IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors

Overview
IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors is applied in selecting and applying accounting policies, accounting for
changes in estimates and reflecting corrections of prior period errors.
The standard requires compliance with any specific IFRS applying to a transaction, event or condition, and provides guidance on developing accounting
policies for other items that result in relevant and reliable information. Changes in accounting policies and corrections of errors are generally
retrospectively accounted for, whereas changes in accounting estimates are generally accounted for on a prospective basis.
IAS 8 was reissued in December 2005 and applies to annual periods beginning on or after 1 January 2005.
Summary of IAS 8
Key definitions [IAS 8.5]
Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting
financial statements.
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.
International Financial Reporting Standardsare standards and interpretations adopted by the International Accounting Standards Board
(IASB). They comprise:
o International Financial Reporting Standards (IFRSs)
o International Accounting Standards (IASs)
o Interpretations developed by the International Financial Reporting Interpretations Committee (IFRIC) or the former Standing
Interpretations Committee (SIC) and approved by the IASB.
Materiality. Omissions or misstatements of items are material if they could, by their size or nature, individually or collectively, influence the
economic decisions of users taken on the basis of the financial statements.
Prior period errors are omissions from, and misstatements in, an entity's financial statements for one or more prior periods arising from a
failure to use, or misuse of, reliable information that was available and could reasonably be expected to have been obtained and taken into
account in preparing those statements. Such errors result from mathematical mistakes, mistakes in applying accounting policies, oversights or
misinterpretations of facts, and fraud.
Selection and application of accounting policies
When a Standard or an Interpretation specifically applies to a transaction, other event or condition, the accounting policy or policies applied to that item
must be determined by applying the Standard or Interpretation and considering any relevant Implementation Guidance issued by the IASB for the
Standard or Interpretation. [IAS 8.7]
In the absence of a Standard or an Interpretation that specifically applies to a transaction, other event or condition, management must use its judgement
in developing and applying an accounting policy that results in information that is relevant and reliable. [IAS 8.10]. In making that judgement,
management must refer to, and consider the applicability of, the following sources in descending order:
the requirements and guidance in IASB standards and interpretations dealing with similar and related issues; and
the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the Framework. [IAS 8.11]
Management may also consider the most recent pronouncements of other standard-setting bodies that use a similar conceptual framework to develop
accounting standards, other accounting literature and accepted industry practices, to the extent that these do not conflict with the sources in paragraph
11. [IAS 8.12]
Consistency of accounting policies
An entity shall select and apply its accounting policies consistently for similar transactions, other events and conditions, unless a Standard or an
Interpretation specifically requires or permits categorisation of items for which different policies may be appropriate. If a Standard or an Interpretation
requires or permits such categorisation, an appropriate accounting policy shall be selected and applied consistently to each category. [IAS 8.13]
Changes in accounting policies
An entity is permitted to change an accounting policy only if the change:
is required by a standard or interpretation; or
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. [IAS 8.14]
Note that changes in accounting policies do not include applying an accounting policy to a kind of transaction or event that did not occur previously or
were immaterial. [IAS 8.16]
If a change in accounting policy is required by a new IASB standard or interpretation, the change is accounted for as required by that new
pronouncement or, if the new pronouncement does not include specific transition provisions, then the change in accounting policy is applied
retrospectively. [IAS 8.19]
Retrospective application means adjusting the opening balance of each affected component of equity for the earliest prior period presented and the other
comparative amounts disclosed for each prior period presented as if the new accounting policy had always been applied. [IAS 8.22]
However, if it is impracticable to determine either the period-specific effects or the cumulative effect of the change for one or more prior
periods presented, the entity shall apply the new accounting policy to the carrying amounts of assets and liabilities as at the beginning of the
earliest period for which retrospective application is practicable, which may be the current period, and shall make a corresponding adjustment
to the opening balance of each affected component of equity for that period. [IAS 8.24]
Also, if it is impracticable to determine the cumulative effect, at the beginning of the current period, of applying a new accounting policy to
all prior periods, the entity shall adjust the comparative information to apply the new accounting policy prospectively from the earliest date
practicable. [IAS 8.25]
Disclosures relating to changes in accounting policies
Disclosures relating to changes in accounting policy caused by a new standard or interpretation include: [IAS 8.28]
the title of the standard or interpretation causing the change
the nature of the change in accounting policy
a description of the transitional provisions, including those that might have an effect on future periods
for the current period and each prior period presented, to the extent practicable, the amount of the adjustment:
o for each financial statement line item affected, and
o for basic and diluted earnings per share (only if the entity is applying IAS 33)
the amount of the adjustment relating to periods before those presented, to the extent practicable
if retrospective application is impracticable, an explanation and description of how the change in accounting policy was applied.
Financial statements of subsequent periods need not repeat these disclosures.
Disclosures relating to voluntary changes in accounting policy include: [IAS 8.29]
the nature of the change in accounting policy
the reasons why applying the new accounting policy provides reliable and more relevant information
for the current period and each prior period presented, to the extent practicable, the amount of the adjustment:
o for each financial statement line item affected, and
o for basic and diluted earnings per share (only if the entity is applying IAS 33)
the amount of the adjustment relating to periods before those presented, to the extent practicable
if retrospective application is impracticable, an explanation and description of how the change in accounting policy was applied.
Financial statements of subsequent periods need not repeat these disclosures.
If an entity has not applied a new standard or interpretation that has been issued but is not yet effective, the entity must disclose that fact and any and
known or reasonably estimable information relevant to assessing the possible impact that the new pronouncement will have in the year it is applied.
