SAIPA 2017 IFRS FOR SMEs SLIDES · Presenter details • Anton van Wyk M. Com CA (SA) • Cell: 082-805-1593 • E-mail: [email protected] • Please feel free to add me on LinkedIn

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IFRS FOR SMEs

2017 SEMINAR

Presented by:

Anton van Wyk M. Com CA (SA)

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Presenter details

• Anton van Wyk M. Com CA (SA)

• Cell: 082-805-1593

• E-mail: [email protected]

• Please feel free to add me on LinkedIn for further communication and course information

Welcome and agenda for the morning

• Welcome to the 2017 IFRS for SMEs seminar

• Agenda for the half-day seminar Estimated duration

• Provisions and contingencies (S21) 1 hour

• Financial instruments (S11, S12 & S22) 1.5 hours

• Foreign currency translation (S30) 30 mins

• Accounting policies, estimates and errors (S10) 30 mins

• Events after the end of the reporting period (S32) 15 mins

• Related party disclosures (S33) 15 mins

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Provisions and contingencies

Section 21 of the IFRS for SMEs

What is a liability?

• A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits

• A present obligation exists when an entity has no realistic alternative but to settlethe obligation

• Present obligations can be

• Legal

• Binding contract/agreement

• Statutory requirements (laws/acts)

• Constructive

• Derives from an entity’s actions ACTION REACTION

Restructuring provisions

• Separate rules exist!• A restructuring is a programme that is planned and controlled by management and

materially changes either the scope of a business undertaken by an entity or the manner in which that business is conducted.

• An entity recognises a restructuring provision ONLY when it has a legal or constructiveobligation at the reporting date, to carry out the restructuring.

• A constructive obligation for restructuring only arises when an entity:• Has a detailed formal plan for the restructuring identifying at least:

• The business or part of business concerned;• The principal locations affected;• The location, function and approximate number of employees who will be compensated

for terminating their services;• The expenditures that will be undertaken; and• When the plan will be implemented; AND

• Has raised a valid expectation in those affected that it will carry out the restructuring by starting to implement that plan or announcing its main features to those affected by it.

Case study 1

• On 22 February 2017, Mr. Jones, an employee of ABC (Pty) Ltd, slipped on a wet floor and broke his leg while at work. He instituted a legal claim against ABC (Pty) Ltd for R100 000 to cover alleged medical costs on 15 March 2017, two weeks after the financial year-end of the company. On 20 March 2017, ABC (Pty) Ltd instituted a counterclaim for R100 000 against Cleaning (Pty) Ltd, the cleaning company responsible for cleaning the premises of ABC (Pty) Ltd, alleging that they had not put up proper signage indicating that the floor was wet, resulting in the fall of Mr. Jones. The financial statements were authorised for issue on 30 April 2017, at which time the legal claim was still unresolved.

• Accident Year-end Jones claim ABC claim AFS issued22/2/17 28/2/17 15/3/17 20/3/17 30/4/17

Does a present obligation exist?

Present Obligation?

YES NO UNCERTAIN

Apply recognition Disclose CL or leave Does a “deemed’’criteria: present obligation� Probable that benefits will flow out? exist? Probable?� Amount can be reliably measured?

NO YESBoth YES? Both not YES?

Recognise Disclose CL or leaveliab/provision

Application to case study 1

• It is clear that there is uncertainty about whether a present obligation exists for ABC (Pty) Ltd.

• ABC (Pty) Ltd considers whether a “deemed” present obligation exists by consulting their legal advisers.

• If the legal advisers are of the opinion that it is probable (i.e. more likely than not) that ABC (Pty) Ltd has a present obligation to Mr. Jones, ABC (Pty) Ltd has a deemed present obligation and will continue to assess the recognition criteria:• Is it probable that money will flow from ABC (Pty) Ltd – remember: not all parties with present

obligations are found guilty in court…• Can the amount of the claim be reliably measured or estimated by the legal advisers?

• If the legal advisers do not hold the opinion that ABC (Pty) Ltd has a deemed present obligation, a contingent liability is disclosed in the notes to the financial statements at 28 February 2017.

• Assume the legal advisers’ professional opinion to be that ABC (Pty) Ltd: • Has a deemed present obligation (i.e. they should have ensured that a sign was put up);• Will be found guilty by the judge; and• Will have to pay an amount of R80 000 to Mr. Jones to reimburse him for his actual medical costs.

• RESULT: ABC (Pty) Ltd will recognise a provision for legal claim to the amount of R80 000 at their financial year-end (28 February 2017). The addressed uncertainty relates to the amount of the claim.

Application to case study 1 (cont’d)

• Counterclaim?• Represents an asset to ABC (Pty) Ltd, and is therefore not dealt with in terms of

Section 21 of IFRS for SME’s• Assets are recognised when they meet the recognition criteria:

• Probable that future economic benefits will flow to the entity; and• The amount can be measured/estimated reliably.

• HOWEVER: Assets arising out of uncertainty (i.e. contingent assets), can only be recognised (i.e. become assets) when it is VIRTUALLY certain that future economic benefits will flow to the entity (e.g. when an insurance company acknowledges a claim and states that it intends to settle, or when prior case law dictates how a judge is most likely to rule in terms of a court case etc.).

• RESULT: ABC (Pty) Ltd will disclose the counterclaim in their financial statements (notes) at 28 February 2017, until such time that payment of their claim becomes virtually certain, at which stage a debtor will be recognised.

Case study 2

• Company X (Pty) Ltd pollutes the environment by means of smoke released by their factories’ chimneys. During the current financial year, legislation became effective that all air-polluting entities must fit smoke filters to their factories with immediate effect. The cost of such filters for X (Pty) Ltd will be R5 million. The legislation determines that companies in breach of law will be fined R1 million when identified. By 28 February 2017, the financial year-end of X (Pty) Ltd, the company had not fitted smoke filters and have not been fined for their neglect either. The company’s luck unfortunately ran out and they were found and fined R1 million for air pollution on 20 March 2017. The financial statements were authorised for issue on 30 April 2017.

• Will a liability/provision be recognised, or a contingent liability disclosed or nothing be done in the financial statements of X (Pty) Ltd as at 28 February 2017?

Avoidance test

• Only those obligations that exist INDEPENDENTLY from the future actions of an entity, may be recognised as liabilities

• Therefore: CAN THE OBLIGATION BE AVOIDED by the entity acting in a certain way, or not acting in a certain way, as at a specified date (usually year-end)?

• If the obligation cannot be avoided in any realistic way, the entity is presently obligated

• If the obligation can be avoided in a realistic way, the entity is not (yet) presently obligated

• Statutory obligations are often a good example of the risk of incorrect recognition


• At financial year-end of X (Pty) Ltd, the company can avoid the settlement of the following statutory obligations, as follows:

• The obligation to fit smoke filters of R5 million• X (Pty) Ltd can stop polluting the air by changing their activities• X (Pty) Ltd can sell their factory• X (Pty) Ltd can close their business entirely

• The obligation to pay a fine of R1 million• X (Pty) Ltd can fit smoke filters before getting fined• X (Pty) Ltd can stop polluting the air by changing their activities• X (Pty) Ltd can sell their factory• X (Pty) Ltd can close their business entirely

• It is therefore clear that X (Pty) Ltd has no present obligation in respect of the above two statutory obligations and will not recognise any amount as a liability or a provision

• X (Pty) Ltd is technically required to disclose a contingent liability in respect of the above two statutory obligations in the notes to the financial statements

• Prejudicial disclosure?• Non-compliance with legislation is an audit issue?

Case study 3

• Mr. X purchases a ticket for R1 800 from South African Airways (SAA) on 21 August 2017 to fly from OR Tambo International Airport to Cape Town International Airport on 22 December 2017. He pays for the ticket with his credit card. The terms and conditions on the ticket clearly state that the ticket is non-refundable.

• A similar ticket, if purchased on the date of the flight, would have cost Mr. X R2 100.

• Ignore VAT.

• Required:

• How and when should SAA recognise and measure the above sales transaction in their financial accounting records on the relevant dates?

IFRS 15 Revenue from Contracts with Customers• IFRS 15 released by IASB

• Effective date 1 January 2017, but earlier adoption permitted

• Moves away from earnings process, and follows an asset/liability approach

• Definition of liability therefore very important for revenue recognition

• Revenue only recognised to the extent that liability is extinguished

• Steps per IFRS:• Identify the contract that will generate the revenue• Determine the relevant underlying performance obligations in the contract• Determine the contract price• Assign the contract price to each performance obligation based on fair value• As the performance obligation is extinguished, the revenue is recognised


• When the ticket is sold, SAA has a performance obligation to fly Mr. X to Cape Town from Johannesburg on 22 December 2017. They have however been paid and therefore the cash payment was received in advance.

• SAA will only be able to recognise the money received as revenue once the flight has been completed.

• What about the terms and conditions stating that the ticket is non-refundable?• Journal entries for SAA:

• 21 August 2017

• Dr Bank 1 800

• Cr Income received in advance (F/P) 1 800

• 22 December 2017

• Dr Income received in advance (F/P) 1 800

• Dr Interest expense (P/L) 400

• Cr Revenue (P/L) 2 200

Provisions and contingencies

• Section 21 of the IFRS for SME’s• Scope

• Applies to all provisions, contingent liabilities and contingent assets

• Including:

• Provisions relating to leases (only in respect of operating leases that have become onerous)

• Provisions relating to construction contracts

• Provisions relating to employee benefit obligations

• Provisions relating to income tax

• The liability elements of the above 4 items are dealt with in own sections in the IFRS for SME’s

3 Tiers of Liabilities

• Outright liabilities – RECOGNISED

• No uncertainty in respect of present obligation

• No uncertainty in respect of timing or amount

• Provisions – RECOGNISED

• No uncertainty in respect of present obligation

• (Addressed) uncertainty in respect of timing or amount

• Contingent liabilities – DISCLOSED OR LEFT, NEVER RECOGNISED

• Uncertainty in respect of present obligation

• (Unaddressed) uncertainty in respect of timing or amount

Provisions

• A provision is a liability of (addressed) uncertain timing or amount

• Recognised only when:

• Entity has an obligation at the reporting date as a result of a past event;

• It is probable (i.e. more likely than not) that the entity will be required to transfer economic benefits in settlement; and

• The amount of the obligation can be estimated reliably.

Changes in this amount are therefore

regarded “changes in estimates"!

Case study 4

• Company A Ltd is a public non-listed entity. Their annual audit takes place within two months after their year-end. No interim audit is performed. The annual audit fee increases only by inflation (6% per annum) and was R1 million for the previous year.

• The chief financial officer (CFO) of Y Ltd has asked your opinion on whether a provision for audit fees should actually be recognised by the company at year-end seeing that none of the audit work has been performed by the auditors by year-end.

• Required:

• Provide your opinion on the abovementioned question of the CFO of Y Ltd.

• Assume Y (Pty) Ltd is a private company instead, with a public interest score of 68 and is owner-managed. Would your answer in respect of the above, differ? And if so, how?

Past (obligating) event

• Very important to search for the correct obligation-creating event for each liability and provision

• Which event creates the obligation for the entity?

• Is the event a PAST event? What does that mean?

• Past events versus events after the end of the reporting period (“post-balance sheet events”)


• Y Ltd is a public non-listed entity that has to be audited in terms of the Companies Act of 2008 (i.e. legal obligation)

• The company has no realistic alternative but to be audited and to settle the fee of the audit

• The past obligating event of the company is the trading of the company which necessitates (triggers) the audit

• The provision for audit fees survives the avoidance test, as the company will have to be audited and there is nothing that can be done to avoid that (even in liquidation, an audit will be performed) = legal obligation

• It would be appropriate for Y Ltd to recognise a provision for audit fees


• Y (Pty) Ltd is a private company that is owner-managed with a PIS of less than 100

• The Companies Act of 2008 does not require for such a company to be audited – there is therefore no legal obligation to be audited

• How to decide?• Does the MOI require an audit?

• Yes: A provision for audit fees should be recognised• No: No provision for audit fees should be recognised

• A case can be made that Y (Pty) Ltd has a constructive obligation to be audited based on the fact that their past behaviour (i.e. electing to be audited since 2008) has created a valid expectation in those affected (the auditors) that the company will act in a certain way (i.e. be audited and pay for the audit)

• Should such a liability be a provision, or an outright liability? Where is the uncertainty?

• What about the matching concept? Shouldn’t the cost of an audit be matched to the income statement of the period being audited instead of in the next financial year?

• Some argue that the provision is recognised based on the principle of an onerous contract ☺

Case study 5

• Company G (Pty) Ltd applies the IFRS for SME’s in their annual financial statements. The company leases its head office building in terms of an operating lease at R100 000 per month. The company decided on 28 February 2017 (their financial year-end) to vacate the current building and move their head office to another building in a better location. The lease contract can be cancelled, which would incur G (Pty) Ltd a cancellation penalty of R1 million, or G (Pty) Ltd can sub-lease the building to another tenant at R80 000 per month for the remainder of the operating lease contract. There are 36 months left on the lease contract as at the financial year-end of the company.

