with other entities.

An integrated report may be prepared in response to existing compliance requirements; for example, a management commentary. Where that report is also

prepared according to the framework or even beyond the framework, it can be considered an integrated report. An integrated report may be either a standalone report or be included as a distinguishable part of another report or communication. For example, it can be included in the company's financial statements.

Nature of value

The IIRC considered the nature of value and value creation. These terms can include the total of all the capitals, the benefit captured by the company, the

market value or cashflows of the organisation, and the successful achievement of the company's objectives. However, the conclusion reached was that the framework should not define value from any one particular perspective, because value depends upon the individual company's own perspective. It can be shown through

movement of capital and can be defined as value created for the company or for others. An integrated report should not attempt to quantify value, as assessments of value are left to those using the report.

Many respondents felt that there should be a requirement for a statement from those 'charged with governance' acknowledging their responsibility for the


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FRS 1 PRESENTATION OF FINANCIAL STATEMENTS

XYZ Group – Statement of Financial Position as at 31 December 2011

31 Dec 2011 31 Dec 2010 ASSETS $’000 $’000 Non-current assets

Property, plant and equipment 350,700 360,020 Goodwill 80,800 91,200 Other intangible assets 227,470 227,470

Investments in associates 100,150 110,770 FVTOCI financial assets 142,500 156,000

901,620 945,460

Current assets Inventories 135,230 132,500 Trade receivables 91,600 110,800

Other current assets 25,650 12,540 Cash and cash equivalents 312,400 322,900

564,880 578,740

Total assets 1,466,500 1,524,200

EQUTY AND LIABILITIES

Equity attributable to owners of the parent

Share capital 650,000 600,000

Retained Earnings (RE) 243,500 161,700

Other Components of Equity (OCE)

(includes RR, FVTOCI Reserves, Share Options, Foreign Currency reserves)

10,200

21,200

903,700 782,900

Non-controlling interest 70,050 48,600

Total equity 973,750 831,500

Non-current liabilities

Long-term borrowings 120,000 160,000

Deferred tax 28,800 26,040

Long-term provisions 28,850 52,240

Total non-current liabilities 177,650 238,280

Current liabilities

Trade and other payables 115,100 187,620

Short-term borrowings 150,000 200,000

Current portion of long-term borrowings 10,000 20,000

Current tax payable 35,000 42,000

Short-term provisions 5,000 4,800

Total current liabilities 315,100 454,420

Total liabilities 492,750 692,700

Total equity and liabilities 1,466,500 1,524,200


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XYZ Group –Statement of Profit or Loss and Other Comprehensive Income

for the year ended 31 December 2011 (presentation in one statement and by function in $’000)

Revenue Cost of sales Gross profit Other income

Distribution costs Administrative expenses Other expenses

Finance costs Share of profit of associates(a) Profit before tax Income tax expense

Profit for the year from continuing operations Loss for the year from discontinued operations PROFIT FOR THE YEAR

2011

390,000 (245,000) 145,000 20,667

(9,000) (20,000) (2,100)

(8,000) 35,100 161,667 (40,417)

121,250 - 121,250

2010

355,000 (230,000) 125,000 11,300

(8,700) (21,000) (1,200)

(7,500) 30,100

128,000 (32,000)

96,000 (30,500) 65,500

Other comprehensive income: Items that will not be reclassified to profit or loss: Gains on property revaluation Remeasurements of defined benefit pension plans

Share of OCI of associates(c) Income tax relating to items that will not be reclassified(d)

933 (667)

400 (166)

500

3,367 1,333

(700) (1,000) 3,000

Items that may be reclassified subsequently to profit or loss: Exchange differences on translating foreign operations(b)

FVTOCI financial assets(b) Cash flow hedges(b) Income tax relating to items that may be reclassified (d)

Other comprehensive income for the year, net of tax

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

5,334

(24,000) (667)

4,833 (14,500)

(14,000) (107,250)

10,667

26,667 (4,000) (8,334) 25,000

28,000 93,500

Profit attributable to: Owners of the parent

Non-controlling interests Total comprehensive income attributable to: Owners of the parent

Non-controlling interests Earnings per share (in cents):

Basic and diluted

97,000

24,250 121,250

85,800

21,450 107,250

0.46

52,400

13,100 65,500

74,800

18,700 93,500

0.30

(a) This means the share of associates’ profit attributable to owners of the associates, ie it is after tax and non-controlling interests in the associates.