[IAS 8.30]
Changes in accounting estimates
The effect of a change in an accounting estimate shall be recognised prospectively by including it in profit or loss in: [IAS 8.36]
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.
However, to the extent that a change in an accounting estimate gives rise to changes in assets and liabilities, or relates to an item of equity, it is
recognised by adjusting the carrying amount of the related asset, liability, or equity item in the period of the change. [IAS 8.37]
Disclosures relating to changes in accounting estimates
Disclose:
the nature and amount of a change in an accounting estimate that has an effect in the current period or is expected to have an effect in future
periods
if the amount of the effect in future periods is not disclosed because estimating it is impracticable, an entity shall disclose that fact. [IAS 8.39-
40]
Errors
The general principle in IAS 8 is that an entity must correct all material prior period errors retrospectively in the first set of financial statements
authorised for issue after their discovery by: [IAS 8.42]
restating the comparative amounts for the prior period(s) presented in which the error occurred; or
if the error occurred before the earliest prior period presented, restating the opening balances of assets, liabilities and equity for the earliest
prior period presented.
However, if it is impracticable to determine the period-specific effects of an error on comparative information for one or more prior periods presented,
the entity must restate the opening balances of assets, liabilities, and equity for the earliest period for which retrospective restatement is practicable
(which may be the current period). [IAS 8.44]
Further, if it is impracticable to determine the cumulative effect, at the beginning of the current period, of an error on all prior periods, the entity must
restate the comparative information to correct the error prospectively from the earliest date practicable. [IAS 8.45]
Disclosures relating to prior period errors
Disclosures relating to prior period errors include: [IAS 8.49]
the nature of the prior period error
for each prior period presented, to the extent practicable, the amount of the correction:
o for each financial statement line item affected, and
o for basic and diluted earnings per share (only if the entity is applying IAS 33)
the amount of the correction at the beginning of the earliest prior period presented
if retrospective restatement is impracticable, an explanation and description of how the error has been corrected.
Financial statements of subsequent periods need not repeat these disclosures.
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations
Overview
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations outlines how to account for non-current assets held for sale (or for distribution
to owners). In general terms, assets (or disposal groups) held for sale are not depreciated, are measured at the lower of carrying amount and fair value
less costs to sell, and are presented separately in the statement of financial position. Specific disclosures are also required for discontinued operations
and disposals of non-current assets.
IFRS 5 was issued in March 2004 and applies to annual periods beginning on or after 1 January 2005.
Summary of IFRS 5
Background
IFRS 5 achieves substantial convergence with the requirements of US SFAS 144 Accounting for the Impairment or Disposal of Long-Lived Assets with
respect to the timing of the classification of operations as discontinued operations and the presentation of such operations. With respect to long-lived
assets that are not being disposed of, the impairment recognition and measurement standards in SFAS 144 are significantly different from those in
IAS 36Impairment of Assets. However those differences were not addressed in the short-term IASB-FASB convergence project.
Key provisions of IFRS 5 relating to assets held for sale
Held-for-sale classification
In general, the following conditions must be met for an asset (or 'disposal group') to be classified as held for sale: [IFRS 5.6-8]
management is committed to a plan to sell
the asset is available for immediate sale
an active programme to locate a buyer is initiated
the sale is highly probable, within 12 months of classification as held for sale (subject to limited exceptions)
the asset is being actively marketed for sale at a sales price reasonable in relation to its fair value
actions required to complete the plan indicate that it is unlikely that plan will be significantly changed or withdrawn
The assets need to be disposed of through sale. Therefore, operations that are expected to be wound down or abandoned would not meet the definition
(but may be classified as discontinued once abandoned). [IFRS 5.13]
An entity that is committed to a sale involving loss of control of a subsidiary that qualifies for held-for-sale classification under IFRS 5 classifies all of
the assets and liabilities of that subsidiary as held for sale, even if the entity will retain a non-controlling interest in its former subsidiary after the sale.
[IFRS 5.8A]
Held for distribution to owners classification
The classification, presentation and measurement requirements of IFRS 5 also apply to a non-current asset (or disposal group) that is classified as held
for distribution to owners. [IFRS 5.5A and IFRIC 17] The entity must be committed to the distribution, the assets must be available for immediate
distribution and the distribution must be highly probable. [IFRS 5.12A]
Disposal group concept
A 'disposal group' is a group of assets, possibly with some associated liabilities, which an entity intends to dispose of in a single transaction. The
measurement basis required for non-current assets classified as held for sale is applied to the group as a whole, and any resulting impairment loss
reduces the carrying amount of the non-current assets in the disposal group in the order of allocation required by IAS 36. [IFRS 5.4]
Measurement
The following principles apply:
At the time of classification as held for sale. Immediately before the initial classification of the asset as held for sale, the carrying amount of
the asset will be measured in accordance with applicable IFRSs. Resulting adjustments are also recognised in accordance with applicable
IFRSs. [IFRS 5.18]
After classification as held for sale. Non-current assets or disposal groups that are classified as held for sale are measured at the lower of
carrying amount and fair value less costs to sell (fair value less costs to distribute in the case of assets classified as held for distribution to
owners). [IFRS 5.15-15A]
Impairment.Impairment must be considered both at the time of classification as held for sale and subsequently:
o At the time of classification as held for sale. Immediately prior to classifying an asset or disposal group as held for sale, impairment
is measured and recognised in accordance with the applicable IFRSs (generally IAS 16Property, Plant and Equipment,
IAS 36Impairment of Assets, IAS 38Intangible Assets, and IAS 39Financial Instruments: Recognition and
Measurement/IFRS 9Financial Instruments). Any impairment loss is recognised in profit or loss unless the asset had been
measured at revalued amount under IAS 16 or IAS 38, in which case the impairment is treated as a revaluation decrease.
o After classification as held for sale. Calculate any impairment loss based on the difference between the adjusted carrying amounts
of the asset/disposal group and fair value less costs to sell. Any impairment loss that arises by using the measurement principles in
IFRS 5 must be recognised in profit or loss [IFRS 5.20], even for assets previously carried at revalued amounts. This is supported by
IFRS 5 BC.47 and BC.48, which indicate the inconsistency with IAS 36.