• Required:

• What would the journal entries be in terms of the above information to comply with the requirements of the IFRS for SME’s as at 28 February 2017?

• Assume a nominal post-tax discount rate of 7.2% per annum

Onerous contracts

• An onerous contract is a contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it.

• If an entity has a contract that is onerous, the present obligation under the contract shall be recognised and measured as a provision.

• Many contracts (for example, some routine purchase orders) can be cancelled without paying compensation to the other party, and therefore there is no obligation. Other contracts establish both rights and obligations for each of the contracting parties. Where events make such a contract onerous, the contract falls within the scope of this Standard and a liability exists which is recognised. Executory contracts that are not onerous fall outside the scope of this Standard.

• The unavoidable costs under a contract reflect the least net cost of exiting from the contract, which is the lower of the cost of fulfilling it and any compensation or penalties arising from failure to fulfil it.

• Before a separate provision for an onerous contract is established, an entity recognises any impairment loss that has occurred on assets dedicated to that contract.


• The least net cost of exiting the contract needs to be calculated:

• Cost of fulfilment:

• R100 000 – R80 000 = R20 000 per month excess

• Discounted at 10% per annum for 36 months

• PV = R619 825

• Cancellation penalty:

• R1 million

• Least net cost of exiting the contract shall be provided, i.e. R619 825


• Journal entries at 28 February 2017

• Dr Operating lease expense (P/L) 619 825 �

• Cr Provision for onerous contract (F/P) 619 825

• Journal entries at 28 February 2018 (assume building is sub-leased)

• Dr Operating lease expense (P/L) 1 200 000

• Cr Bank 1 200 000

• Dr Bank 960 000

• Cr Rental income (P/L) 960 000

• Dr Interest on onerous contract (P/L) 53 592

• Cr Provision for onerous contract (F/P) 53 592

• Dr Provision for onerous contract (F/P) 240 000

• Cr Operating lease expense (P/L) 240 000

Executory contracts

• What is an “executory contract”?

• Both parties have not performed at all OR both parties have performed to the same extent

• Executory contracts do not contain liability elements

• Examples:

• Operating lease instalments not in arrears = executory contract (both parties have performed to the same extent)

• Operating lease instalments in arrears = non-executory contract (one party (lessor) has outperformed the other (lessee) and lessee therefore incurs liability

• Valuable test in practice!

Measurement of provisions

• Initial measurement

• PV of expected future cost of settling the obligation (if effect of time value of money is material)

• Gains from the expected disposal of assets must be excluded from the measurement of a provision

• Reimbursement from third parties, for settling the provision

• Disclosed as contingent liability in notes to AFS

• Recognised as asset only when virtually certain to occur

• Amount recognised for reimbursement is limited to amount of provision

• SoFP: Asset and provision presented separately!

• SoCI: Expense and reimbursement may be offset and presented net

• Debit side of provision is an expense, unless an asset is more appropriate (e.g. IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities)

Case study 6

• Company X (Pty) Ltd owns plant with a cost price of R50 million (excl. VAT). The expected future cost to dismantle the plant after 20 years is R10 million (excl. VAT). An appropriate nominal pre-tax discount rate is 10% per annum. The plant is depreciated over 20 years and there is no residual value. Plant is not revalued in terms of the IFRS for SME’s.

• Calculations:

• PV of R10 million at 10% p.a. for 20 years = R1 486 436

• Journal to recognise plant at initial recognition:

• Dr Plant 50 000 000

• Cr Bank/Creditors/LTL 50 000 000

• Dr Plant 1 486 436

• Cr Provision for dismantling (F/P) 1 486 436

Case study 6 (cont’d)

• Assume that for year 1, the estimates remain unchanged.• Journal entries:

• Dr Interest expense (P/L) 148 644

• Cr Provision for dismantling (F/P) 148 644

• Assume for year 2, that the discount rate changes from 10% p.a. to 9% p.a. on the first day of the year. New PV = R1 944 897

• Journal entries:

• 1st day of Year 2

• Dr Plant (R1 944 897 – R1 635 080) 309 817


• End of Year 2



Measurement of provisions (cont’d)

• Subsequent measurement

• Only those expenditures for which the provision was originally recognised, may be charged against a provision

• Provisions are estimates, and are therefore reviewed at each reporting date

• Changes in estimates are recognised in profit or loss, unless capitalised to assets per IFRIC 1

• Where provisions are measured at present value, the unwinding of the effect of discounting shall be recognised as finance cost in profit or loss

Disclosures relating to provisions

• For each class of provision, the following is disclosed in the notes to the AFS:

• A reconciliation showing:

• The CA at the beginning and end of the period

• Additions during the period (including adjustments due to changes in estimates)

• Amounts charged against the provision during the period

• Unused amounts reversed during the period

• Brief description of the nature of the obligation and the expected amount and timing of any resulting payments

• Indication of the uncertainties about the amount or timing of those outflows

• The amount of any expected reimbursement (stating which amount has been recognised as an asset for that reimbursement)

• Comparative information for prior periods is not required.

Disclosure of contingent liabilities

• Only is the possibility of outflow of resources is not remote

• For each class of contingent liability, the following:

• A brief description of the nature of the contingent liability

• An estimate of its financial effect (if practicable)

• An indication of the uncertainties relating to the amount or timing of the outflow (if practicable)

• The possibility of any reimbursement (if possible)

• Where disclosure is ever impracticable, that fact must be disclosed in the notes to the AFS as well

Disclosure of contingent assets

• Where assets arise out of uncertainty and likelihood of inflow of economic benefits is less than virtually certain, the following is disclosed:

• A description of the nature of the contingent assets at the end of the reporting period

• An estimate of the financial effect (only if practicable without undue cost or effort)

• Where disclosure is ever impracticable, that fact must be disclosed in the notes to the AFS as well

Financial instruments

Sections 11, 12 and 22 of the IFRS for SMEs

Sections in the IFRS for SMEs

• Section 11: Basic financial instruments

• Section 12: Other financial instruments issues

• Section 22: Liabilities and equity

Overview of main areas in s11

• Scope• Section 11 versus section 12?• Accounting policy choice (IFRS for SMEs versus full IFRSs (IAS 39))• Basic financial instruments

• Initial recognition• Initial measurement• Subsequent measurement

• Amortised cost and effective interest method• Impairment of financial instruments measured at cost or amortised cost

• Recognition• Measurement• Reversal

• Fair value• Valuation technique

• Derecognition of financial assets and financial liabilities• Disclosures

Examples of financial instruments

• WITHIN THE SCOPE OF SECTION 11 OF THE IFRS FOR SMEs• Cash• Demand and fixed term deposits (entity is the depositor)• Commercial paper and commercial bills held• Accounts receivable• Accounts payable• Loans receivable• Loans payable• Bonds and similar debt instruments• Investments in non-convertible preference shares• Investments in non-puttable ordinary shares and preference shares• Commitments to receive a loan, where the commitment cannot be settled net in

cash

Scope of Sections 11 and 12

• S11 and s12 together deal with recognition (including derecognition), measurement and disclosure of financial instruments

SECTION 11 SECTION 12

Basic financial instruments More complex financial instruments

Relevant to ALL entities Must be considered to ensure correctwith financial instruments inclusion or exclusion from scope

Accounting policy choice

• An entity with financial instruments, shall CHOOSE to apply either:

• Sections 11 and 12 in IFRS for SMEs in FULL; or

• IAS 39 Financial Instruments: Recognition and Measurement (in full IFRSs)plus the disclosure requirements of Sections 11 and 12 of IFRS for SMEs

• The above choice is an accounting policy choice!

• Section 10 Accounting Policies, Estimates and Errors in IFRS for SMEs will apply to changes in accounting policies! Make sure a change made qualifies as a change in accounting policy!

Specific scope exclusions

• The following do not fall within the scope of section 11:

• Investments in subsidiaries, associates and joint ventures

• Financial instruments that meet the definition of equity (i.e. entity’s own equity)

• Leases

• Derecognition per s11 will apply to lease receivables and lease payables

• S12 may also apply to some leases

• Employers’ rights and obligations under employee benefit plans

What are basic FI’s? Section 11!

• (a) Cash

• (b) A debt instrument that meets the prescribed conditions (see next slide)

• (c) A commitment to receive a loan that:

• (i) cannot be settled NET in cash; and

• (ii) when the commitment is executed, is expected to meet the prescribed conditions

• (d) An investment in non-convertible preference shares and non-puttable ordinary shares or preference shares

What are the prescribed conditions?

• A debt instrument that satisfies (a) to (d) below, shall be accounted for i.t.o. s11:

• (a) Returns to the holder are• (i) a fixed amount• (ii) a fixed rate of return over the life of the instrument• (iii) a variable return that, throughout the life of the instrument, is equal to a

single referenced quoted and observable interest rate (such as LIBOR or prime)• (iv) A combination of (ii) and (iii), provided that both rates are positive

• (b) No contractual provision that determines that the holder can lose the principal amount or any interest attributable to current/prior periods (subordination agreement of debt instrument is not an example of this)

• (c) Contractual provisions that permit issuer to prepay or holder to put back before maturity are not contingent on future events

• (d) No conditional returns or repayment provisions except for the variable rate return in (a) (iii) and prepayment provisions in (c) above.

Examples – satisfy

• Debt instruments that normally satisfy the prescribed conditions:

• Trade receivables/trade payables

• Loans from banks and other 3rd parties

• Accounts payable in foreign currency

• Loans to/from subsidiaries and associates that are due on demand

• A debt instrument that would become immediately receivable if the issuer defaults on an interest or principal payment

Examples – don’t satisfy

• Debt instruments that normally don’t satisfy the prescribed conditions:

• An investment in another entity’s equity instruments other than non-convertible preference shares or non-puttable ordinary or preference shares

• Interest rate swap that returns a cash flow that is positive or negative

• Forward commitment to purchase a commodity or financial instrument that is capable of being cash-settled and that, on settlement, could have positive or negative cash flow (positive and negative cash flows not acceptable)

• Options and forward contracts (returns not fixed)

• Investments in convertible debt (return to the holder can vary with price of issuer’s equity shares)

• Loan receivable from 3rd party that gives the 3rd party the right or obligation to prepay IF the applicable tax/accounting requirements change (contingent on future events)

What is a financial instrument (FI)?

• A contract (NB)

• That gives rise to a financial asset of one entity and

• A financial liability or equity instrument of another entity

Initial recognition – when?

• Financial assets (FA’s) or financial liabilities (FL’s) shall be initially recognised ONLY when the entity becomes a party to the contractual provisions of the instrument

• Legal form prevails…

Initial measurement

• When a FA or FL is recognised initially (i.e. at FIRST recognition), the entity shall measure the FI at its transaction price

• Transaction costs are usually included in the transaction price…

• If the FA or FL is subsequently measured at fair value through profit or loss, the transaction costs are expensed at initial recognition through profit or loss

• If the arrangement/agreement, in effect, constitutes a financing transaction, the FA or FL shall be measured at the present value of the future payments discounted at a market rate of interest for similar debt

• This is normally evident in:

• Interest-free financing

• Financing below market-related terms

Thoughts on initial measurement

• Initial measurement is EXTREMELY interesting

• Goal is to ensure initial measurement at an appropriate amount which is market-related

• If transaction is based on ‘arm’s length’ terms, the transaction price will approximate the fair value of the financial instrument (FA or FL)

• Therefore always compare transaction terms with market terms!!

Possibility 1: Sales/purchase transactions with ‘implicit’ financing element

Possibility 2: Other debt instruments – interest below market-related rates

Examples of initial recognition

• Company GHI (Pty) Ltd obtains a long-term loan from ZZZ Bank of R3 million. Interest of 9.5% per annum (nominal and pre-tax) is compounded and paid annually. The loan’s capital will be paid back at the end of the 5 year term of the agreement. Similar loans bear interest at 9.5% per annum, nominal and pre-tax

• It is evident that there is no sign of:

• An ‘implicit’ financing element (this is not a sales/purchase transaction)

• Interest below market-related rates

• The loan will therefore be initially measured by GHI (Pty) Ltd at the transaction price of R3 million (Test: Discounting future cash flows (interest and capital) will return a present value of R3 million, as the loan’s terms are the same as the market-related terms)

Examples of initial measurement (2)

• Parent A grants a loan of R2 million to subsidiary B. The loan is repayable at the end of 5 years and bears nominal interest of 5% per annum, pre-tax. Interest is compounded and paid annually. Loans to entities with a similar risk profile to that of entity B bear market-related interest at 10% per annum, nominal and pre-tax

• It is evident that there is an effective financing transaction present as the subsidiary and the parent are related parties and the interest rate on the loan is 5% below the market interest rate

• The loan will be initially measured at the present value of the expected cash flows, as it constitutes an effective financing arrangement

• FV = R2 million (redemption amount)• Pmt = 5% x R2 million = R100 000 interest paid annually• I/Yr = 10% (market-related)• N = 5 (term of loan in years)• P/Yr = 1 (compounded annually)• Thus PV = R1 620 921 (rounded)

• The loan will be initially measured at R1 620 921


• Purchase or sales transaction = risk of ‘implicit’ financing element!