(b) This illustrates the aggregated presentation, with disclosure of the current year gain or loss and reclassification adjustment presented in the notes. Alternatively, a gross presentation can be used.

(c) This means the share of associates’ gain (loss) on property revaluation

attributable to owners of the associates, ie it is after tax and non-controlling interests in the associates.

(d) The income tax relating to each item of other comprehensive income is

disclosed in the notes.


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XYZ Group – Statement of Changes in Equity (SOCE) for the year ended 31

December 2011 ($’000)

Share

capital Retained

earnings

Translation

of foreign

operations

FVTOCI

financial

assets

Cash

flow

hedges

Revaluati

onsurplus

Total Non -

controll

ing interest

Total

equity

Balance at 1 January 2010 600,000 118,100 (4,000) 1,600 2,000 - 717,700 29,800 747,500

Changes in accounting

policy - 400 - - - - 400 100 500

Restated

balance 600,000 118,500 (4,000) 1,600 2,000 - 718,100 29,900 748,000

Changes in

equity for

2010

Dividends - (10,000) - - - - (10,000) - (10,000)

Total

comprehensive income for the

year(k)

- 53,200 6,400 16,000 (2,400) 1,600 74,800 18,700 93,500

Balance at 31 December

2010 600,000 161,700 2,400 17,600 (400) 1,600 782,900 48,600 831,500

Changes in

equity for

2010

Issue of share

capital 50,000 - - - - - 50,000 - 50,000

Dividends - (15,000) - - - - (15,000) - (15,000)

Total

comprehensive income for the

year - 96,600 3,200 (14,400) (400) 800 85,800 21,450 107,250

Transfer to retained

earnings - 200 - - - (200) - - -

Balance at

31 December 2011 650,000 243,500 5,600 3,200 (800) 2,200 903,700 70,050 973,750


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FRS 113 FAIR VALUE MEASUREMENT

This standard was issued on 20 September 2011 and applies for annual periods beginning on or after 1 January 2013. Earlier application is permitted

Certain FRSs require entities to measure or disclose the fair value of assets, liabilities or their own equity instruments. Some of those FRSs contained limited

guidance about how to measure fair value, whereas others contained extensive guidance and that guidance was not always consistent across those FRSs that refer to fair value. Inconsistencies in the requirements for measuring fair value and for disclosing information about fair value measurements have contributed to diversity

in practice and have reduced the comparability of information reported in financial statements. FRS 113 remedies that situation.

Scope FRS 113 applies when another FRS requires or permits fair value measurements or disclosures about fair value measurements (such as fair value less costs to sell, based on fair value or disclosures about those measurements), except

a. FRS 102 Share-based Payment

b. FRS 17 Leases c. measurements that have some similarities to fair value but are not fair value,

such as net realisable value in FRS 2 Inventories or value in use in FRS 36

Impairment of Assets.

Definition of Fair Value

This FRS defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

1. Entry Price The price paid to acquire an asset (Dr Asset $FV Cr

Bank $FV) or received to assume a liability (Dr Bank $FV Cr Loan $FV) in an exchange transaction.

2. Exit Price The price that would be received to sell an asset (Dr

Bank $FV Cr Asset $FV) or paid to transfer a liability (Dr Loan $FV Cr Bank $FV).

3. Expected Cash Flow The probability-weighted average (ie mean of the distribution) of possible future cash flows.


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The Asset or Liability A fair value measurement is for a particular asset or liability. Therefore, when measuring fair value an entity shall take into account the characteristics of the

asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. Such characteristics include, for example, the following:

(a) the condition and location of the asset; and (b) restrictions, if any, on the sale or use of the asset.