Assets carried at fair value prior to initial classification. For such assets, the requirement to deduct costs to sell from fair value may result in
an immediate charge to profit or loss.
Subsequent increases in fair value. A gain for any subsequent increase in fair value less costs to sell of an asset can be recognised in the
profit or loss to the extent that it is not in excess of the cumulative impairment loss that has been recognised in accordance with IFRS 5 or
previously in accordance with IAS 36. [IFRS 5.21-22]
No depreciation. Non-current assets or disposal groups that are classified as held for sale are not depreciated. [IFRS 5.25]
The measurement provisions of IFRS 5 do not apply to deferred tax assets, assets arising from employee benefits, financial assets within the scope of
IFRS 9Financial Instruments, non-current assets measured at fair value in accordance with IAS 41Agriculture, and contractual rights under insurance
contracts. [IFRS 5.5]
Presentation
Assets classified as held for sale, and the assets and liabilities included within a disposal group classified as held for sale, must be presented separately
on the face of the statement of financial position. [IFRS 5.38]
Disclosures
IFRS 5 requires the following disclosures about assets (or disposal groups) that are held for sale: [IFRS 5.41]
description of the non-current asset or disposal group
description of facts and circumstances of the sale (disposal) and the expected timing
impairment losses and reversals, if any, and where in the statement of comprehensive income they are recognised
if applicable, the reportable segment in which the non-current asset (or disposal group) is presented in accordance with IFRS 8Operating
Segments
Disclosures in other IFRSs do not apply to assets held for sale (or discontinued operations, discussed below) unless those other IFRSs require specific
disclosures in respect of such assets, or in respect of certain measurement disclosures where assets and liabilities are outside the scope of the
measurement requirements of IFRS 5. [IFRS 5.5B]
Key provisions of IFRS 5 relating to discontinued operations
Classification as discontinuing
A discontinued operation is a component of an entity that either has been disposed of or is classified as held for sale, and: [IFRS 5.32]
represents either a separate major line of business or a geographical area of operations
is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations, or
is a subsidiary acquired exclusively with a view to resale and the disposal involves loss of control.
IFRS 5 prohibits the retroactive classification as a discontinued operation, when the discontinued criteria are met after the end of the reporting period.
[IFRS 5.12]
Disclosure in the statement of comprehensive income
The sum of the post-tax profit or loss of the discontinued operation and the post-tax gain or loss recognised on the measurement to fair value less cost to
sell or fair value adjustments on the disposal of the assets (or disposal group) is presented as a single amount on the face of the statement of
comprehensive income. If the entity presents profit or loss in a separate statement, a section identified as relating to discontinued operations is presented
in that separate statement. [IFRS 5.33-33A].
Detailed disclosure of revenue, expenses, pre-tax profit or loss and related income taxes is required either in the notes or in the statement of
comprehensive income in a section distinct from continuing operations. [IFRS 5.33] Such detailed disclosures must cover both the current and all prior
periods presented in the financial statements. [IFRS 5.34]
Cash flow information
The net cash flows attributable to the operating, investing, and financing activities of a discontinued operation is separately presented on the face of the
cash flow statement or disclosed in the notes. [IFRS 5.33]
Disclosures
The following additional disclosures are required:
adjustments made in the current period to amounts disclosed as a discontinued operation in prior periods must be separately disclosed
[IFRS 5.35]
if an entity ceases to classify a component as held for sale, the results of that component previously presented in discontinued operations
must be reclassified and included in income from continuing operations for all periods presented [IFRS 5.36]
IFRS 3 Business Combinations
Overview
IFRS 3 Business Combinations outlines the accounting when an acquirer obtains control of a business (e.g. an acquisition or merger). Such business
combinations are accounted for using the 'acquisition method', which generally requires assets acquired and liabilities assumed to be measured at their
fair values at the acquisition date.
A revised version of IFRS 3 was issued in January 2008 and applies to business combinations occurring in an entity's first annual period beginning on
or after 1 July 2009.
Summary of IFRS 3
Background
IFRS 3 (2008) seeks to enhance the relevance, reliability and comparability of information provided about business combinations (e.g. acquisitions and
mergers) and their effects. It sets out the principles on the recognition and measurement of acquired assets and liabilities, the determination of goodwill
and the necessary disclosures.
IFRS 3 (2008) resulted from a joint project with the US Financial Accounting Standards Board (FASB) and replaced IFRS 3 (2004). FASB issued a
similar standard in December 2007 (SFAS 141(R)). The revisions result in a high degree of convergence between IFRSs and US GAAP in the
accounting for business combinations, although some potentially significant differences remain.