• Company A sells goods to the value of R25 000 (excluding VAT) to customer X on credit. Customer X is granted 90 days, which is the standard credit period for all customers, to settle the debt. The prime rate of interest is 10% per annum, nominal and pre-tax

• The debtor (financial asset) that is recognised by company A is measured initiallyat the transaction price. As the debt is within the normal credit terms of the company and also short-term (3 months), the amount will be left undiscounted. There is no evidence of an ‘implicit’ financing element present…

• The trade debtor will be initially measured at R28 500 (including VAT) – this is the transaction price!


• Purchase or sales transaction = risk of ‘implicit’ financing element!

• Company B sells goods to Customer Z for R2 million on credit and charges no interest. Customer Z is granted 12 months to settle the debt. The credit terms exceed the normal credit terms of company B. The applicable interest rate is 10% per annum, nominal and pre-tax in respect of similar customers

• The debtor (financial asset) that is recognised by company B is measured initiallyat the present value of the expected cash flows as it constitutes an effectivefinancing arrangement (there is an ‘implicit’ financing element present)

• The trade debtor will be initially measured at the current cash price of the item, or if that price is not available, the present value of the future cash flows discounted at a market-related interest rate (e.g. 10% per annum)

Initial measurement – summary

FI terms market-related?

YES NO

Measure ‘Implicit’ financing Otherinitially element in sales/ debt

at transaction purchase transaction instrumentprice

Measure at cash price

If not available: Measure initiallyat PV of futurecash flows usingI% of similar debt

Subsequent measurement of FI’s

• Debt instruments that satisfy prescribed conditions

• Amortised cost, using the effective interest method

• Debt instruments classified as current assets or current liabilities

• Undiscounted amount of cash or other consideration expected to be paid or received, net of impairment where appropriate

• Unless the arrangement constitutes a financing transaction: PV of future payments discounted at a market-related interest rate for similar debt instrument

• Commitments to receive a loan: at cost, which could be zero

• Investments in non-convertible preference shares or non-puttable ordinary or preference shares:

• If traded publicly or fair value can be reliably measured: @FVTPL;

• Otherwise at cost less impairment

Effective interest method?

• Affected by discounts, premiums and transaction costs

• The nominal interest rate is not (necessarily) the interest recognised in profit or loss…

• Effective interest takes into account ALLOCATION of items such as transaction costs, discounts/premiums at acquisition, discounts/premiums at redemption and effectively ‘smoothes’ them over the term of the instrument

• This is also why the prescribed conditions are important in respect of limiting uncertainty and contingencies and fixing returns (rates and amounts)

Example: amortised cost

• Company DEF (Pty) Ltd issues bonds and receives R2 million in cash on 1/1/2014. The bonds bear interest at 12% per annum (nominal and pre-tax) and are redeemable at R2.2 million (i.e. R200 000 premium) at maturity date, being 31/12/2019 (i.e. 5 years). Interest receivable is compounded and received annually at the end of the year. Similar bonds in the market bear interest at 12% per annum, nominal and pre-tax. Transaction costs amount to R50 000 and are paid in cash on 1/1/2014.

• The bonds are debt instruments that satisfy prescribed conditions:

• Returns: fixed amount, fixed rate

• No contractual provision that determines that company DEF can lose principle or interest for any current or prior period(s)

• No contingent prepayment provisions for holder or issuer

• No conditional returns (not even interest rate is variable)

• Bond will be subsequently measured at amortised cost, using effective interest method

Example (continued)

• The effective interest rate must be calculated first

• PV = R2 million less R50 000 transaction costs = R1 950 000 net inflow

• N = 5 years

• P/Yr = 1 (compounded once per annum)

• Pmt = (R240 000) (i.e. R2 million x 12%)

• FV = (R2.2 million) (redemption amount)

• Thus: effective I% = 14.24%

• Why not 12%?

• Transaction costs reduce net cash inflow by R50 000

• Redemption premium not reflected in the 12% annual interest

Example (continued)

• Journal entries1/1/2014 (initial recognition and measurement)Dr Bank 2 000 000Cr Bond liability 2 000 000(recognise bond issued)Dr Bond liability 50 000Cr Bank 50 000(capitalise transaction costs to bond)

31/12/2014 (subsequent measurement)Dr Interest expense (P/L) 277 680Cr Bank 240 000Cr Bond liability (bal. figure) 37 680(recognise interest at effective rate of 14.24% p.a. on R1.95 million)

Example (continued)

• Journal entries31/12/2015Dr Interest expense (P/L) 283 046Cr Bank 240 000Cr Bond liability (bal. figure) 43 046(recognise interest at effective rate of 14.24% p.a.)31/12/2016Dr Interest expense (P/L) 289 175Cr Bank 240 000Cr Bond liability (bal. figure) 49 175(recognise interest at effective rate of 14.24% p.a.)31/12/2017Dr Interest expense (P/L) 296 178Cr Bank 240 000Cr Bond liability (bal. figure) 56 178(recognise interest at effective rate of 14.24% p.a.)31/12/2018Dr Interest expense (P/L) 304 178Cr Bank 240 000Cr Bond liability (bal. figure) 64 178(recognise interest at effective rate of 14.24% p.a.)Dr Bond liability 2 200 000Cr Bank 2 200 000(settlement of bond liability)

Impairment testing of FA’s

• At end of each reporting period – entity to assess whether objective evidence of impairment of FA’s (measured at cost or amortised cost) exists

• If so, recognise impairment loss in profit or loss

• What is objective evidence of impairment?

• Significant financial difficulty or issuer or obligor

• Breach of contract, such as default in interest or principal payments

• The creditor (based on debtor’s financial difficulty) granting concession to debtor that the creditor wouldn’t otherwise consider

• When it becomes probable that debtor will enter bankruptcy or other financial reorganisation

• Observable data indicating measurable decrease in future cash flows from a group of FA’s (even though decrease cannot as yet be allocated to individual FA’s within the group) (e.g. adverse national or local economic conditions or adverse changes in industry conditions)

• Significant adverse changes in technological, market, economic or legal environment in which entity operates

Impairment testing of FA’s (2)

• FA’s to be tested individually for impairment

• Investments in equity instruments of another entity

• Other FA’s that are individually significant

• Remaining FA’s to be tested either individually or grouped based on similar credit characteristics

• Professional judgement to be used


• How is the impairment loss measured?

• FA’s measured at amortised cost:

• IL = CA of FA less PV of estimated cash flows discounted at the FA’s original effective interest rate

• FA’s measured at cost less impairment:

• IL = CA of FA less best estimate of amount receivable should the FA be sold at reporting date (amount is an approximation, could be zero)


• Reversal of impairment loss is allowed/possible

• If the decrease in the impairment loss can be related objectively to an event occurring after the impairment was recognised (e.g. debtor’s credit rating improves)

• The carrying amount of the FA (after reversal of IL) shall NOT exceed the CA of the FA that would have existed had there never been an impairment loss

• Journal entry:

• Dr Financial asset (F/P) XXX

• Cr Reversal of impairment loss (P/L) XXX

Or

• Dr Allowance for impairment (F/P) XXX

• Cr Reversal of impairment loss (P/L) XXX

Example of impairment of FA’s

• Company A (Pty) Ltd invested in bonds for R5 million with a term of 5 years. The bonds bear coupon interest at 10% p.a. (nominal and pre-tax). Similar bonds also bear coupon interest at 10% p.a. (nominal and pre-tax). The bonds will be redeemed at the end of 5 years (31/12/2016) at a premium of 10% on their par value of R5 million. Interest is calculated and paid annually.

• Step 1: Calculate effective rate of the FA

• PV = (R5m) cash outflow

• FV = R5.5m cash inflow at redemption

• N = 5 years

• P/Yr = 1 (compounded annually)

• Pmt = R500 000 (i.e. 10% x R5m)

• Thus I/Yr = 11.587068399%

Example (continued)

• Step 2: Journalise the transaction in the records of Company A (Pty) Ltd

• 1/1/2014• Dr Investment in bonds 5 000 000• Cr Bank 5 000 000

• 31/12/2014• Dr Bank 500 000• Dr Investment in bonds (bal. figure) 79 353• Cr Interest received (P/L) 579 353

• 31/12/2015• Dr Bank 500 000• Dr Investment in bonds (bal. figure) 88 548• Cr Interest received (P/L) 588 548

Example (continued)

• Assume at the end of year 2015, objective evidence exists that the holder of the bonds is experiencing financial difficulty and cannot make further coupon payments for two years (being 2016 and 2017). The coupon payments will then be made at R600 000 for the years ending 2018, 2019 and 2020. The bonds will now be redeemed at R5 million + 10% on their par value on 31/12/2020.

• What is the impairment loss on the bonds?

• Step 1: Calculate the PV of the expected future cash flows as at 31/12/2015

• CF1 and CF2 = 0

• CF3 and CF4 = R600 000

• CF5 = R6.1 million (being R5.5 million + R600 000)

• I/Yr = 11.587068399% (the original effective interest rate!!)

• Thus new PV = R4 344 636

Example (continued)

• Step 2: Calculate the CA of the FA as at 31/12/2015

• R5m (Jnl 1) + R79 353 (Jnl 2) + R88 548 (Jnl 3) = R5 167 901

• Step 3: Compare CA (step 2) to recoverable amount (step 1)

• R5 167 901 – R4 344 636 = R823 265 (impairment loss)

• Journal entry:

• Dr Impairment loss (P/L) 823 265

• Cr Investment in bonds (F/P) 823 265

Or

• Cr Allowance for impairment (F/P) 823 265

• (recognise impairment loss on FA measured at amortised cost)

Example (continued)

• Journal entries for 2016 to 2020 (with revised cash flows)• 31/12/2016 (no cash payment of interest by holder)• Dr Investment in bonds 503 416• Cr Interest received (P/L) 503 416• 31/12/2017 (no cash payment of interest by holder)• Dr Investment in bonds 561 747• Cr Interest received (P/L) 561 747• 31/12/2018 (cash interest payments commence by holder)• Dr Bank 600 000• Dr Investment in bonds 26 837• Cr Interest received (P/L) 626 837• 31/12/2019• Dr Bank 600 000• Dr Investment in bonds 29 947• Cr Interest received (P/L) 629 947• 31/12/2020• Dr Bank 600 000• Dr Investment in bonds 33 417• Cr Interest received (P/L) 633 417• Dr Bank 5 500 000• Cr Investment in bonds 5 500 000

Example (continued)

• Assume on 31/12/2018, objective evidence indicates that the credit rating of the holder of the bonds has improved and the holder can make payment of R750 000 interest for 2019 and 2020 and settle the bonds at a premium of 10% on par value on 31/12/2020. This represents a possible reversal of the impairment loss.

• Step 1: What is the new PV of future cash flows as at 31/12/2018?

• Pmt = R750 000 (given)

• FV = R5.5 million (given)

• I/Yr = 11.587068399% (the original effective interest rate!!)

• N = 2 (i.e. 2019 and 2020)

• P/Yr = 1 (compounded annually)

• Thus PV = R5 691 526 (rounded)

Example (continued)

• Step 2: What is the CA of the FA at 31/12/2018?• R4 344 636 (previous PV of cash flow) + R503 416 (2016) + R561 747 (2017) + R26 837

(2018) = R5 436 636

• Step 3: What would the CA of the FA have been, had there never been an IL?• As at 31/12/2018, the CA of the investment in bonds would have been zero (bonds would

have been settled). The reversal of the impairment loss may therefore not be recognised.

• If it is assumed that the CA of the investment in bonds exceeded R5 691 526 at the date of the reversal of the impairment loss, the reversal of the impairment loss would be done as follows:• R5 691 526 – R5 436 636 = R254 890 (reversal of impairment loss)

• Journal entry:• 31/12/2018• Dr Investment in bonds 254 890Or• Dr Allowance for impairment 254 890• Cr Reversal of impairment loss (P/L) 254 890

FA’s measured at fair value

• Investments in ordinary (equity) shares or preference shares must be measured at fair value, if they are publicly traded or their fair values can be measured reliably

• Fair value hierarchy, to determine fair value, is as follows:

• Quoted price for an identical asset in an active market (usually the current bid price)

• If quoted prices are unavailable, the price of recent transaction for an identical asset (as long as no significant changes have taken place in economic circumstances or no significant time lapse)

• If the market is not active and recent transactions of an identical asset are not a good estimate of fair value, the entity estimates fair value by using a valuation technique

FA’s measured at fair value (2)

• What is a valuation technique?

• Recent arm’s length market transactions for an identical asset between knowledgeable willing parties

• Reference to the fair value of another asset that is substantially the same as the asset being measured

• Discounted cash flow analysis

• Option pricing models

• Other techniques commonly used by market participants to price the asset and technique has been demonstrated to provide reliable estimates of prices obtained in actual market transactions, such techniques may be used

• Use market-inputs as far as possible, rather than entity-inputs…

FA’s measured at fair value (3)

• What if fair value can no longer be reliably measured/estimated?

