SBR Notes - A summary of the most important IAS and IFRS Standards PDF

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SBR NotesConceptual Framework Financial Informaion should be readily understandable  Informaion has the quality of relevance when it has the capacity to inluence the economic decisions of users by helping them evaluate past, present and future events or conirming, or correcing, their past evaluaio...

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SBR Notes Conceptual Framework  

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Financial Information should be readily understandable Information has the quality of relevance when it has the capacity to influence the economic decisions of users by helping them evaluate past, present and future events or confirming, or correcting, their past evaluations. Relevant financial information has predictive value, confirmatory value or both. Comparability is the qualitative characteristic that enables users to identify and understand similarities and differences amongst items

IAS 2 – Inventories  

Inventories to be valued at lower of cost or Net Realisable Value (NRV) NRV is defined as the estimated selling price in the ordinary course of business less costs of completion and costs to sell

IAS 8 – Accounting policies, changes in accounting estimates and errors

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A change in accounting estimate is an adjustment of the carrying amount of an asset or liability, or related expense, resulting from reassessing the expected future benefits and obligations associated with that asset or liability.

IAS 16 – Property, Plant and Equipment  

Initial recognition at cost, subsequent measurement: Cost Model or Revaluation Model Costs of parts that need replacement must be recognized within the carrying value of the asset. This will be depreciated separately over the life of the component and the cost of the replacement must be capitalized if the recognition criteria are satisfied

IAS 21 – Effects of changes in foreign currency 

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Functional currency – The functional currency of an entity is the currency of its primary economic environment. This is the currency in which it generates and expends cash. The following primary factors must be considered when determining the functional currency: o The currency that mainly influences sales prices for goods and services o The currency of the country whose competitive forces and regulations mainly determine the sales prices of goods and services o The currency that mainly influences labour, material and other costs of providing goods and services If the primary factors are inconclusive, then the secondary factors should be considered: 1) The currency in which the entity generates funds from financing activities, 2) The currency in which the entity retains receipts from operating activities There are times when instead of applying the above rules, a foreign subsidiary should simply adopt the same functional currency as its parent. In determining this, the following should be considered:

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Whether the foreign operation is an extension of the parent, rather than having significant autonomy The level of transactions between the foreign operation and the parent Whether the foreign operation generates sufficient cash flows to meet its cash needs Whether its cashflows directly affect those of the reporting entity

IAS 36 – Impairment of Assets  

At the end of each reporting period, an entity is required to assess whether there is any indication that an asset may be impaired If there is an indication that the asset may be impaired, then the asset’s recoverable amount must be calculated.

IAS 38 – Intangible Assets 

An intangible asset is defined as an identifiable non-monetary asset without physical substance.

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An entity is required to recognise an intangible asset if: o The asset is identifiable o The asset is controlled by the entity o The asset will generate future economic benefits for the entity o The cost of the asset can be measured reliably. As per IAS 38, an intangible asset is identifiable if it: o Is separable (can be separated and sold or transferred either individually or as part of a package) o Arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations At initial recognition, intangible assets are measured at cost. For subsequent measurement, an entity has a choice of either using the cost model or revaluation model for measuring each class of intangible asset o Cost Model – The asset is measured at cost less accumulated amortisation and impairments o Revaluation model – The asset is measured at fair value less accumulated amortisation and impairments. Revaluations should be sufficiently frequent such that the carrying amount of the asset does not differ materially from the actual fair value at the reporting date The revaluation model can only be adopted if the fair value can be determined by reference to an active market. An active market is one in which products are homogenous, there are willing buyers and sellers to be found at all times and prices are available to the public. Active markets are rare for intangible assets. They are likely to exist for milk quotas or stock exchange seats, but unlikely to exist for brands, newspaper mastheads, patents, trademarks, music and film publishing rights. Revaluation gains and losses are to be accounted for in the same way as revaluation gains and losses of tangible assets in accordance with IAS 16.

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If the recognition criteria are not met, IAS 38 requires the expenditure to be expensed to profit or loss when it is incurred.

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An intangible asset should be derecognised only on disposal or when no future economic benefits are expected from its use or disposal.

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IAS 38 prohibits presenting the proceeds from the disposal of an intangible asset as revenue.

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Intangible assets with finite lives are required to be amortised over their useful lives and intangible assets with indefinite lives to be subject to an annual impairment review in accordance with IAS 36.

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Research – Research is defined in IAS 38 as an original or planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding. Research expenditure is expensed to profit or loss as incurred.