Key definitions
[IFRS 3, Appendix A]
business
combination
A transaction or other event in which an acquirer obtains control of one or more businesses. Transactions sometimes referred to as
'true mergers' or 'mergers of equals' are also business combinations as that term is used in [IFRS 3]
business
An integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in
the form of dividends, lower costs or other economic benefits directly to investors or other owners, members or participants
acquisition date The date on which the acquirer obtains control of the acquiree
acquirer The entity that obtains control of the acquiree
acquiree The business or businesses that the acquirer obtains control of in a business combination
Scope
IFRS 3 must be applied when accounting for business combinations, but does not apply to:
The formation of a joint venture* [IFRS 3.2(a)]
The acquisition of an asset or group of assets that is not a business, although general guidance is provided on how such transactions should
be accounted for [IFRS 3.2(b)]
Combinations of entities or businesses under common control (the IASB has a separate agenda project on common control transactions)
[IFRS 3.2(c)]
Acquisitions by an investment entity of a subsidiary that is required to be measured at fair value through profit or loss under
IFRS 10Consolidated Financial Statements. [IFRS 3.2A]
* Annual Improvements to IFRSs 20112013 Cycle, effective for annual periods beginning on or after 1 July 2014, amends this scope exclusion to
clarify that is applies to the accounting for the formation of a joint arrangement in the financial statements of the joint arrangement itself.
Determining whether a transaction is a business combination
IFRS 3 provides additional guidance on determining whether a transaction meets the definition of a business combination, and so accounted for in
accordance with its requirements. This guidance includes:
Business combinations can occur in various ways, such as by transferring cash, incurring liabilities, issuing equity instruments (or any
combination thereof), or by not issuing consideration at all (i.e. by contract alone) [IFRS 3.B5]
Business combinations can be structured in various ways to satisfy legal, taxation or other objectives, including one entity becoming a
subsidiary of another, the transfer of net assets from one entity to another or to a new entity [IFRS 3.B6]
The business combination must involve the acquisition of a business, which generally has three elements: [IFRS 3.B7]
o Inputs an economic resource (e.g. non-current assets, intellectual property) that creates outputs when one or more processes
are applied to it
o Process a system, standard, protocol, convention or rule that when applied to an input or inputs, creates outputs (e.g. strategic
management, operational processes, resource management)
o Output the result of inputs and processes applied to those inputs.
Method of accounting for business combinations
Acquisition method
The acquisition method (called the 'purchase method' in the 2004 version of IFRS 3) is used for all business combinations. [IFRS 3.4]
Steps in applying the acquisition method are: [IFRS 3.5]
1. Identification of the 'acquirer'
2. Determination of the 'acquisition date'
3. Recognition and measurement of the identifiable assets acquired, the liabilities assumed and any non-controlling interest (NCI, formerly
called minority interest) in the acquiree
4. Recognition and measurement of goodwill or a gain from a bargain purchase
I dentifying an acquirer
The guidance in IFRS 10Consolidated Financial Statements is used to identify an acquirer in a business combination, i.e. the entity that obtains 'control'
of the acquiree. [IFRS 3.7]
If the guidance in IFRS 10 does not clearly indicate which of the combining entities is an acquirer, IFRS 3 provides additional guidance which is then
considered:
The acquirer is usually the entity that transfers cash or other assets where the business combination is effected in this manner [IFRS 3.B14]
The acquirer is usually, but not always, the entity issuing equity interests where the transaction is effected in this manner, however the
entity also considers other pertinent facts and circumstances including: [IFRS 3.B15]
o relative voting rights in the combined entity after the business combination
o the existence of any large minority interest if no other owner or group of owners has a significant voting interest
o the composition of the governing body and senior management of the combined entity
o the terms on which equity interests are exchanged
The acquirer is usually the entity with the largest relative size (assets, revenues or profit) [IFRS 3.B16]
For business combinations involving multiple entities, consideration is given to the entity initiating the combination, and the relative sizes of
the combining entities. [IFRS 3.B17]
Acquisition date
An acquirer considers all pertinent facts and circumstances when determining the acquisition date, i.e. the date on which it obtains control of the
acquiree. The acquisition date may be a date that is earlier or later than the closing date. [IFRS 3.8-9]
IFRS 3 does not provide detailed guidance on the determination of the acquisition date and the date identified should reflect all relevant facts and
circumstances. Considerations might include, among others, the date a public offer becomes unconditional (with a controlling interest acquired),
when the acquirer can effect change in the board of directors of the acquiree, the date of acceptance of an unconditional offer, when the acquirer
starts directing the acquiree's operating and financing policies, or the date competition or other authorities provide necessarily clearances.
Acquired assets and liabilities
IFRS 3 establishes the following principles in relation to the recognition and measurement of items arising in a business combination:
Recognition principle. Identifiable assets acquired, liabilities assumed, and non-controlling interests in the acquiree, are recognised
separately from goodwill [IFRS 3.10]
Measurement principle. All assets acquired and liabilities assumed in a business combination are measured at acquisition-date fair value.
[IFRS 3.18]
Exceptions to the recognition and measurement principles
The following exceptions to the above principles apply:
Contingent liabilities the requirements of IAS 37Provisions, Contingent Liabilities and Contingent Assets do not apply to the recognition of
contingent liabilities arising in a business combination [IFRS 3.22-23]
Income taxes the recognition and measurement of income taxes is in accordance with IAS 12Income Taxes [IFRS 3.24-25]
Employee benefits assets and liabilities arising from an acquiree's employee benefits arrangements are recognised and measured in
accordance with IAS 19Employee Benefits (2011) [IFRS 2.26]
Indemnification assets - an acquirer recognises indemnification assets at the same time and on the same basis as the indemnified item
[IFRS 3.27-28]
Reacquired rights the measurement of reacquired rights is by reference to the remaining contractual term without renewals [IFRS 3.29]
Share-based payment transactions - these are measured by reference to the method in IFRS 2Share-based Payment
Assets held for sale IFRS 5Non-current Assets Held for Sale and Discontinued Operations is applied in measuring acquired non-current
assets and disposal groups classified as held for sale at the acquisition date.