• At the date that the fair value can no longer be measured/estimated reliably, its carrying amount (as at the last date the asset was reliably measured at fair value) becomes its new cost

• The FA will be measured at cost less impairment, until a reliably measured fair value becomes available again

Derecognition of FA’s

• FA’s shall be derecognised only when:

• The contractual rights to the cash flows from the FA expire or are settled; or

• The entity transfers to another party substantially all of the risks and rewards of ownership of the FA; or

• The entity, despite having retained some significant risks and rewards of ownership, has transferred control of the FA to another party and the other party has the practical ability to sell the FA in its entirety to an unrelated 3rd party and is able to exercise that ability unilaterally and without needing to impose additional restrictions on the transfer. In this case, the entity shall:

• Derecognise the FA; and

• Recognise separately any rights and obligations retained or created in the transfer

Derecognition of FA’s (2)

• If a transfer does NOT result in derecognition of a FA because the entity has retained the significant risks and rewards of ownership of the transferred FA, the entity shall continue to recognise the transferred FA in its entirety, and shall recognise a financial liability for the consideration transferred

• The FA and FL shall NOT be offset

• In subsequent periods, the entity shall recognise any income received on the transferred asset and any expense incurred on the financial liability

Derecognition of FA’s (3)

• If the transferor provides non-cash collateral (e.g. debt or equity instruments) to the transferee, the accounting for the collateral by the two parties depends on whether the transferee has the right to sell or re-pledge the collateral and on whether the transferor has defaulted

• Accounting is as follows:• Transferee has right to sell/re-pledge: transferor reclassifies the FA in the SoFP

(e.g. as loaned asset, pledged equity instruments etc.) separately from other assets• Transferee sells collateral pledged to it: recognise the proceeds from sale, and a

liability measured at fair value for its obligation to return the collateral• Transferor defaults and no longer entitled to redeem collateral: derecognise

collateral and transferee recognises collateral as its own asset initially at fair value, or if it has already sold the collateral, derecognises its obligation to return the collateral

• Thus: transferor continues to recognise the collateral and transferee does NOT recognise collateral UNLESS there is default as in previous point

Derecognition of FL’s

• An entity shall derecognise a FL (or a part of a FL) only when it is extinguished (when the obligation specified in the contract has been discharged, cancelled or expired)

• The entity shall recognise in profit or loss any difference between the CA of the FL (or part of a FL) extinguished or transferred to another party and the consideration paid (including non-cash items transferred or liabilities assumed)

Example: derecognition appropriate

• An entity sells a group of its accounts receivable to a bank at less than their face amount. The entity continues to handle collections from the debtors on behalf of the bank, including sending monthly statements, and the bank pays the entity a market-rate fee for servicing the receivables. The entity is obliged to remit promptly to the bank any and all amounts collected, but it has no obligation to the bank for slow payment or non-payment by the debtors.

• In this case, the entity has transferred to the bank substantially all of the risks and rewards of ownership of the receivables. Accordingly, it removes the receivables from its statement of financial position (derecognises them), and it shows no liability in respect of the proceeds received from the bank. The entity recognises a loss calculated as the difference between the carrying amount of the receivables at the time of sale and the proceeds received from the bank. The entity recognises a liability to the extent that it has collected funds from the debtors but has not yet remitted them to the bank.

Example: derecognition inappropriate

• The facts are the same as the preceding example except that the entity has agreed to buy back from the bank any receivables for which the debtor is in arrears as to principal or interest for more than 120 days.

• In this case, the entity has retained the risk of slow payment or non-payment by the debtors―a significant risk with respect to receivables. Accordingly, the entity does not treat the receivables as having been sold to the bank, and it does not derecognise them.

• Instead, it treats the proceeds from the bank as a loan secured by the receivables.

• The entity continues to recognise the receivables as an asset until they are collected or written off as uncollectible.

Disclosures

• IFRS for SMEs (par. 11.40 to 11.48) apply…

• Disclosures required in respect of:

• Accounting policies for FI’s

• 6 categories of FA’s and FL’s and their amounts (notes or in SoFP)

• Derecognition (i.r.o. transferred FA’s that don’t qualify for derecognition)

• Collateral (when FA’s have been pledged as collateral for liabilities/contingent liabilities)

• Defaults and breaches on loans payable (details, if not remedied)

• Items of income, expense, gains or losses on FI’s (details, amounts etc.)

Section 11: Basic Financial Instruments – UPDATES MAY 2015• The accounting policy choice to account for basic financial instruments in terms of the IFRS for

SMEs or IAS 39 (in full IFRSs), is retained

• Even when IAS 39 is finally superseded by IFRS 9 in full IFRSs, a final version of IAS 39 will be retained for reference i.t.o. the IFRS for SMEs

• Addition of an ‘undue cost or effort exemption’ from the measurement requirements of investments in equity instruments measured at fair value through profit or loss

• Clarification of the scope of section 11 and its interaction with other sections of the IFRS for SMEs (specific scope exclusions clarified)

• Clarification that a bank loan that permits the borrower to terminate the arrangement early, even though the borrower may be required to pay a penalty to compensate the bank for its costs of the borrower terminating the arrangement early would still enable the loan agreement to be treated as a basic financial instrument, given that all the other conditions are still satisfied (this was interpreted before as NOT satisfying the relevant requirement and was included in examples of transactions that would NOT satisfy the requirements to be treated as basic financial instruments)

Section 11: Basic Financial Instruments – UPDATES MAY 2015• Clarification (by means of examples) what ‘effectively constitutes a financing

transaction’

• Payment is deferred beyond normal terms, e.g. providing interest-free credit to a buyer for the sale of goods

• Financed at a rate of interest that is not a market rate, e.g. an interest-free or below market interest rate loan to an employee

• Clarification when measuring fair value (the fair value hierarchy) in a binding sale agreement (i.e. level 2 of the hierarchy), that this is an arm’s length transaction between knowledgeable, willing parties (old definition of fair value i.t.o. full IFRSs is retained here)


• Scope

• Section 11 versus section 12?

• Accounting policy choice (IFRS for SMEs versus full IFRSs (IAS 39))

• More complex financial instruments• Initial recognition• Initial measurement• Subsequent measurement

• Fair value through profit or loss• Impairment of financial instruments measured at cost or amortised cost• Derecognition of financial assets and financial liabilities• “Hedge accounting”• Disclosures

Examples of financial instruments

• WITHIN THE SCOPE OF SECTION 12 OF THE IFRS FOR SMEs• Asset-backed securities (e.g. securitised receivables)• Options• Rights• Warrants• Futures and forward contracts• Interest rate swaps that can be settled net in cash• Designated and qualifying hedging instruments• Commitments to make a loan to another entity• Commitments to receive a loan where the commitment can be settled net in cash

Specific scope exclusions (s12)

• Similar to Section 11• Interests in subsidiaries, associates and joint ventures• Employers’ rights and obligations under employee benefit plans• Leases• FI’s that meet the definition of an entity’s own equity instruments

• Unique to Section 12• FI’s covered by Section 11• Rights under insurance contracts• Contracts for contingent consideration in a business combination

Unique scope considerations (NB)

• Basic principle: contracts to buy or sell a non-financial item (such as PP&E, a commodity, inventory, intangible asset etc.) are EXCLUDED from section 12 as the contracts are not financial instruments

• Exception: Contracts to buy or sell a non-financial item will be INCLUDED in section 12 if the contract can be settled:

• Net in cash or another financial instrument; or

• By exchanging financial instruments as if the contracts were financial instruments;

• Except for: contracts that were entered into and continue to be held for the purpose of the physical receipt or delivery of the non-financial item in accordance with the entity’s expected purchase, sale or usage requirements = these contracts shall be excluded from the scope of section 12

Unique scope considerations (2)

• Example• Company A (Pty) Ltd is the holder of an option to acquire a machine from

Company B (Pty) Ltd at R300 000.

• The option contract is NOT within the scope of section 12 as it is not a financial instrument (reason: machine = PP&E = non-financial item)

• If the option can be settled net in cash (i.e. company A (Pty) Ltd can demand payment of the difference between the market value of the machine and R300 000 at maturity date of the option), the option contract IS within the scope of section 12 as it is now a speculative instrument

• If the option can be settled net in cash, but company A (Pty) Ltd entered into the option and continues to hold the option for the purpose of the physical delivery of the machine in terms of company A (Pty) Ltd’s expected purchase, sale or usage requirements, the option contract is NOT within the scope of section 12 (reason: its purpose is not speculation)

Unique scope considerations (3)

• Section 12 applies to all contracts that impose risks on the buyer or seller that are not typical of contracts to buy or sell tangible items

• For example: this section applies to contracts that could result in a loss to the buyer or seller as a result of contractual terms that are unrelated to changes in the price of the non-financial item, changes in foreign exchange rates or a default by one of the counterparties

• Crux: Be on the lookout for unusual contract terms that can cause unusual losses to the buyer/seller of the non-financial item…

Initial recognition

• Same as section 11

Initial measurement

• FA’s or FL’s shall be initially measured at its fair value, which is normally the transaction price

• Section 11: measure initially at transaction price (look out for unusual interest arrangements, then at PV of future cash flows)

• Section 12:

• Transaction costs shall NOT be included in the initial measurement of FI’s, as the subsequent measurement is at FVTPL

• If payment for an asset is deferred or is financed at a rate of interest that is not a market rate, the entity shall initially measure the asset at the present value of the future payments discounted at a market rate of interest

Subsequent measurement

• At the end of each reporting period, an entity shall measure all FI’s within the scope of section 12 at fair value and recognise changes in fair value in profit or loss, exceptas follows:

• Equity instruments that are not publicly traded and whose fair values cannot be reliably measured (and all contracts linked to such instruments that, if exercised, will result in delivery of such instruments), shall be measured at cost less impairment

• “Amortised cost” does not feature within section 12…

• At the date that the fair value can no longer be measured/estimated reliably, its carrying amount (as at the last date the asset was reliably measured at fair value) becomes its new cost

• The FA will be measured at cost less impairment, until a reliably measured fair value becomes available again

Impairment of FI’s (at cost)


Derecognition of FA’s and FL’s


Hedge accounting

• Special set of rules to account for designated hedging instruments and their hedged items

• Certain requirements have to be met before hedge accounting can take place

• Hedge accounting permits the gain or loss on the hedging instrument and on the hedged item to be recognised in profit or loss at the same time

Requirements for hedge accounting

• ALL of the following criteria must be complied with:

• The entity designates and documents the hedging relationship (risk being hedged, hedged item, hedging instrument is clearly identified)

• The hedged risk is a qualifying hedged risk specified in the IFRS for SMEs

• The hedging instrument is a specified hedging instrument specified in the IFRS for SMEs

• The entity expects the hedging instrument to be highly effective in offsetting the designated hedged risk (“hedge effectiveness” is the degree to which changes in fair value or cash flows of the hedged item that are attributable to the hedged risk, are offset by changes in fair value or cash flows of the hedging instrument)

Qualifying hedged risks

• Interest rate risk of a debt instrument measured at amortised cost (not foreign exchange risk: forex gains or losses on hedged item already in P/L (s30) and forex gains or losses on hedging instrument too = therefore effect of hedge accounting is immaterial)

• Foreign exchange risk OR interest rate risk in a firm commitment or a highly probable forecast transaction

• Price risk of a commodity it holds, or in a firm commitment or highly probable forecast transaction to purchase or sell a commodity

• Foreign exchange risk in a net investment in a foreign operation

Qualifying hedging instruments

• Interest rate swap, foreign currency swap, foreign currency FEC, commodity FEC that is expected to be highly effective in offsetting a qualifying risk that is designated as the hedged risk

• It involves a party external to the reporting entity (i.e. external to the group, segment or individual entity being reported on)

• Its notional amount is equal to the designated amount of the principal/notional amount of the hedged item

• It has a specified maturity date, not later than:

• The maturity date of the hedged item;

• The expected settlement of the commodity purchase or sale commitment; or

• The occurrence of the highly probably forecast transaction being hedged.• It has no prepayment, early termination or extension features

Hedge type 1: fair value hedge

• Fair value hedge hedges the risk of changes in the fair value of:

• recognised financial instruments (e.g. interest rate risk on fixed interest rate loans) or

• commodities held (price risk)

• Examples of hedging instrument used to hedge designated hedged item’s risk:

• Interest rate swap (swap fixed rate for variable interest rate)

• Acquisition of put (“sell”) option on commodities

Hedge type 1: fair value hedge (2)

• Changes in the fair value of FAIR VALUE hedges (hedging instrument), are accounted for in profit or loss and the hedging instrument (e.g. interest rate swap or put option) as an asset or liability in the statement of financial position

• The changes in the fair value of the hedged item are also recognised in profit or loss and an adjustment is made to the carrying amount of the hedged item

• If hedge accounting is discontinued and the hedged item is an asset or liability carried at amortised cost and has not been recognised, any fair value adjustments (gains/losses) recognised as adjustments to the CA of the hedged item are amortised into profit or loss using the effective interest method over the remaining life of the hedged item

Hedge type 1: fair value hedge (3)

• Hedge accounting is discontinued if:

• The hedging instrument expires or is sold or terminated;

• The hedge no longer meets the requirements of hedge accounting; or

• The entity revokes the designation

Hedge type 2: cash flow hedge

• Cash flow hedge hedges the risk of changes in the cash flows of:

• recognised financial instruments (e.g. interest rate risk on variable interest rate loans) or

• firm commitments/highly probable forecast transactions (price risk or foreign exchange risk)

• net investments in a foreign operation (foreign exchange risk)

• Examples of hedging instrument used to hedge designated hedged item’s risk:

• Interest rate swap (swap variable rate for fixed interest rate)

• Foreign currency FEC (on foreign firm commitment or foreign highly probable forecast transactions) to hedge foreign exchange risk

• Commodity FEC (on foreign firm commitment or highly probable forecast transaction) to hedge price risk

• Foreign long-term loan obtained (to hedge forex risk on net investment in foreign operation)

Hedge type 2: cash flow hedge (2)

• Changes in the cash flows of CASH FLOW hedges (hedging instrument), are accounted for in other comprehensive income (OCI) and the hedging instrument (e.g. interest rate swap or forex FEC or commodity FEC) as an asset or liability in the statement of financial position – only the effective portion! The ineffective portion is recognised in profit or loss

• The hedging gain/loss recognised in other comprehensive income shall be reclassified (‘recycled’) to profit or loss when the hedged item is recognised in profit or loss or when the hedging relationship ends

Hedge type 2: cash flow hedge (3)

• Hedge accounting is discontinued if:

• The hedging instrument expires or is sold or terminated;

• The hedge no longer meets the requirements of hedge accounting; or

• The entity revokes the designation

• The forecast transaction (which is the hedged item) is no longer highly probable

Examples of hedge accounting

• Example 1: Foreign firm commitment hedged by fair value hedge

• Company A (Pty) Ltd places a non-cancellable order for inventory on 20 January 2015 to the value of $100 000. The inventory is delivered on 28 February 2015. Company A’s reporting date is 31 March 2015, at which date the foreign creditor is still unsettled and 40% of the inventory acquired in this transaction had been sold. The foreign creditor is settled at 30 April 2015. Company A (Pty) Ltd took out a hedge (foreign exchange FEC) on 20 January 2015 to cover the payment of the creditor on 30 April 2015 at S1 = R9.80. Company A (Pty) Ltd complies with all hedging criteria, except that hedge effectiveness must be assessed on an ongoing basis.

• The spot rates and FEC rates for similar FEC’s than Company A (Pty) Ltd’s FEC, are as follows:

Spot rate FEC rate20 January 2015 $1 = R9.50 $1 = R9.8028 February 2015 $1 = R9.75 $1 = R10.0031 March 2015 $1 = R9.90 $1 = R10.2230 April 2015 $1 = R9.98 $1 = R10.30

Examples of hedge accounting (2)

• Solution

• 20 Jan 2015 – no journal entries as no transaction date and hedge fair value = 0

• 28 Feb 2015

• Effectiveness assessment• Gain on hedge: $100 000 x (R10.00 – R9.80) = R20 000• Loss on transaction: $100 000 x (R9.75 – R9.50) = R25 000 = 80% = effective

• Journal entries• Dr Forex loss (P/L) 25 000• Cr FC Liability 25 000

• Dr FEC Asset 20 000• Cr Hedging gain (P/L) 20 000

• Dr Inventory ($100k x R9.75) 975 000• Cr Foreign creditor 975 000

• Dr FC Liability 25 000• Cr Inventory 25 000


• 31 March 2015 (year-end)

• Effectiveness assessment

• Gain on hedge: $100 000 x (R10.22 – R9.80) = R42 000

• Loss on transaction: $100 000 x (R9.90 – R9.50) = R40 000 = 105% = effective

• Journal entries

• Dr Forex loss (P/L) (R40 000 – R25 000 before) 15 000

• Cr Foreign creditor 15 000

• Dr FEC Asset (R42 000 – R20 000 before) 22 000

• Cr Hedging gain (P/L) 22 000

• Dr Cost of sales (40% x (R975 000 – R25 000)) 380 000

• Cr Inventory 380 000


• 30 April 2015 (settlement date)

• Effectiveness assessment• Gain on hedge: $100 000 x (R9.98 – R9.80) = R18 000• Loss on transaction: $100 000 x (R9.98 – R9.50) = R48 000 = 37.5% = ineffective

• Journal entries• Dr Forex loss (P/L) (R48 000 – R15 000 – R25 000) 8 000• Cr Foreign creditor 8 000

• Dr For. creditor (R975k + R15k + R8k) or ($100k x R9.98) 998 000• Cr Bank 998 000

• Dr Fair value loss (P/L) (R18 000 – R22 000 – R20 000) 24 000• Cr FEC Asset 24 000

• Dr Bank (R20k + R22k – R24k) or ($100k x (R9.98 – R9.80)) 18 000• Cr FEC Asset 18 000


• Example 2: Foreign highly probable forecast transaction hedged by cash flow hedge

• Company A (Pty) Ltd places a cancellable order for inventory on 20 January 2015 to the value of $100 000. The inventory is delivered on 28 February 2015. Company A’s reporting date is 31 March 2015, at which date the foreign creditor is still unsettled and 40% of the inventory acquired in this transaction had been sold. By 30 April 2015 the remainder of the inventory had been sold. The foreign creditor is settled at 30 April 2015. Company A (Pty) Ltd took out a hedge (foreign exchange FEC) on 20 January 2015 to cover the payment of the creditor on 30 April 2015 at $1 = R9.80. Company A (Pty) Ltd complies with allhedging criteria, except that hedge effectiveness must be assessed on an ongoing basis.

• The spot rates and FEC rates for similar FEC’s than Company A (Pty) Ltd’s FEC, are as follows:

Spot rate FEC rate20 January 2015 $1 = R9.50 $1 = R9.8028 February 2015 $1 = R9.75 $1 = R10.0031 March 2015 $1 = R9.90 $1 = R10.2230 April 2015 $1 = R9.98 $1 = R10.30


• Solution

• 20 Jan 2015 – no journal entries as no transaction date and hedge fair value = 0

• 28 Feb 2015


• Journal entries

• Dr FEC Asset 20 000• Cr Hedging gain (OCI) 20 000

• Dr Inventory ($100k x R9.75) 975 000• Cr Foreign creditor 975 000


• 31 March 2015 (year-end)


• Journal entries• Dr Hedging gain (OCI) 8 000• Cr Cost of sales (R20k x 40%) 8 000

• Dr Forex loss (P/L) (R40 000 – R25 000 before) 15 000• Cr Foreign creditor 15 000

• Dr FEC Asset (R42 000 – R20 000 before) 22 000• Cr Hedging gain (P/L) 22 000

• Dr Cost of sales (40% x R975 000) 390 000• Cr Inventory 390 000


• 30 April 2015 (settlement date)

• Effectiveness assessment• Gain on hedge: $100 000 x (R9.98 – R9.80) = R18 000• Loss on transaction: $100 000 x (R9.98 – R9.50) = R48 000 = 37.5% = ineffective

• Journal entries• Dr Forex loss (P/L) (R48 000 – R15 000 – R25 000) 8 000• Cr Foreign creditor 8 000

• Dr For. creditor (R975k + R15k + R8k) or ($100k x R9.98) 998 000• Cr Bank 998 000

• Dr Fair value loss (P/L) (R18 000 – R22 000 – R20 000) 24 000• Cr FEC Asset 24 000

• Dr Bank (R20k + R22k – R24k) or ($100k x (R9.98 – R9.80)) 18 000• Cr FEC Asset 18 000

• Dr Hedging gain (OCI) (R20k x 60%) 12 000• Cr Cost of sales 12 000

• Dr Cost of sales (R975k x 60%) 585 000• Cr Inventory 585 000

Disclosures

• IFRS for SMEs (par. 12.26 to 12.29) apply…

• Disclosures required in respect of:

• All disclosures as required in s11, adapted to include FI’s as per s12

• Disclosures relating to fair value hedges and cash flow hedges

Section 12: Other Financial Instruments Issues – UPDATES MAY 2015• Clarification of the scope of section 12 and its interaction with other sections of the IFRS for SMEs

(specific scope exclusions clarified)• Similar adjustments as to section 11 Basic Financial Instruments

• Consequential adjustments to references to measurement of investments in equity instruments relating to ‘undue cost or effort exemption’, as discussed earlier

• Clarification that hedges measured at fair value that meet the specified requirements (i.e. cash flow hedges) are recognised in other comprehensive income (OCI)• Further clarification that the cumulative amount deferred in OCI on a cash flow hedge, is restricted

and that the excess above the restriction is recognised in P/L (hedge ineffectiveness is also separately disclosed in the notes)

• Emphasis that hedge effectiveness is tested cumulatively since inception of the hedge• Clarification that amounts deferred in OCI are reclassified to P/L when the hedged item affects P/L

(e.g. cost of sales, depreciation, amortised cost model etc.)• Clarification that the cumulative amount of exchange differences relating to a hedge of a net

investment in a foreign operation deferred in OCI shall NOT be reclassified to P/L upon disposal or partial disposal of the foreign operation

• Clarification that hedge accounting is discontinued prospectively


• Scope• Classification of an instrument as liability or equity• Original issue of shares or other equity instruments

• Sale of options, rights and warrants• Capitalisation issues, bonus issues and share splits• Convertible debt or similar compound financial instruments• Treasury shares• Distributions to owners• Non-controlling interest and transactions in shares of a consolidated subsidiary

Scope

• Section 22 assists in classification of FI’s as either liabilities, or equity• Also, how to account for the issue of equity instruments to investors/owners• Share-based payment dealt with in section 26 of IFRS for SMEs

• Entity receives goods/services from its employees as consideration for its equity instruments (e.g. shares and share options)

• Entity receives goods/services from vendors of goods services in consideration for its equity instruments

• Specific EXCLUSIONS from the scope

• Investments in subsidiaries, associates and joint ventures

• Employers’ rights and obligations under employee benefit plans

• Contracts for contingent consideration (from acquirer’s perspective)

• FI’s, contracts and obligations under share-based payment transactions (share buy-backs are within the scope of section 22)

Classification of FI’s as Equity or FL

• Equity = A – L (i.e. E = residual interest, a balancing figure)

• Includes investments by the owners of the entity

• PLUS: additions to those investments earned through profitable operations and retained in the entity for use in the entity’s operations

• MINUS: reductions to those investments as a result of unprofitable operations and distributions to owners

• Liability = present obligation of entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying future economic benefits

• Liability definition is stronger…

Summary: Equity vs FL

Equity versus FL

Does the entity have an unconditional right to avoid settling in cash or another FA?

NO YES

FL How settled?(fully/partially)

Entity’s own Otherordinary shares

Variable # or Fixed # andVariable R Fixed R

FL Equity Equity

Classification examples

• The entity issues 10 000 debentures that bear interest at 10% per annum (annually compounded and payable in cash). The debentures are compulsorily redeemable in cash at maturity date at par value plus 20% premium.

• The debentures are initially classified as FL’s in full

• The entity issues 10 000 preference shares that bear preference dividends at 8% per annum (annually compounded and payable in cash). The preference shares are compulsorily convertible into 2 000 ordinary shares of the entity at maturity date.

• The preference shares are initially classified as compound FI’s (capital = equity; interest = FL)

Classification examples (2)

• The entity issues 5 000 preference shares that earn preference dividends at 10% per annum (compounded annually). The preference dividends are non-cumulative in nature, i.e. if not declared, they are forsaken. The preference shares are compulsorily convertible into 2 500 ordinary shares of the entity at maturity date.

• The preference shares are initially classified as equity in full

• The entity issues 10 000 bonds that bear coupon interest of 10% per annum (compounded annually and payable in cash). The bonds are compulsorilyconvertible into a number of ordinary shares of the entity equalling the nominal value of the bonds plus a premium of 5% on nominal value.

• The bonds are initially classified as FL’s in full

Classification examples (3)

• The entity issues 5 000 bonds that bear interest at 12% per annum (annually compounded and payable in cash). The bonds are convertible at the choice of the holder into 3 000 ordinary shares of the entity at maturity date. If such conversion is not exercised, the bonds are redeemable in cash at par value.

• The bonds are initially classified as compound FI’s (interest = FL, capital = FL, conversion option = equity)

• The entity issues preference shares that earn preference dividends at 10% per annum (compounded annually and payable in cash). Preference dividends are non-cumulative in nature. The preference shares are convertible at the choice of the issuer (i.e. the entity) into 3 000 ordinary shares of the entity at maturity date. If such conversion is not exercised, the preference shares are redeemable in cash at par value.

• The preference shares are initially classified as equity in full

Compound financial instruments

• The ISSUER of a compound financial instrument shall, at initial recognition, recognise separately the FL and equity components of the financial instrument

• The proceeds of the issue shall be allocated between FL and equity components

• Steps to follow with compound financial instruments:

• 1. Value the FL component first (= PV of all cash flows that cannot be unconditionally avoided, discounted at a market rate for a similar instrument without a conversion option, think of interest, dividends and capital!)