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Development – Development is defined in IAS 38 as the application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems or services before the start of commercial production or use. Development expenditure must be recognised as an intangible asset if the entity can demonstrate that:

o The project is technically feasible o The entity intends to complete the intangible asset and then sell it or use it o The intangible asset will generate future economic benefits o The entity has adequate resources to complete the project o It can reliably measure the expenditure on the project Disclosures: IAS 38 requires entities to disclose: 

The amount of research and development expenditure expensed during the period

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The methods used for amortisation

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For intangible assets assessed as having indefinite lives,

IFRS 3 – Business Combinations   

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A business combination is defined as a transaction or other event in which an acquirer obtains control of one or more businesses. A business is defined as an integrated set of activities and assets capable of providing a return. The accounting treatment of the acquisition of an interest in a joint operation that meets the definition of a business should apply the same principles as are applied in a business combination unless those principles contradict IFRS 11 Joint Arrangements Acquired intangible assets must be recognised and measured at fair value if they are separable or arise from other contractual rights.

IFRS 10 – Consolidated Financial Statements 

An investor controls an investee when it has power over the investee and is exposed, or has rights to, variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee

IFRS 15 – Revenue from contracts with customers 

Revenue is defined as income arising from a company’s ordinary activities.

Financial Instruments IAS 32 – Financial Instruments: Presentation A Financial Instrument is any contract that gives rise to a financial asset1 of one entity and a financial liability2 of equity instrument3 of another entity 1. A financial asset is any asset that is:  Cash  An equity instrument of another entity  A contractual right to receive cash or another financial asset from another entity  A contractual right to exchange financial instruments with another entity under conditions which are favourable to the entity  A non-derivative contract for which the entity is or may be obliged to receive a variable number of its own equity instruments 2. A financial liability is any liability that is:  A contractual obligation to deliver cash or another financial asset to another entity  A contractual obligation to exchange financial instruments with another entity under conditions which are potentially unfavourable  A non-derivative contract for which the entity is or may be obliged to deliver a variable number of its own equity instruments 3. An equity instrument is any contract that evidences a residual interest In an entity’s assets after deducting all of its liabilities IAS 32 provides the rules for classification of financial instruments. The issuer of a financial instrument must recognize a financial liability or an equity instrument on initial recognition based on the substance of the instrument and the definitions as per IAS 32. Dividends, Interest, losses and gains – The accounting treatment of interest, dividends, losses and gains relating to a financial instrument follows the treatment of the instrument itself. Dividends paid in respect of preference shares classified as financial liabilities are recorded as finance costs in the statement of profit or loss. Dividends paid in respect of shares classified as equity instruments are recorded in the statement of changes in equity. Offsetting – IAS 32 states that a financial asset and a financial liability may only be offset in very limited circumstances. A net amount may only be reported if the entity: 

Has a legally enforceable right to set off the amounts

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Intends either to settle on a net basis or to realise the asset and settle the liability simultaneously

Compound Instruments – A compound instrument is a financial instrument that has characteristics of both liabilities and equity. An example would be debt that can be redeemed for either cash or a fixed number of equity shares. IAS 32 requires that a compound instrument should be split into two components:  

A financial liability (the liability to repay the debt holder in cash) An equity instrument (the option to convert into shares)

These two components must be shown separately in the financial statements Financial Assets – Investments in Equity Instruments: Investments in equity instruments (such as investment in the ordinary shares of another entity) can be measured at either:  

Fair value through profit or loss, or Fair value through other comprehensive income

Fair value through profit or loss – The normal expectation is that the equity instrument has the designation of fair value through profit or loss Fair value through other comprehensive income – It is possible to designate an equity instrument as fair value through other comprehensive income, provided that the following conditions are complied with:  

The equity instrument must not be held for trading, and There must have been an irrevocable choice of this designation upon initial recognition of the asset

IFRS 9 – Financial Instruments Financial Liabilities – Initial recognition: Financial Liabilities are initially recognized at fair value. If the financial liability will be held at fair value through profit or loss, transaction costs are expensed to the statement of profit or loss. If the financial liability will not be held at fair value through profit or loss, transaction costs should be deducted from its carrying amount Subsequent measurement – Subsequent measurement of financial liabilities can be at either amortised cost or fair value through profit or loss. Most financial liabilities, such as borrowings are subsequently measured at amortised cost using the effective interest rate method. The initial carrying amount of a financial liability measured at amortised cost is its fair value less any transaction costs. Finance cost is charged at the effective interest rate. This increases the carrying amount of the financial liability. The carrying amount is reduced by any cash payments made during the period. Out of the money derivatives or liabilities held for trading are measured at fair value through profit or loss. It is also possible to measure a liability at fair value when it would normally be measured at amortised cost if it eliminated or reduces an accounting mismatch. In this case IFRS 9 says that any movement in fair value is split into two components: 1) the fair value change due to own credit risk

which is presented in other comprehensive income, and 2) the remaining fair value change which is presented in profit or loss Compound Instruments – At initial recognition, a compound instrument must be split into an equity component and a liability component:  