In applying the principles, an acquirer classifies and designates assets acquired and liabilities assumed on the basis of the contractual terms, economic
conditions, operating and accounting policies and other pertinent conditions existing at the acquisition date. For example, this might include the
identification of derivative financial instruments as hedging instruments, or the separation of embedded derivatives from host contracts.[IFRS 3.15]
However, exceptions are made for lease classification (between operating and finance leases) and the classification of contracts as insurance contracts,
which are classified on the basis of conditions in place at the inception of the contract. [IFRS 3.17]
Acquired intangible assets must be recognised and measured at fair value in accordance with the principles if it is separable or arises from other
contractual rights, irrespective of whether the acquiree had recognised the asset prior to the business combination occurring. This is because there is
always sufficient information to reliably measure the fair value of these assets. [IAS 38.33-37] There is no 'reliable measurement' exception for such
assets, as was present under IFRS 3 (2004).
Goodwill
Goodwill is measured as the difference between:
the aggregate of (i) the value of the consideration transferred (generally at fair value), (ii) the amount of any non-controlling interest (NCI,
see below), and (iii) in a business combination achieved in stages (see below), the acquisition-date fair value of the acquirer's previously-
held equity interest in the acquiree, and
the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed (measured in accordance with IFRS 3).
[IFRS 3.32]
This can be written in simplified equation form as follows:

Goodwill = Consideration transferred + Amount of non-controlling interests + Fair value of previous equity interests - Net assets recognised

If the difference above is negative, the resulting gain is a bargain purchase in profit or loss, which may arise in circumstances such as a forced seller
acting under compulsion. [IFRS 3.34-35] However, before any bargain purchase gain is recognised in profit or loss, the acquirer is required to
undertake a review to ensure the identification of assets and liabilities is complete, and that measurements appropriately reflect consideration of all
available information. [IFRS 3.36]
Choice in the measurement of non-controlling interests (NCI )
IFRS 3 allows an accounting policy choice, available on a transaction by transaction basis, to measure non-controlling interests (NCI) either at: [IFRS
3.19]
fair value (sometimes called the full goodwill method), or
the NCI's proportionate share of net assets of the acquiree.
The choice in accounting policy applies only to present ownership interests in the acquiree that entitle holders to a proportionate share of the entity's net
assets in the event of a liquidation (e.g. outside holdings of an acquiree's ordinary shares). Other components of non-controlling interests at must be
measured at acquisition date fair values or in accordance with other applicable IFRSs (e.g. share-based payment transactions accounted for under
IFRS 2Share-based Payment). [IFRS 3.19]
Example
P pays 800 to acquire an 80% interest in the ordinary shares of S. The aggregated fair value of 100% of S's identifiable assets and liabilities (determined
in accordance with the requirements of IFRS 3) is 600, and the fair value of the non-controlling interest (the remaining 20% holding of ordinary shares)
is 185.
The measurement of the non-controlling interest, and its resultant impacts on the determination of goodwill, under each option is illustrated below:

NCI based on
fair value
NCI based on
net assets
Consideration transferred 800 800
Non-controlling interest 185
(1)
120
(2)


985 920
Net assets (600) (600)
Goodwill 385 320
(1) The fair value of the 20% non-controlling interest in S will not necessarily be proportionate to the price paid by P for its 80% interest, primarily due
to any control premium or discount [IFRS 3.B45]
(2) Calculated as 20% of the fair value of the net assets of 600.
Business combination achieved in stages (step acquisitions)
Prior to control being obtained, an acquirer accounts for its investment in the equity interests of an acquiree in accordance with the nature of the
investment by applying the relevant standard, e.g. IAS 28Investments in Associates and Joint Ventures (2011), IFRS 11Joint Arrangements,
IAS 39Financial Instruments: Recognition and Measurement or IFRS 9Financial Instruments. As part of accounting for the business combination, the
acquirer remeasures any previously held interest at fair value and takes this amount into account in the determination of goodwill as noted above [IFRS
3.32] Any resultant gain or loss is recognised in profit or loss or other comprehensive income as appropriate. [IFRS 3.42]
The accounting treatment of an entity's pre-combination interest in an acquiree is consistent with the view that the obtaining of control is a significant
economic event that triggers a remeasurement. Consistent with this view, all of the assets and liabilities of the acquiree are fully remeasured in
accordance with the requirements of IFRS 3 (generally at fair value). Accordingly, the determination of goodwill occurs only at the acquisition date.
This is different to the accounting for step acquisitions under IFRS 3(2004).