• 2. Allocate the PV (per step 1) to FL and the remainder of the proceeds to equity component (as a balancing figure)

• 3. Use the effective interest method to subsequently account for the FL

• 4. Equity is not re-measured

Example: compound FI’s

• On 1/1/2014, the entity issues 500 convertible bonds. The bonds are issued at par with a face value of R100 per bond and are for a 5-year term, with no transaction costs. The total proceeds from the issue are R50 000. Interest is payable annually in arrears at a nominal interest rate of 4%, pre-tax. Each bond is convertible, at the holder’s discretion, into 25 ordinary shares of the issuer at any time to maturity. At the time the bonds are issued, the market interest rate for similar debt that does not have a conversion option, is 6% per annum.

• Step 1: Value the FL component first. The settlement of the interest payments as well as capital of the bonds cannot be unconditionally avoided and are FL’s.

FV = R50 000 (redemption amount)Pmt = R2 000 (4% x R50 000) (interest payable annually)I/Yr = 6% (use MARKET-RELATED rate as debt is being VALUED)N = 5P/Yr = 1Thus PV = R45 788 (rounded)

Example (continued)

• Step 2: Allocate the proceeds between FL and equity

• 1/1/2014

• Dr Bank 50 000

• Cr Financial liability (bonds) 45 788

• Cr Equity (conversion option) 4 212

• Step 3: Account for effective interest on FL in subsequent periods

• 31/12/2014


• Cr Bank (R50 000 x 4%) 2 000

• Cr Financial liability (bonds) 747 (balancing figure)

Section 22: Liabilities and Equity –UPDATES MAY 2015

• Addition of clarifying guidance on classification of financial instruments as equity or a liability (focus on the unconditional right to avoid settlement in cash or another financial asset, without which the instrument meets the definition of a financial liability and is classified as such)

• Exemption from the initial measurement requirements (i.e. at fair value) for equity instruments issued as part of a business combination

• Clarification that income tax relating to distributions to holders of equity instruments (owners) and to transaction costs of an equity transaction should be accounted for in terms of section 29 Income Tax

• Modification to require that the liability element of a compound financial instrument is accounted for in the same way as a similar stand-alone financial liability• Test the financial liability against the requirements provided in section 11 Basic Financial

Instruments to determine whether the liability is to be accounted for i.t.o. section 11 (amortised cost) or section 12 (fair value) – i.e. no automatic assumption of amortised cost for the liability element of the compound financial instrument

• Addition of an ‘undue cost or effort exemption’ from the requirement to measure the liability to pay a non-cash distribution (dividend) at the fair value of the non-cash assets to be distributed and clarifying guidance on accounting for the settlement of the dividend payable (i.e. difference between dividend paid (i.e. non-cash assets transferred) and the dividend payable at date of settlement, is recognised in P/L)• Disclose the fact that the exemption has been used, and the reasons for the undue cost or effort

Foreign currency translation


Section 30

• Deals with foreign currency translation

• Scope exclusions

• Determining the “functional currency”

• Foreign currency transactions reported in functional currency

• Change in functional currency

• Presentation currency different to functional currency

• Translation into the presentation currency

• Translation of foreign operation into the investor’s presentation currency

• Disclosures required

Scope of section 30

• Two major sections covered:

• Translating foreign currency transactions and foreign operations into the functional currency of an SME; and

• Translating the functional currency financial statements into a different presentation currency

• Exclusions from scope:

• Accounting for financial instruments denominated in a foreign currency

• Hedge accounting of foreign currency items

How to determine functional currency

• Each entity must identify its functional currency

• Functional currency = currency of the primary economic environment in which the entity operates

• Primary economic environment = the one in which it primarily generates and expends cash

• Primary indicators (if absolutely conclusive: only these considered)

• The currency that mainly influences sales prices for goods and services (often the currency in which sales prices for goods/services are denominated and settled)

• The currency that mainly influences labour, material and other costs of providing goods or services (often the currency in which such costs are denominated and settled)

• Secondary indicators (if primary not conclusive, or primary indicators mainly conclusive)

• The currency in which funds from financing activities are generated (e.g. issuing debt and equity instruments)

• The currency in which receipts from operating activities are usually retained

Example: functional currency

• A stand-alone entity extracts a mineral (commodity) from underground in South Africa. The currency of South Africa is the ZAR. Sales of the commodity are denominated in US Dollar (US$), the local currency of the United States of America. The US$ sales price of the mineral is affected by global supply and demand. The USA accounts for about 50% of global demand for the mineral.

• About 90% of the entity’s costs are for expatriate staff salaries and imported chemicals and specialised machinery imported from the USA. These costs are denominated and settled in US$. The entity’s other costs are incurred and settled in ZAR.

• Functional currency of the entity?

• The entity’s functional currency is the US$

• Market forces in the USA economy largely determine:• The selling price of the entity’s output (USA is major contributor to the global market demand

and the entity’s sales are denominated and settled in US$)• The costs of the entity’s inputs (competitive forces and regulations in the USA mainly

determine the cost of the entity’s inputs (about 90% of its costs are sourced from the USA and denominated and settled in US$

Example: functional currency (2)

• A stand-alone entity based in South Africa, manufactures a product for export to the Netherlands. Labour and raw materials for this product are relatively inexpensive in South Africa.

• The entity’s sales prices are nearly always denominated in Euro (the local currency of the Netherlands) and established predominantly based on competitive forces in the Netherlands and by the Netherlands’ regulations. Customers settle in Euro and the entity holds it excess cash in Euro only converting sufficient Euro to ZAR to settle its operating costs as they fall due.

• The majority of the entity’s borrowings are in Euro. Most costs are however paid in ZAR. Specialised machinery is purchased from suppliers in Botswana and are denominated in Pula (the local currency of Bostwana). Such costs are not significant when compared to the ZAR-denominated operating costs.

• Functional currency?• Competitive forces in the Netherlands are the predominant influences on the sales prices of the entity’s

products, which indicates that Euro is its functional currency• ZAR is also indicated as possibly being the functional currency because of the majority of raw material

and labour costs being influenced by competitive forces in South Africa• Economic forces in Botswana are not material because the cost of the machinery imported is not

significant• Primary indicators are therefore mixed, so secondary indicators are considered• The entity generates funds from financing activities in Euro and holds the majority of its cash reserves in

Euro• Secondary indicators confirm Euro as the functional currency• Management is still to apply professional judgement as to the final selection of the functional currency

Functional currency: foreign operation?

• Reporting entity (who has the foreign subsidiary, associate, JV or branch), will consider the following factors to determine whether the functional currency of the foreign operation (FO) is the same as that of the reporting entity (RE):

• Whether activities of the FO are carried out as extension of the RE, rather than being carried out with a significant degree of autonomy (e.g. FO only sells goods imported from the RE and remits cash back to the RE)

• Whether transactions with the RE are a high or low proportion of the FO’s activities (dependence)

• Whether cash flows from the FO’s activities directly affect the cash flows of the RE and are readily available for remittance to the RE

• Whether cash flows from the FO’s activities are sufficient to service existing and normally expected debt obligations without funds being made available by the RE

Example: functional currency (3)

• Parent company A (with a functional currency of ZAR) manufactures influenza remedies in South Africa. It has a subsidiary in Botswana. The subsidiary is predominantly financed by a loan in Pula (the local currency of Botswana).

• The subsidiary operates with significant autonomy from the parent. Management of the subsidiary determine, without interference from the parent, the prices of its products, which are mainly influenced by local competition and regulations.

• The subsidiary uses some of the parent’s formulas under a licence agreement, but also develops and produces some of its own formulas to meet local preferences and local health and safety regulations. It manufactures its own products in Botswana with locally sourced raw materials and local labour. It also sells its products to customers in Botswana. Some specialised machinery is purchased from abroad but the cost of such equipment is insignificant in relation to other operating costs.

• Is the subsidiary autonomous or an extension of the parent company?• Primary indicators indicate that Pula is the functional currency

• Pula is the currency in which sales prices are denominated and settled• The prices are determined by competition and government regulation in Botswana• Prices are not significantly influenced by international competition, regulations or changes in

exchange rates between Pula and other currencies• The most significant costs are denominated and settled in Pula

• The primary indicators all indicate Pula as the functional currency, and therefore any further indicators are not considered

Foreign currency transactions

• A transaction that is denominated or requires settlement in a foreign currency

• Foreign currency = currency different from the functional currency

• Initial recognition:

• Foreign currency translated to functional currency at spot exchange rate at the transaction date

• Considerations?

• When is the transaction date? (see next slide for example)

• A rate that approximates the actual at the transaction date, is often used (e.g. average rate for a week or month etc.)

• As long as exchange rates do not fluctuate significantly

Example: transaction date

• An SME in Johannesburg (RSA) places a non-cancellable order to import inventories from the United States of America (USA) on 15 January 2015 to the value of $100 000.

• The goods are shipped ‘free-on-board’ by the USA supplier on 28 January 2015.• The goods reach the Durban harbour on 7 February 2015 and clear customs on

9 February 2015.• The goods are transported via road transport to Johannesburg and reach the SME

on 11 February 2015.• Spot exchange rates were: US$1 = ?

• 15 January 2015 R11.25

• 28 January 2015 R11.50

• 7 February 2015 R11.57

• 9 February 2015 R11.58

• 11 February 2015 R11.56

Foreign currency transactions (2)

• Subsequent reporting periods:• At the end of each reporting period, an entity shall:

• Translate foreign currency monetary items using the closing (spot) rate• Translate non-monetary items that are measured in terms of historical cost in a

foreign currency using the exchange rate at the date of the transaction (i.e. not restated)

• Translate non-monetary items that are measured at fair value in a foreign currency using the exchange rates at the date when the fair value was determined

• Exchange differences arising on the settlement or translation of monetary items at rates different to the initial recognition, are recognised in profit or loss when incurred

• When another section of the IFRS for SMEs requires a gain or loss on a non-monetary item to be recognised in other comprehensive income, an entity shall also recognise any exchange component of that gain or loss in other comprehensive income (the same applies for profit or loss)

Example 1: foreign currency transaction

• SME A (Pty) Ltd receives inventories free-on-board on 31 January 2015 (the order value was $100 000). The amount will be settled in cash on 30 April 2015. The entity’s reporting date is 28 February 2015.

• Spot exchange rates are as follows: $1 = R?• 31 January 2015 R11.00• 28 February 2015 R11.40• 30 April 2015 R11.70

• Journal entries?• 31 January 2015 (transaction date)

• Dr Inventory (F/P) ($100 000 x R11.00) R1 100 000• Cr Foreign payable (F/P) R1 100 000

• 28 February 2015 (reporting date)• Dr Foreign exchange loss (P/L) R40 000• Cr Foreign payable (F/P) R40 000• ($100 000 x (R11.40 – R11.00))

• 30 April 2015 (settlement date)• Dr Foreign exchange loss (P/L) R30 000• Cr Foreign payable (F/P) R30 000• ($100 000 x (R11.70 – R11.40))• Dr Foreign payable (F/P) R1 170 000• Cr Bank ($100 000 x R11.70) R1 170 000

Example 2: foreign currency loan payable

• SME B (Pty) Ltd obtained a two-year loan from a foreign bank on 1 January 2015 for FC5 000. The loan bears fixed interest at 8% per annum (market-related), payable on 31 December of each year. The FC5 000 capital is settled on 31 December 2016. The entity’s functional currency is ZAR. FC is a foreign currency.

• Spot exchange rates are as follows: R1 = FC?• 1 January 2015 5.00• Average exchange rate (2015) 5.06• 31 December 2015 5.10• Average exchange rate (2016) 4.90• 31 December 2016 4.80

• Notes in terms of section 11• Interest is market-related, therefore the loan is accounted for at transaction price

of FC5 000, translated into functional currency at spot rate at the date• The effective interest rate (used for amortised cost model) is also 8% p.a.