The liability component is calculated as the present value of repayments discounted at a market rate of interest for similar instruments without the conversion rights The equity component is calculated as the difference between the cash proceeds from issuing the instrument and the value of the liability component

Financial Assets – Investments in Equity Instruments 

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Fair value through profit or loss: Investments in equity instruments classified as fair value through profit or loss are initially recognised at fair value. Transaction costs are expensed to profit or loss. At the reporting date the asset is revalued to fair value with the gain or loss being recorded in the statement of profit or loss. Fair value through other comprehensive income: Investments in equity instruments classified as fair value through other comprehensive income are initially recognised at fair value plus transaction costs. At the reporting date, the asset is revalued to fair value with the gain or loss being recorded in other comprehensive income. This gain or loss may not be reclassified to profit or loss in future periods.

Financial Assets – Investments in Debt Instruments Financial Assets that are debt instruments can be measured in one of three ways:   

Amortised cost Fair value through other comprehensive income Fair value through profit or loss

Amortised cost – IFRS 9 says that an investment in a debt instrument is measured at amortised cost if: 

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The entity’s business model is collect contractual cash flows. o This means that the entity does not plan on selling the asset prior to maturity, but rather intends to hold it until redemption The contractual terms of the financial asset give rise to cash flows that are solely payments of principal and interest on the principal amount outstanding

Measurement – For investments in debt that are measured at amortised cost:  

The asset is initially recognised at fair value plus transaction costs Interest income is calculated using the effective rate of interest

Fair value through other comprehensive income – An investment in a debt instrument is measured at fair value through other comprehensive income if: 

The entity’s business model involves both collecting contractual cash flows and selling financial assets.

This means that sales are more frequent than for debt instruments held at amortised cost. For instance, the entity may sell financial assets if the possibility of buying investments with a higher return arises. The contractual terms of the financial asset give rise to cash flows that are solely payments of principal and interest on the principal amount outstanding. o

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Measurement – For investments in debt that are measured at fair value through other comprehensive income:   

The asset is initially recognised at fair value plus transaction costs Interest income is calculated using the effective rate of interest At the reporting date, the asset is revalued to fair value with the gain or loss recognised in other comprehensive income. This will be reclassified to profit or loss when the financial asset is disposed of.

Fair value through profit or loss – Investments in debt instruments that are not measured at amortised cost or fair value through other comprehensive income are measured, according to IFRS 9 at fair value through profit or loss Meaurement – For investments in debt that are measured at fair value through profit or loss:  

The asset is initially recognised at fair value, with any transaction costs being expensed to the statement of profit or loss At the reporting date, the asset is revalued to fair value, with the gain or loss recognised in the statement of profit or loss

Reclassification – Financial assets are classified according to IFRS 9, when initially recognised. If an entity changes its business model for managing financial assets, all affected financial assets are reclassified. This applies only to investments in debt. Credit Loss Allowances – For Investments in debt instruments measured at amortised cost or fair value through other comprehensive income, the entity must also recognise a credit loss allowance. Impairment of Financial Assets – IFRS 9 says that a loss allownance must be recognised for financial assets that are debt instruments and which are measured at amortised cost or fair value through other comprehensive income.  

If credit risk on the financial asset has not increased significantly, the loss allowance should be equal to 12 month expected credit losses If credit risk on the financial asset has increased significantly, the loss allowance should be equal to lifetime expected credit losses

1. A credit loss is the present value of the difference between contractual cash flows and the cash flows that the entity expects to receive 2. Expected credit losses are the weighted average credit losses 3. Lifetime Expected Credit Losses are the expected credit losses that result from all possible default events

4. 12 month Expected Credit Losses are the portion of lifetime expected credit losses that might occur with 12 months after the reporting date Adjustments to the loss allowances are charged/credited to the statement of profit or loss Unless credit-impaired, interest income is recognised on the gross carrying value of the asset Significant increases in credit risk – To assess whether there has been a significant increase in credit risk, IFRS 9 says that an entity should compare the asset’s risk of default at the reporting date with its risk of default on initial recognition. Entities should not solely rely on past information when determining if credit risk has increased significantly. An entity can assume that credit risk has not increased significantly if the instrument has a low credit risk at the reporting date. Credit risk can be assumed to have increased if contractual payments are more than 30 days overdue at the reporting date. Measuring Expected Credit Losses – An entity’s estimate of expected credit losses should be:   

Unbiased and probability weighted Reflective of the time value of money Based on information about past events, current conditions and forecasts of future economic conditions

If an asset is credit-impaired, IFRS 9 says that the loss allowance should be measured ...