Measurement period
If the initial accounting for a business combination can be determined only provisionally by the end of the first reporting period, the business
combination is accounted for using provisional amounts. Adjustments to provisional amounts, and the recognition of newly identified asset and
liabilities, must be made within the 'measurement period' where they reflect new information obtained about facts and circumstances that were in
existence at the acquisition date. [IFRS 3.45] The measurement period cannot exceed one year from the acquisition date and no adjustments are
permitted after one year except to correct an error in accordance with IAS 8. [IFRS 3.50]
Related transactions and subsequent accounting
General principles
In general:
transactions that are not part of what the acquirer and acquiree (or its former owners) exchanged in the business combination are
identified and accounted for separately from business combination
the recognition and measurement of assets and liabilities arising in a business combination after the initial accounting for the business
combination is dealt with under other relevant standards, e.g. acquired inventory is subsequently accounted under IAS 2Inventories. [IFRS
3.54]
When determining whether a particular item is part of the exchange for the acquiree or whether it is separate from the business combination, an acquirer
considers the reason for the transaction, who initiated the transaction and the timing of the transaction. [IFRS 3.B50]
Contingent consideration
Contingent consideration must be measured at fair value at the time of the business combination and is taken into account in the determination of
goodwill. If the amount of contingent consideration changes as a result of a post-acquisition event (such as meeting an earnings target), accounting for
the change in consideration depends on whether the additional consideration is classified as an equity instrument or an asset or liability: [IFRS 3.58]
If the contingent consideration is classified as an equity instrument, the original amount is not remeasured
If the additional consideration is classified as an asset or liability that is a financial instrument, the contingent consideration is measured at
fair value and gains and losses are recognised in either profit or loss or other comprehensive income in accordance with IFRS 9Financial
Instruments or IAS 39Financial Instruments: Recognition and Measurement
If the additional consideration is not within the scope of IFRS 9 (or IAS 39), it is accounted for in accordance with IAS 37Provisions,
Contingent Liabilities and Contingent Assets or other IFRSs as appropriate.
Note: Annual Improvements to IFRSs 20102012 Cycle changes these requirements for business combinations for which the acquisition date is on or
after 1 July 2014. Under the amended requirements, contingent consideration that is classified as an asset or liability is measured at fair value at each
reporting date and changes in fair value are recognised in profit or loss, both for contingent consideration that is within the scope of IFRS 9/IAS 39 or
otherwise.
Where a change in the fair value of contingent consideration is the result of additional information about facts and circumstances that existed at the
acquisition date, these changes are accounted for as measurement period adjustments if they arise during the measurement period (see above). [IFRS
3.58]
Acquisition costs
Costs of issuing debt or equity instruments are accounted for under IAS 32Financial Instruments: Presentation and IAS 39Financial Instruments:
Recognition and Measurement/IFRS 9Financial Instruments. All other costs associated with an acquisition must be expensed, including
reimbursements to the acquiree for bearing some of the acquisition costs. Examples of costs to be expensed include finder's fees; advisory, legal,
accounting, valuation and other professional or consulting fees; and general administrative costs, including the costs of maintaining an internal
acquisitions department. [IFRS 3.53]
Pre-existing relationships and reacquired rights
If the acquirer and acquiree were parties to a pre-existing relationship (for instance, the acquirer had granted the acquiree a right to use its intellectual
property), this must must be accounted for separately from the business combination. In most cases, this will lead to the recognition of a gain or loss for
the amount of the consideration transferred to the vendor which effectively represents a 'settlement' of the pre-existing relationship. The amount of the
gain or loss is measured as follows:
for pre-existing non-contractual relationships (for example, a lawsuit): by reference to fair value
for pre-existing contractual relationships: at the lesser of (a) the favourable/unfavourable contract position and (b) any stated settlement
provisions in the contract available to the counterparty to whom the contract is unfavourable. [IFRS 3.B51-53]
However, where the transaction effectively represents a reacquired right, an intangible asset is recognised and measured on the basis of the remaining
contractual term of the related contract excluding any renewals. The asset is then subsequently amortised over the remaining contractual term, again
excluding any renewals. [IFRS 3.55]
Contingent liabilities
Until a contingent liability is settled, cancelled or expired, a contingent liability that was recognised in the initial accounting for a business combination
is measured at the higher of the amount the liability would be recognised under IAS 37Provisions, Contingent Liabilities and Contingent Assets, and the
amount less accumulated amortisation under IAS 18Revenue. [IFRS 3.56]
Contingent payments to employees and shareholders
As part of a business combination, an acquirer may enter into arrangements with selling shareholders or employees. In determining whether such
arrangements are part of the business combination or accounted for separately, the acquirer considers a number of factors, including whether the
arrangement requires continuing employment (and if so, its term), the level or remuneration compared to other employees, whether payments to
shareholder employees are incremental to non-employee shareholders, the relative number of shares owns, linkages to valuation of the acquiree, how
the consideration is calculated, and other agreements and issues. [IFRS 3.B55]
Where share-based payment arrangements of the acquiree exist and are replaced, the value of such awards must be apportioned between pre-
combination and post-combination service and accounted for accordingly. [IFRS 3.B56-B62B]
I ndemnification assets
Indemnification assets recognised at the acquisition date (under the exceptions to the general recognition and measurement principles noted above) are
subsequently measured on the same basis of the indemnified liability or asset, subject to contractual impacts and collectibility. Indemnification assets
are only derecognised when collected, sold or when rights to it are lost. [IFRS 3.57]
Other issues
In addition, IFRS 3 provides guidance on some specific aspects of business combinations including:
business combinations achieved without the transfer of consideration, e.g. 'dual listed' and 'stapled' arrangements [IFRS 3.43-44]
reverse acquisitions [IFRS 3.B19]
identifying intangible assets acquired [IFRS 3.B31-34]
Disclosure
Disclosure of information about current business combinations
An acquirer is required to disclose information that enables users of its financial statements to evaluate the nature and financial effect of a business