Example 2 (continued)

1 January 2015Dr Bank (FC5 000 / FC5) R1 000Cr Foreign loan – financial liability (F/P) R1 000

31 December 2015Dr Interest expense (P/L) [(FC5 000 x 8%) / FC5.06] R79Cr Foreign loan – financial liability (F/P) R79

Dr Foreign loan – financial liability (F/P) R78Cr Bank (FC400 / FC5.10) R78

Dr Foreign loan – financial liability (F/P) R21Cr Forex gain (P/L) [(FC5 000 / FC5.10) – R1 001] R21 (*)(*) consists of R1 gain on interest and R20 gain on capital

Example 2 (continued)

31 December 2016Dr Interest expense (P/L) [(FC5 000 x 8%) / FC4.90] R82Cr Foreign loan – financial liability (F/P) R82

Dr Foreign loan – financial liability (F/P) R83Cr Bank (FC400 / FC4.80) R83

Dr Forex loss (P/L) [(FC5 000 / FC4.80) – R979] R63Cr Foreign loan – financial liability (F/P) R63

Dr Foreign loan – financial liability (F/P) R1 042Cr Bank (FC5 000 / FC4.80) R1 042

Change in functional currency

• The translation procedures applicable to the new functional currency shall be applied prospectively from the date of the change (similar to a change in estimate)

• Functional currency can only change if there is a change to the underlying transactions, events and conditions relevant to the entity, which are then reflected by another functional currency

• The entity translates all items into the new functional currency using the exchange rate at the date of the change of the functional currency

• The resulting translated amounts for non-monetary items are treated as their historical cost

Translation into another P/C

• Presentation currency (PC) is a free choice for the SME – AFS can therefore be presented in any currency/(ies) the entity chooses

• Translation procedures:

• Assets and liabilities shall be translated at the closing (spot) rate for that statement of financial position (also applies to comparative figures)

• Income and expenses for each statement of comprehensive income shall be translated at exchange rates at the dates of the transactions (also applied to comparative figures)

• All resulting exchange differences (i.e. balancing figure) shall be recognised in other comprehensive income (OCI) – called a “foreign currency translation reserve”, or “FCTR”

Example: translation procedures

• The following trial balance resulted from ABC (Pty) Ltd, who prepared their financial statements in their functional currency of US$ for 2014. ABC (Pty) Ltd wishes to present their 2014 financial statements in ZAR for taxation purposes.

• US$ trial balance as at 31 December 2014:

• Share capital (contributed 1/1/2013) ($100)

• Retained earnings (as at 1/1/2014) (*) ($5 000)

• Property, plant and equipment $6 000

• Inventories $1 900

• Trade payables ($1 300)

• Revenue (*) ($7 000)

• Cost of sales (*) $4 000

• Operating expenses (*) $1 000

• Taxation (*) $500

(*) = evenly incurred

Example: translation procedures (2)

• The following exchange rates applied: US$1 = R?• 1 January 2013 R9.50• 1 January 2014 R10.90• 31 December 2014 R11.70• Average exchange rate (2014) R11.30• Average exchange rate (2013) R10.00

• Prepare the post-translation trial balance as at 31 December 2014 in ZAR

• Share capital ($100 x R9.50) (R950)• Retained earnings (1/1/2014) ($5 000 x R10.00) (R50 000)• Property, plant and equipment ($6 000 x R11.70) R70 200• Inventories ($1 900 x R11.70) R22 230• Trade payables ($1 300 x R11.70) (R15 210)• Revenue ($7 000 x R11.30) (R79 100)• Cost of sales ($4 000 x R11.30) R45 200• Operating expenses ($1 000 x R11.30) R11 300• Taxation ($500 x R11.30) R5 650• Foreign currency translation reserve (FCTR) = OCI!! (R9 320)


• The US$ trial balance indicates the following as at 31 December 2015:

• Share capital (contributed 1/1/2013) ($100)

• Retained earnings (for 2013) (*) ($5 000)

• Retained earnings (for 2014) (*) ($1 500)

• Property, plant and equipment $8 000

• Inventories $1 600

• Trade payables ($1 400)

• Revenue (*) ($8 300)

• Cost of sales (*) $5 000

• Operating expenses (*) $1 200

• Taxation (*) $500

(*) = evenly incurred


• The following exchange rates applied: US$1 = R?• 1 January 2013 R9.50• 1 January 2014 R10.90• 31 December 2014 R11.70• 31 December 2015 R11.50• Average exchange rate (2015) R11.20• Average exchange rate (2014) R11.30• Average exchange rate (2013) R10.00

• Prepare the post-translation trial balance as at 31 December 2015 in ZAR• Share capital ($100 x R9.50) (R950)• Retained earnings (2013) ($5 000 x R10.00) (R50 000)• Retained earnings (2014) ($1 500 x R11.30) (R16 950)• Property, plant and equipment ($8 000 x R11.50) R92 000• Inventories ($1 600 x R11.50) R18 400• Trade payables ($1 400 x R11.50) (R16 100)• Revenue ($8 300 x R11.20) (R92 960)• Cost of sales ($5 000 x R11.20) R56 000• Operating expenses ($1 200 x R11.20) R13 440• Taxation ($500 x R11.20) R5 600• Foreign currency translation reserve (FCTR) = OCI!! (R8 480)


• Statement of financial position (ZAR) 2015 2014• Property, plant and equipment 92 000 70 200• Inventories 18 400 22 230

Total assets 110 400 92 430

• Share capital 950 950• Retained earnings 84 870 66 950• Other comprehensive income 8 480 9 320• Trade payables 16 100 15 210

Total equity and liabilities 110 400 92 430


• Statement of changes in equity (ZAR) R/E FCTR• Opening balance (1 January 2015) 66 950 9 320• Total comprehensive income for the year 17 920 (840)• Closing balance (31 December 2015) 84 870 8 480

• Note: the FCTR clearly decreased during 2015 due to the strengthening of the ZAR against the US$.

Translation of foreign operations

• Intragroup monetary assets/liabilities (e.g. intercompany loans) must be eliminated in consolidated financial statements, but resulting exchange differences will remain behind in the consolidated financial statements of the parent company

Parent (ZAR) Subs (US$)

Loan to S (denominated in US$) R11 000

Loan from P (denominated in US$) ($1 000)

Spot exchange rate (2015): US$1 = R11.00

Spot exchange rate (2014): US$1 = R10.50

Consolidated AFS of parent (2015)

Exchange gain on intragroup loan (P/L) = R500 = will not be eliminated

Translation of foreign operations (2)

• Section 19 Business Combinations and Goodwill deals with the calculation of goodwill arising in a business combination transaction

• Section 30 determines that:

• Goodwill arising at the date of acquisition (i.t.o. s19); and

• Fair value adjustments to assets and liabilities at the acquisition date (i.t.o. s19)

are to be regarded as assets and liabilities of the foreign operation…

• They are therefore to be translated to the closing rate at the reporting date and will therefore contribute to the FCTR at reporting date

Accounting policies, accounting estimates and errorsSection 21 of the IFRS for SMEs

Section 10

• Deals with accounting policies, changes in accounting estimates and correction of (material) errors in respect of the prior period

• Accounting policies• Selection and application• Consistency• Changes in accounting policies

• Application• Retrospective application• Disclosure requirements

• Changes in accounting estimates• Disclosure requirements

• Corrections of prior period errors• Disclosure requirements

Accounting policies - selection

• “Accounting policies” = the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements

• The IFRS for SMEs only applies to events/transactions that are material in the AFS

• IFRS for SMEs provides accounting treatment, then follow the treatment• IFRS for SMEs does NOT provide accounting treatment, then SME’s management

must use professional judgement in developing and applying an accounting policy that results in information that is:• Relevant; and VS Consistency• Reliable Comparability

• Faithful representation• Economic substance over legal form From one period to the next• Neutral and free from bias and between entities• Prudent and• Complete in all material aspects

If no existing IFRS?

• Assistance (approach) used to develop and apply own accounting policies by management of SME (hierarchy):

• Consult IFRS for SMEs for requirements and guidance dealing with similar and related issues; and then

• Consider the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses (and the pervasive principles) in section 2 of the IFRS for SMEs; and then

• Consider the requirements and guidance in full IFRSs dealing with similar and related issues

• Select and apply accounting policies consistently for similar transactions, events and conditions unless IFRS for SMEs specifically permits categorisation of items for which different policies may be appropriate…

Interesting to note…

• Departure from the IFRS for SMEs to achieve a specific outcome (even for immaterial items) is NOT allowed…

• Guidance to IFRS and IFRS for SMEs

• “Integral part of the IFRS for SMEs” = mandatory to apply

• Not integral part = non-mandatory, but highly recommended

Changes in accounting policies

• An SME shall change an accounting policy ONLY if the change:

(i) is required by changes made to the IFRS for SMEs (involuntary);

OR

(ii) results in the financial statements providing reliable and more relevant information about the effects of transactions, other events or conditions on the entity’s financial position, financial performance or cash flows (voluntary)

What is NOT a change in AP?

• Application of an AP to transactions, events or conditions that differ in substance from those previously occurring

• Application of a new AP for transactions, events or conditions that did not occur previously (or were immaterial)

• A change to the cost model when a reliable measure of fair value is no longer available (or vice versa) for an asset that this IFRS for SMEs would otherwise require or permit to be measured at fair value (e.g. investment property)

• i.e. availability of the fair value of the asset causes a transfer between asset categories/changes in measurement (e.g. ‘investment property’ to ‘PP&E’, or ‘PP&E’ to ‘investment property’; or an investment in shares of another entity measured at ‘cost’ to ‘@ fair value through profit or loss’ and vice versa etc.)

Important principle

• If the IFRS for SMEs allows a choice of accounting treatment (including the measurement basis) for a specified transaction, event or condition and an entity changes its previous choice:

• That is a change in accounting policy…

How are changes in AP applied?

• Involuntary changes in AP• Accounted for in terms of transitional provisions, if any, specified in the amendment

of the IFRS for SMEs• IFRS for SMEs allows IAS 39 to be followed for financial instruments, instead of

section 11 and section 12• IAS 39 undergoing significant changes: thus when IAS 39 is amended, follow

transitional provisions of the amendment

• All other changes in AP• “Retrospective application”

• Apply the new AP to comparative information for prior periods to the earliest date for which it is practicable (as if new AP had always been applied)

• If impracticable to apply to one/more prior periods – the entity shall apply the new AP to the CA’s of assets and liabilities as at the beginning of the earliest period for which retrospective application is practicable (which may be the current period)

Disclosure of change in AP

• Involuntary changes in AP• Nature of the change in AP• Current and each prior period presented, to the extent practicable, the amount of the

adjustment for each financial statement line-item affected• The amount of the adjustment relating to periods prior to those presented, to the extent

practicable• An explanation if it is impracticable to disclose the above information

• Voluntary changes in AP• Nature of the change in AP• The reason(s) why the new AP provides reliable and more relevant information• Current and each prior period presented, to the extent practicable, the amount of the

adjustment for each financial statement line-item affected• The amount of the adjustment relating to periods prior to those presented, to the extent

practicable• An explanation if it is impracticable to disclose the above information

Examples: changes in AP’s?

• SME ABC (Pty) Ltd decides to change the way that their inventory is measured from the first-in-first out (FIFO) basis, to the weighted average cost method.• Is this a change in accounting policy?

• SME DEF (Pty) Ltd determines that the remaining useful life and residual value of a machine needs to be reduced to 5 years instead of 7 years.• Is this a change in accounting policy?

• The IFRS for SMEs is currently being revised in certain areas and when approved, these amendments/improvements will require certain SMEs to amend the accounting treatment adopted for certain transactions.• Is this a change in accounting policy?

• SME JKL (Pty) Ltd decides to measure investment property in terms of the fair value model through profit or loss as from the end of the current financial reporting period. The fair value has never before been reliably measurable for their investment property, but is now.• Is this a change in accounting policy? What if the fair value had been reliably measurable

before?

Changes in accounting estimates

• “Change in accounting estimate” = an adjustment to the carrying amount of an asset or liability, or the amount of the periodic consumption of an asset, that results from the assessment of the PRESENT status of, and expected future benefits and obligations associated with, assets and liabilities

• Changes in AE’s result from NEW information and developments

• Changes in AE’s are not corrections of errors!

• When it is difficult to distinguish a change in accounting estimate from a change in accounting policy, the change is treated as a change in accounting estimate…

• Examples

• Allowance for doubtful debt is amended

• Allowance for obsolete inventory is amended

• Changes in useful lives/residual values/depreciation methods of depreciable assets

• Warranty obligations and amendments to the carrying amounts of provisions

Application of changes in AE’s

• The SME shall recognise the effect of a change in accounting estimate PROSPECTIVELY by including it in profit or loss in:

• The period of the change (if the change affects that period only); or

• The period of the change and future periods (if the change affects both)

Disclosure of changes in AE’s

• The nature of the change in an accounting estimate

• The effect of the change on assets, liabilities, income and expenses for the current period

• If practicable: the estimated effect of the change in one or more future periods

Corrections of prior period errors

• “Prior period errors” are omissions from, and misstatements in, the entity’s financial statements for one or more prior periods arising from a failure to use, or misuse of, reliable information that:

• Was available when the AFS for those periods were authorised for issue; and

• Could reasonably be expected to have been obtained and taken into account in the preparation and presentation of those AFS

• Examples

• effects of mathematical mistakes,

• mistakes in applying accounting policies,

• oversights,

• misinterpretation of facts,

• fraud etc.

Treatment of prior period errors

• To the extent practicable, an entity shall correct a material prior period error RETROSPECTIVELY in the first AFS authorised for issue after its discovery, by:

• Restating comparative amounts for the prior periods presented in which the error occurred; or

• If the error occurred before the earliest period presented, restating the opening balances of assets, liabilities and equity for the earliest period presented

• If impracticable to apply to one/more prior periods – the entity shall apply the correction to the CA’s of assets and liabilities as at the beginning of the earliest period for which retrospective application is practicable (which may be the current period)

Disclosure of prior period errors

• The nature of the prior period error

• For each period presented, to the extent practicable, the amount of the correction for each financial statement line-item affected

• To the extent practicable, the amount of the correction at the beginning of the earliest period presented

• An explanation if it is not practicable to determine the amounts required for the above disclosure items

Impracticability considered…

• Retrospective application will always seem “impracticable” ☺

• Retrospective information must sometimes be estimated…

• Estimates must reflect the circumstances that existed when the transaction, event or condition occurred

• Try to isolate information that:

• Provides evidence of circumstances that existed on the dates as at which the transaction, event or condition occurred and

• Would have been available when the AFS for that period were authorised for issue

• “Hindsight accounting” should be avoided at all cost – retrospective application is not an opportunity to achieve a specific outcome or achieve more than one goal at a time!