The Transaction A fair value measurement assumes that the asset or liability is exchanged in an

orderly transaction between market participants to sell the asset or transfer the liability at the measurement date under current market conditions. A fair value measurement assumes that the transaction to sell the asset or transfer

the liability takes place either: (a) in the Principal Market for the asset or liability;

Fair Value in Principal Market = Selling Price – Transport Cost only FRS 113 makes it clear that the price used to measure fair value must not be

adjusted for transaction costs (i.e. cost of entering the market), but should consider transportation costs.

or

(b) in the absence of a principal market, in the Most Advantageous Market for the asset or liability.

Fair Value in Most Advantageous Market (i.e. market with Highest Net SP after all costs) = Selling Price – Transaction Cost – Transport Cost

Market Participants

An entity shall measure the fair value of an asset or a liability using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest.

The Price Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal (or most advantageous) market at

the measurement date under current market conditions (ie an exit price) regardless of whether that price is directly observable or estimated using another valuation technique.


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Application to non-financial assets

Highest and best use for non-financial assets A fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest

and best use or by selling it to another market participant that would use the asset in its highest and best use.

Application to liabilities and an entity’s own equity instruments

General Principles A fair value measurement assumes that a financial or non-financial liability or an entity’s own equity instrument (eg equity interests issued as consideration in a

business combination) is transferred to a market participant at the measurement date. The transfer of a liability or an entity’s own equity instrument assumes the following:

(a) A liability would remain outstanding and the market participant transferee would be required to fulfill the obligation. The liability would not be settled with the counterparty or otherwise extinguished on the measurement date.

(b) An entity’s own equity instrument would remain outstanding and the market

participant transferee would take on the rights and responsibilities associated with the instrument. The instrument would not be cancelled or otherwise

extinguished on the measurement date.

Valuation Techniques An entity shall use valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the

use of relevant observable inputs and minimising the use of unobservable inputs. Market Approach The market approach uses prices and other relevant information generated by

market transactions involving identical or comparable (ie similar) assets, liabilities or a group of assets and liabilities, such as a business. Cost Approach

The cost approach reflects the amount that would be required currently to replace the service capacity of an asset (often referred to as current replacement cost).

Income Approach The income approach converts future amounts (eg cash flows or income and expenses) to a single current (ie discounted) amount. When the income approach is used, the fair value measurement reflects current market expectations about those

future amounts. Present Value Techniques

This is the use of present value techniques to measure fair value.


FRS 1 AND FRS 113

71

Inputs to valuation techniques

General Principles Valuation techniques used to measure fair value shall maximise the use of relevant observable inputs and minimise the use of unobservable inputs.

Fair Value Hierarchy To increase consistency and comparability in fair value measurements and related

disclosures, this FRS establishes a fair value hierarchy that categorises into three levels, the inputs to valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1 inputs) and the lowest priority to

unobservable inputs (Level 3 inputs).

Level 1 Inputs (highest priority) Level 1 inputs are quoted prices (unadjusted price is the most reliable fair value) in active markets for identical assets or liabilities that the entity can access at the

measurement date. A Level 1 input will be available for many financial assets and financial liabilities, some of which might be exchanged in multiple active markets (eg on different

exchanges). Therefore, the emphasis within Level 1 is on determining both of the following:

(a) the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability; and

(b) whether the entity can enter into a transaction for the asset or liability at the

price in that market at the measurement date.

Level 2 Inputs Level 2 inputs are inputs other than quoted prices included within Level 1 that are

observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability. Level 2 inputs

include the following: (a) quoted prices for similar assets or liabilities in active markets.

(b) quoted prices for identical or similar assets or liabilities in markets that are

not active.

(c) inputs other than quoted prices that are observable for the asset or liability, for example:

(i) interest rates and yield curves observable at commonly quoted intervals;

(ii) implied volatilities; and

(iii) credit spreads. (d) market-corroborated inputs.


FRS 1 AND FRS 113

72

Level 3 Inputs (lowest priority) Level 3 inputs are unobservable inputs for the asset or liability.