combination that occurs either during the current reporting period or after the end of the period but before the financial statements are authorised for
issue. [IFRS 3.59]
Among the disclosures required to meet the foregoing objective are the following: [IFRS 3.B64-B66]
name and a description of the acquiree
acquisition date
percentage of voting equity interests acquired
primary reasons for the business combination and a description of how the acquirer obtained control of the acquiree
description of the factors that make up the goodwill recognised
qualitative description of the factors that make up the goodwill recognised, such as expected synergies from combining operations,
intangible assets that do not qualify for separate recognition
acquisition-date fair value of the total consideration transferred and the acquisition-date fair value of each major class of consideration
details of contingent consideration arrangements and indemnification assets
details of acquired receivables
the amounts recognised as of the acquisition date for each major class of assets acquired and liabilities assumed
details of contingent liabilities recognised
total amount of goodwill that is expected to be deductible for tax purposes
details about any transactions that are recognised separately from the acquisition of assets and assumption of liabilities in the business
combination
information about a bargain purchase
information about the measurement of non-controlling interests
details about a business combination achieved in stages
information about the acquiree's revenue and profit or loss
information about a business combination whose acquisition date is after the end of the reporting period but before the financial
statements are authorised for issue
Disclosure of information about adjustments of past business combinations
An acquirer is required to disclose information that enables users of its financial statements to evaluate the financial effects of adjustments recognised in
the current reporting period that relate to business combinations that occurred in the period or previous reporting periods. [IFRS 3.61]
Among the disclosures required to meet the foregoing objective are the following: [IFRS 3.B67]
details when the initial accounting for a business combination is incomplete for particular assets, liabilities, non-controlling interests or
items of consideration (and the amounts recognised in the financial statements for the business combination thus have been determined
only provisionally)
follow-up information on contingent consideration
follow-up information about contingent liabilities recognised in a business combination
a reconciliation of the carrying amount of goodwill at the beginning and end of the reporting period, with various details shown separately
the amount and an explanation of any gain or loss recognised in the current reporting period that both:
o relates to the identifiable assets acquired or liabilities assumed in a business combination that was effected in the current or
previous reporting period, and
o is of such a size, nature or incidence that disclosure is relevant to understanding the combined entity's financial statements.
Deloitte guide to IFRS 3 and IAS 27

In July 2008, the Deloitte IFRS Global Office has published Business Combinations and Changes in Ownership Interests: A Guide to the Revised IFRS
3 and IAS 27. This 164-page guide deals mainly with accounting for business combinations under IFRS 3(2008). Where appropriate, it deals with
related requirements of IAS 27(2008) particularly as regards the definition of control, accounting for non-controlling interests, and changes in
ownership interests. Other aspects of IAS 27 (such as the requirements to prepare consolidated financial statements and detailed procedures for
consolidation) are not addressed.
Click to download the new Guide to IFRS 3 and IAS 27 (PDF 647k).
Overview of differences between IFRS 3 (2008) and IFRS 3 (2004)
The table below summarises some of key differences in accounting for business combinations under IFRS 3 (2008) and IFRS 3 (2004). The table is not
exhaustive.
Area High-level overview of changes
Transaction costs
acquisition costs such as advisers fees, stamp duty and similar costs cannot be included in
the measurement of goodwill
Calculation of goodwill
pre-existing ownership interests are measured fair valued at acquisition date
option to measure non-controlling interests on the basis of fair value or net assets
(transaction by transaction)
Contingent consideration (e.g. earn-outs)
fair value accounting at the acquisition date
subsequent changes do not impact goodwill but are accounted for separately
Transactions arising in conjunction with
business combinations
new detailed guidance on the split between compensation and consideration for
replacement share-based payment awards
settlement of pre-existing relationships (contracts, legal cases, etc.) can result in a gain/loss
unrecognised deferred taxes no longer impact goodwill on subsequent measurement
Recognition and measurement
'reliable measurement' exclusion for intangible assets removed
new guidance on indemnification assets and assets not expected to be used
Changes in ownership interests
(see IFRS 10)
buying or selling minority interests in a subsidiary only impacts equity
loss of control requires fair valuing of retained holding and recycling of reserves
IFRS 10 Consolidated Financial Statements
Overview
IFRS 10 Consolidated Financial Statements outlines the requirements for the preparation and presentation of consolidated financial statements,
requiring entities to consolidate entities it controls. Control requires exposure or rights to variable returns and the ability to affect those returns through
power over an investee.
IFRS 10 was issued in May 2011 and applies to annual periods beginning on or after 1 January 2013.
Summary of IFRS 10
Objective
The objective of IFRS 10 is to establish principles for the presentation and preparation of consolidated financial statements when an entity controls one
or more other entities. [IFRS 10:1]
The Standard: [IFRS 10:1]
requires a parent entity (an entity that controls one or more other entities) to present consolidated financial statements
defines the principle of control, and establishes control as the basis for consolidation
set out how to apply the principle of control to identify whether an investor controls an investee and therefore must consolidate the
investee
sets out the accounting requirements for the preparation of consolidated financial statements
defines an investment entity and sets out an exception to consolidating particular subsidiaries of an investment entity*.
* Added by Investment Entities amendments, effective 1 January 2014.

Key definitions
[IFRS 10:Appendix A]
Consolidated financial
statements
The financial statements of a group in which the assets, liabilities, equity, income, expenses and cash flows of the parent
and its subsidiaries are presented as those of a single economic entity
Control of an investee
An investor controls an investee when the investor 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
Investment entity*
An entity that:
1. obtains funds from one or more investors for the purpose of providing those investor(s) with investment
management services
2. commits to its investor(s) that its business purpose is to invest funds solely for returns from capital appreciation,
investment income, or both, and
3. measures and evaluates the performance of substantially all of its investments on a fair value basis.