Example

• SME ABC (Pty) Ltd holds an investment in the shares of another entity. The fair value of the share portfolio has now become readily available as the entity in which the shares are held, listed on the JSE Ltd. ABC (Pty) Ltd measured the investment in the share portfolio at cost (less impairment) as the fair value was not reliably determinable until listing on the JSE Ltd. In the current year, ABC (Pty) Ltd discovered a material error i.r.o. the calculation of the cost price of the share portfolio at initial recognition of the investment. The CFO of ABC (Pty) Ltd has indicated that he wishes to measure the shares at their estimated fair value from initial recognition as that information has now become readily available for the listed investment as part of retrospectively correcting the cost price.

• Change in accounting policy?• Change in accounting estimate?• Correction of material prior period error? What is the error?

Approach i.r.o. impracticability

• Apply change in policy/correction of error retrospectively. If impracticable:

• Apply retrospectively as far back as possible. If impracticable:

• Use estimates, but not hindsight accounting, to apply retrospectively as far back as possible. If still impracticable:

• Accept as impracticable and deal with current period only

Events after the end of the reporting periodSection 32 of the IFRS for SMEs

Section 32

• Deals with events after the end of the reporting period

• Defining events after the end of the reporting period (2 types)

• Recognition and measurement

• Adjusting events

• Non-adjusting events

• Dividends?

• Non-adjusting events affecting going concern?

• Disclosure requirements

Events after the end of the RP

• Those events, favourable and unfavourable, that occur between the end of the reporting period and the date when the AFS are authorised for issue

Condition? “Golden period”

End of reporting period AFS authorisedfor issue

• Two types of events can be identified:

• Adjusting events after the end of the RP

• Non-adjusting events after the end of the RP

2 types of events…

• Adjusting events after the end of the RP = those events that provide evidence of CONDITIONS that existed at the end of the reporting period

• Non-adjusting events after the end of the RP = those events that provide evidence of CONDITIONS that arose after the end of the reporting period

Adjusting events…

• The AFS must be adjusted (amounts and disclosures) to reflect the effect of adjusting events after the end of the reporting period

• Examples of adjusting events:• Settlement after the end of the RP of a court case that confirms the entity had a

present obligation at reporting date• Provision recognised; or• Provision adjusted

• Receipt of information after the end of the RP indicating that an asset was impaired at y/e, or that the amount for the allowance for impairment needs to be adjusted• Bankruptcy of debtor after reporting date?• Sale of inventories at lower selling price after reporting date?

• Determination of cost/selling price of assets acquired/sold before the end of RP• Determination of profit-sharing or bonus payments where entity had a

legal/constructive obligation at RP to make such payment as a result of events before that date

• Discovery of fraud or errors that show the AFS are incorrect

Non-adjusting events…

• The AFS must NOT be adjusted (amounts) to reflect the effect of non-adjusting events after the end of the reporting period

• Can only result in amended/additional disclosure (notes to the AFS)!

• Examples of non-adjusting events:

• Decline in MV of investments between y/e and date of authorisation for issue of the AFS due to market conditions that arose after the end of the RP

• Amount becomes receivable as a result of a judgement or settlement of court case between the end of the RP and the authorisation of the AFS for issue (court case was ongoing at RP date)

• Becomes a contingent asset at end of the RP (i.e. increase in disclosure)

Dividends?

• Dividends declared after the end of the RP before the date the AFS are authorised for issue…?

• Non-adjusting event after the end of the RP!

• No adjustments (journals) processed in the AFS!

• The dividend declared may be disclosed (notes), or PRESENTED as a segregated component of retained earnings at the end of the reporting period (on the face of the statement of financial position (balance sheet))

Going concern threats?

• Non-adjusting events after the end of the reporting period threatening the going concern principle = not dealt with by IFRS for SMEs

• Guidance from full IFRSs must be consulted:

• An entity shall NOT prepare its AFS on the going concern assumption if any events after the end of the reporting period (including non-adjusting events) indicate that the assumption is not appropriate!

Disclosure

• Date of authorisation for issue of annual financial statements• Person who gave the authorisation• If AFS can be amended after issue (by owners or others) the fact must be

disclosed

• Non-adjusting events after the end of the RP:

• The nature of the event; and

• An estimate of its financial effect (or a statement that such estimate cannot be made)

Typical non-adjusting events, disclosed

• Concluding a major business combination / disposal of major subsidiary• Announcement of a plan to discontinue an operation• Major purchases of assets, disposals of or plans to dispose of assets• Expropriation of major assets by government• Destruction of major production plant by fire caused by lightning• Announcement or commencement of implementation of major restructuring• Issue or repurchase of an entity’s debt or equity instruments• Abnormally large changes in asset prices or foreign exchange rates• Changes in tax rates or tax laws enacted or announced that have a significant

effect on current and deferred tax assets and liabilities• Entering into significant commitments or contingent liabilities (e.g. issuing

significant guarantees)• Commencement of major litigation arising solely out of events that occurred after

the end of the reporting period

Related party disclosures


Section 33

• Deals with related party disclosures

• Two main issues:

• What is a “related party”?

• Disclosures required i.r.o. related parties:

• Disclosure of parent-subsidiary relationships

• Disclosure of key management personnel compensation

• Disclosure of related party transactions

What is a “related party”?

• A related party is a person or entity that is RELATED to the entity that is preparing its financial statements (i.e. the reporting entity)

• When is a person (or a close member of that person’s family) related to the reporting entity?

• When that person (or close member of that person’s family):

• Is a member of the key management personnel of the reporting entity, or of a parent of the reporting entity; or

• Has control over the reporting entity; or

• Has joint control or significant influence over the reporting entity or has significant voting power in it

Close member of family? (*)

• Close members of the family of a person are those family members who may be expected to influence, or be influenced by, that person in their dealings with the entity and include:

• that person’s children and spouse or domestic partner;

• children of that person’s spouse or domestic partner; and

• dependants of that person or that person’s spouse or domestic partner.

(*) IAS 24 (full IFRSs) guidance

Diagram: “person” related party to RE?

PERSON = related to RE if:

1. Key management personnelParent

control

2. Control over Reporting3. Joint control, entity

significant influence, or (RE)significant voting power

What is a “related party”? (2)

• When is an entity related to the reporting entity (RE)? If any of these conditions apply:• The entity and the RE are members of the same group (parent and all subs’s are

related to each other)• Either entity is an associate or JV of the other entity (or of a member of a group of

which the other entity is a member)• Both entities are JV’s of a third entity• Either entity is a JV of a third entity and the other entity is an associate of the

third entity• Entity is a post-employment benefit plan for the benefit of the employees of either

the RE or an entity related to the RE (if RE is such a plan itself, then all sponsoring employers are related to the RE)

• The entity is controlled/jointly controlled by a related person identified on previous slide

• A member of key management personnel has significant voting power in the entity

• A person that controls the RE has significant influence over the entity or significant voting power in it

Diagram: “entity” related party to RE?

1 (member of key mgt. personnel of 2) has significant

Entity voting power in 1 3(has control over 2) has significant influence/voting 3rd entitypower in 1

1 & 2 = members of same group 2 1 is assoc/JV of 2, or vice versa Reporting1 & 2 are JV’s of 3 entity

(RE)

1 is JV of 3 and 2 is assoc of 3, or 1 is assoc of 3 and 2 is JV of 31 is PEB plan for employees of 2 or 3 (if 3 is related to 2)1 is controlled by (who is a related person to 2)

Examples to consider…

• SME A (Pty) Ltd and SME B (Pty) Ltd have a director, who is a member of key management personnel of both entities, in common. A (Pty) Ltd and B (Pty) Ltd are not related in any other way, except for the information mentioned here.• Are A and B related parties?

• SME C (Pty) Ltd and SME D (Pty) Ltd are two venturers owning 50% interest each and contractually sharing joint control over joint venture E (Pty) Ltd. They are not related in any other way, except for this information.• Are C and D related parties?

• SME F (Pty) Ltd have normal dealings with the following entities, who are not related to F (Pty) Ltd in any other way than the information given here:• Bank XYZ Ltd (provider of finance to F (Pty) Ltd)• Trade union ABC (representing the employees of F (Pty) Ltd)• Johannesburg Metro Council (providing public utilities to F (Pty) Ltd)

• Are any of these entities related parties to F (Pty) Ltd?

• Customers, suppliers, franchisors, distributors and general agents with whom SME G (Pty) Ltd transacts a significant volume of business• Does the economic dependence resulting from these relationships make the entities related

parties of G (Pty) Ltd?

Disclosures required for RP’s

• CATEGORY A: Disclosure of parent-subsidiary relationships• Must be disclosed, irrespective of whether RP transactions have occurred• What must be disclosed by an entity?

• Name of the parent and ultimate parent (if different)• If the parent or ultimate parent does not produce AFS for public use, the name of the next

most senior parent that does so (if any)

• CATEGORY B: Disclosure of key management personnel compensation• “Key management personnel” = those persons having authority and responsibility for

planning, directing and controlling the activities of the entity, directly or indirectly, including any director (executive or non-executive) of that entity

• “Compensation” = all employee benefits (s28) and share-based payment (s26)• “Employee benefits” = all form of consideration paid, payable or provided by the entity (or on

behalf of the entity, e.g. by the parent) in exchange for services rendered to the entity and also includes such consideration paid on behalf of a parent of the entity in respect of goods or services provided to the entity by the employee

• What must be disclosed?• Key management personnel compensation, in total

Disclosures required for RP’s (2)

• CATEGORY C: Disclosure of related party transactions

• A “related party transaction” is a transfer of resources, services or obligations between the reporting entity (RE) and a related party (RP), regardless of whether a price is charged

• Examples of RP transactions:

• Transactions between the RE and its principal owner(s)

• Transactions between the RE and another entity when both entities are under common control of a single entity/person

• Transactions in which an entity or person that controls the RE incurs expenses directly, that otherwise would have been borne by the RE

• Purchases, sales or transfers of goods or services between RE and RP

• Leases between the RE and the RP

• Guarantees given/received between RE and RP

• Settlements by the RE on behalf of the RP or vice versa


• CATEGORY C: Disclosure of related party transactions (continued)

• What must be disclosed in respect of RP transactions?

• Nature of the related party relationship

• Information about transactions, outstanding balances and other commitments that is necessary for an understanding of the potential effect of the relationship on the AFS

• Minimum disclosures will be:

• The amount(s) of the transaction(s)

• The amount of outstanding balances, their terms and conditions, whether they are secured, the nature of the consideration to be provided to settle and details of any guarantees given or received

• Allowances made for any uncollectible receivables relating to RPs’ outstanding balances

• The expense recognised during the period i.r.o. bad/doubtful debts i.r.o. receivables relating to RP’s


• CATEGORY C: Disclosure of related party transactions (continued)

• The disclosures per the previous slide (minimum disclosures) are required to be made separately, for the following 4 CATEGORIES:

• Entities with control, joint control or significant influence over the RE

• Entities over which the RE has control, joint control or significant influence

• Key management personnel of the RE or the parent of the RE (in aggregate)

• Other related parties

• Exemptions from disclosure requirements of RP transactions (Cat C):

• National, regional or local government that has control, joint control or significant influence over the RE; and

• Another entity that is a RP because the same national, regional or provincial government has control, joint control or significant influence over both the RE and the other entity mentioned

• The entity must still disclose the parent/subsidiary relationship…


• Final thoughts…

• The RE shall not state that the terms and conditions in the RP transaction are equivalent to those that prevail in arm’s length transactions unless such terms can be substantiated

• An entity may disclose items of similar nature in aggregate, except when separate disclosure is required/necessary for an understanding of the effects of related party transactions on the financial statements of the RE

Example of note disclosure

26. Related party transactions

Transactions between the Company and its subsidiary, which is a related party, have been eliminated in consolidation.

The Group sells goods to its associate (see note 12), which is a related party, as follows:Amounts owed to the Groupby the related party and included in trade receivables

Sales of goods at year-end2015 2014 2015 2014R R R R

Associate 10 000 8 000 800 400

The payments under the finance lease (see note 20) are personally guaranteed by a principal shareholder of the Company. No charge has been requested for this guarantee.

The total remuneration of directors and other members of key management in 2015 (including salaries and benefits) was R249 918 (2014: R208 260)

Documents

SAIPA 2017 IFRS FOR SMEs SLIDES · Presenter details • Anton van Wyk M. Com CA (SA) • Cell: 082-805-1593 • E-mail: [email protected] • Please feel free to add me on LinkedIn