Unobservable inputs shall be used to measure fair value to the extent that relevant observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.

However, the fair value measurement objective remains the same, ie an exit price at the measurement date from the perspective of a market participant that holds the asset or owes the liability. Therefore, unobservable inputs shall reflect the assumptions that market participants would use when pricing the asset or liability,

including assumptions about risk.

Disclosure

An entity shall disclose information that helps users of its financial statements assess both of the following: (a) for assets and liabilities that are measured at fair value on a recurring or non-

recurring basis in the statement of financial position after initial recognition, the valuation techniques and inputs used to develop those measurements.

(b) for recurring fair value measurements using significant unobservable inputs (Level 3), the effect of the measurements on profit or loss or other comprehensive income for the period.


FRS 1 AND FRS 113

77

Yanong (Jun 2015 Q2) The directors of Yanong, a public limited company, have seen many different ways of dealing with the measurement and disclosure of the fair value of assets, liabilities

and equity instruments. They feel that this reduces comparability among different entities’ financial statements. They would like advice on several transactions where they currently use fair value measurement as they have heard that the introduction of FRS 113 Fair Value Measurement, while not interfering with the scope of fair

value measurement, will reduce the extent of any diversity and inconsistency. (a) Yanong owns several farms and also owns a division which sells agricultural vehicles. It is considering selling this agricultural retail division and wishes to

measure the fair value of the inventory of vehicles for the purpose of the sale. Three markets currently exist for the vehicles. Yanong has transacted regularly in all three markets. At 30 April 2015, Yanong wishes to find the fair value of 150 new

vehicles, which are identical. The current volume and prices in the three markets are as follows: Market

Sales price –

per vehicle $

Historical

volume – vehicles sold by Yanong

Total volume

of vehicles sold in market

Transaction

costs - per vehicle

$

Transport

cost to the market – per vehicle

$

Europe Asia

Africa

40,000 38,000

34,000

6,000 2,500

1,500

150,000 750,000

100,000

500 400

300

400 700

600

Yanong wishes to value the vehicles at $39,100 per vehicle as these are the highest net proceeds per vehicle, and Europe is the largest market for Yanong’s product. Yanong would like advice as to whether this valuation would be acceptable under FRS 113 Fair Value Measurement. (6 marks)

Required:

Advise Yanong on how the above transactions should be dealt with in its financial statements with reference to relevant Singapore Financial Reporting Standards.

Note: Ignore any deferred tax implications of the transactions above.


FRS 1 AND FRS 113

79

FRS 113 (Dec 2012 Q4) Modified (a) The International Accounting Standards Board has recently completed a joint project with the Financial Accounting Standards Board (FASB) on fair value

measurement by issuing IFRS 13 Fair Value Measurement. This was issued by the Accounting Standards Council (ASC) in Singapore as FRS 113. FRS 113 defines fair value, establishes a framework for measuring fair value and requires significant disclosures relating to fair value measurement.

The ASC wanted to enhance the guidance available for assessing fair value in order that users could better gauge the valuation techniques and inputs used to measure fair value. There are no new requirements as to when fair value accounting is

required, but the FRS gives guidance regarding fair value measurements in existing standards. Fair value measurements are categorised into a three-level hierarchy, based on the type of inputs to the valuation techniques used. However, the

guidance in FRS 113 does not apply to transactions dealt with by certain specific standards. Required:

(i) Discuss the main principles of fair value measurement as set out in FRS 113. (7 marks)

(ii) Describe the three-level hierarchy for fair value measurements used

in FRS 113. (6 marks) (b) Jayach, a public limited company, is reviewing the fair valuation of certain

assets and liabilities in light of the introduction of FRS 113. It carries an asset that is traded in different markets and is uncertain as to which valuation to use. The asset has to be valued at fair value under Financial Reporting

Standards. Jayach currently only buys and sells the asset in the Australasian market. The data relating to the asset are set out below: Year to 30 November 2012 Asian

Market European Market

Australasian Market

Volume of market – units Price Transport costs of entering the market Transaction costs

4 million $19 $2 $1

2 million $16 $2 $2

1 million $22 $3 $2

Additionally, Jayach had acquired an entity on 30 November 2012 and is required to fair value a decommissioning liability. The entity has to decommission a mine at the end of its useful life, which is in three years’ time. Jayach has determined that it will use a valuation technique to measure the fair value of the liability. If Jayach

were allowed to transfer the liability to another market participant, then the following data would be used.

Input Labour and material cost Overhead Third party mark-up – industry average

Annual inflation rate Risk adjustment – uncertainty relating to cash flows Risk-free rate of government bonds Entity’s non-performance risk

Amount $2 million 30% of labour & mat cost 20%

5% 6% 4% 2%

Jayach needs advice on how to fair value the liability.


FRS 1 AND FRS 113

80

Required:

Discuss, with relevant computations, how Jayach should fair value the above asset and liability under FRS 113. (10 marks)

Professional marks will be awarded in question 4 for the clarity and quality of the presentation and discussion. (2 marks)

(25 marks)

CHAPTER 2 – ASSETS

87

FRS 16 PROPERTY, PLANT AND EQUIPMENT

Scope

FRS 16 shall be applied in accounting for property, plant and equipment except when another Standard requires or permits a different accounting treatment. This Standard does not apply to:

(a) property, plant and equipment classified as held for sale in accordance with FRS 105 Non-current Assets Held for Sale and Discontinued Operations;

(b) biological assets related to agricultural activity (FRS 41 Agriculture);

(c) the recognition and measurement of exploration and evaluation assets (see FRS 106 Exploration for and Evaluation of Mineral Resources); or

(d) mineral rights and mineral reserves such as oil, natural gas and similar non-regenerative resources.

However, this Standard applies to property, plant and equipment used to develop or maintain the assets described in (b) - (d). Other Standards may require recognition of an item of property, plant and

equipment based on an approach different from that in this Standard. For example, FRS 17 Leases requires an entity to evaluate its recognition of an item of leased property, plant and equipment on the basis of the transfer of risks and rewards.

However, in such cases other aspects of the accounting treatment for these assets, including depreciation, are prescribed by this Standard. An entity shall apply this Standard to property that is being constructed or

developed for future use as investment property but does not yet satisfy the definition of ‘investment property’ in FRS 40 Investment Property. Once the construction or development is complete, the property becomes investment

property and the entity is required to apply FRS 40. FRS 40 also applies to investment property that is being redeveloped for continued future use as investment property. An entity using the cost model for investment property in accordance with FRS 40 shall use the cost model in this Standard.

Recognition

The cost of an item of property, plant and equipment shall be recognised as an asset if, and only if:

(a) it is probable that future economic benefits associated with the item will flow to the entity; and

(b) the cost of the item can be measured reliably.

Items such as spare parts, stand-by equipment and servicing equipment are recognised in accordance with this FRS when they meet the definition of property,

plant and equipment. Otherwise, such items are classified as inventory.

CHAPTER 2 – ASSETS

88

Initial Costs The cost of an item of property, plant and equipment comprises:

(a) its purchase price, including import duties and non-refundable purchase

taxes, after deducting trade discounts and rebates.

(b) any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended

by management.

(c) the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurs either when the item is acquired or as a consequence of having used

the item during a particular period for purposes other than to produce inventories during that period.

The resulting carrying amount of such an asset and related assets is reviewed for

impairment in accordance with FRS 36 Impairment of Assets.

Subsequent Costs An entity does not recognise in the carrying amount of an item of property, plant and equipment the costs of the day-to-day servicing of the item. Rather, these

costs are recognised in profit or loss as incurred. Costs of day-to-day servicing are primarily the costs of labour and consumables, and may include the cost of small parts. The purpose of these expenditures is often described as for the ‘repairs and

maintenance’ of the item of property, plant and equipment. An entity recognises in the carrying amount the cost of replacing part of property, plant and equipment when that cost is incurred if the recognition criteria are met.

The carrying amount of those parts that are replaced is derecognised in accordance with the derecognition provisions of this Standard.

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