Parent An entity that controls one or more entities
Power Existing rights that give the current ability to direct the relevant activities
Protective rights
Rights designed to protect the interest of the party holding those rights without giving that party power over the entity to
which those rights relate
Relevant activities Activities of the investee that significantly affect the investee's returns
* Added by Investment Entities amendments, effective 1 January 2014.
Control
An investor determines whether it is a parent by assessing whether it controls one or more investees. An investor considers all relevant facts and
circumstances when assessing whether it controls an investee. An investor controls an investee when it 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 10:5-6; IFRS 10:8]
An investor controls an investee if and only if the investor has all of the following elements: [IFRS 10:7]
power over the investee, i.e. the investor has existing rights that give it the ability to direct the relevant activities (the activities that
significantly affect the investee's returns)
exposure, or rights, to variable returns from its involvement with the investee
the ability to use its power over the investee to affect the amount of the investor's returns.
Power arises from rights. Such rights can be straightforward (e.g. through voting rights) or be complex (e.g. embedded in contractual arrangements). An
investor that holds only protective rights cannot have power over an investee and so cannot control an investee [IFRS 10:11, IFRS 10:14].
An investor must be exposed, or have rights, to variable returns from its involvement with an investee to control the investee. Such returns must have
the potential to vary as a result of the investee's performance and can be positive, negative, or both. [IFRS 10:15]
A parent must not only have power over an investee and exposure or rights to variable returns from its involvement with the investee, a parent must also
have the ability to use its power over the investee to affect its returns from its involvement with the investee. [IFRS 10:17].
When assessing whether an investor controls an investee an investor with decision-making rights determines whether it acts as principal or as an agent
of other parties. A number of factors are considered in making this assessment. For instance, the remuneration of the decision-maker is considered in
determining whether it is an agent. [IFRS 10:B58, IFRS 10:B60]
Accounting requirements
Preparation of consolidated financial statements
A parent prepares consolidated financial statements using uniform accounting policies for like transactions and other events in similar circumstances.
[IFRS 10:19]
However, a parent need not present consolidated financial statements if it meets all of the following conditions: [IFRS 10:4(a)]
it is a wholly-owned subsidiary or is a partially-owned subsidiary of another entity and its other owners, including those not otherwise
entitled to vote, have been informed about, and do not object to, the parent not presenting consolidated financial statements
its debt or equity instruments are not traded in a public market (a domestic or foreign stock exchange or an over-the-counter market,
including local and regional markets)
it did not file, nor is it in the process of filing, its financial statements with a securities commission or other regulatory organisation for the
purpose of issuing any class of instruments in a public market, and
its ultimate or any intermediate parent of the parent produces consolidated financial statements available for public use that comply with
IFRSs.
Investment entities are prohibited from consolidating particular subsidiaries (see further information below).
Furthermore, post-employment benefit plans or other long-term employee benefit plans to which IAS 19Employee Benefits applies are not required to
apply the requirements of IFRS 10. [IFRS 10:4(b)]
Consolidation procedures
Consolidated financial statements: [IFRS 10:B86]
combine like items of assets, liabilities, equity, income, expenses and cash flows of the parent with those of its subsidiaries
offset (eliminate) the carrying amount of the parent's investment in each subsidiary and the parent's portion of equity of each subsidiary
(IFRS 3Business Combinations explains how to account for any related goodwill)
eliminate in full intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between entities of the
group (profits or losses resulting from intragroup transactions that are recognised in assets, such as inventory and fixed assets, are
eliminated in full).
A reporting entity includes the income and expenses of a subsidiary in the consolidated financial statements from the date it gains control until the date
when the reporting entity ceases to control the subsidiary. Income and expenses of the subsidiary are based on the amounts of the assets and liabilities
recognised in the consolidated financial statements at the acquisition date. [IFRS 10:B88]
The parent and subsidiaries are required to have the same reporting dates, or consolidation based on additional financial information prepared by
subsidiary, unless impracticable. Where impracticable, the most recent financial statements of the subsidiary are used, adjusted for the effects of
significant transactions or events between the reporting dates of the subsidiary and consolidated financial statements. The difference between the date of
the subsidiary's financial statements and that of the consolidated financial statements shall be no more than three months [IFRS 10:B92, IFRS 10:B93]
Non-controlling interests (NCIs)
A parent presents non-controlling interests in its consolidated statement of financial position within equity, separately from the equity of the owners of
the parent. [IFRS 10:22]
A reporting entity attributes the profit or loss and each component of other comprehensive income to the owners of the parent and to the non-controlling
interests. The proportion allocated to the parent and non-controlling interests are determined on the basis of present ownership interests. [IFRS 10:B94,
IFRS 10:B89]
The reporting entity also attributes total comprehensive income to the owners of the parent and to the non-controlling interests even if this results in the
non-controlling interests having a deficit balance. [IFRS 10:B94]
Changes in ownership interests
Changes in a parent's ownership interest in a subsidiary that do not result in the parent losing control of the subsidiary are equity transactions (i.e.
transactions with owners in their capacity as owners). When the proportion of the equity held by non-controlling interests changes, the carrying
amounts of the controlling and non-controlling interests area adjusted to reflect the changes in their relative interests in the subsidiary. Any difference
between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognised directly in
equity and attributed to the owners of the parent.[IFRS 10:23, IFRS 10:B96]
If a parent loses control of a subsidiary, the parent [IFRS 10:25]:
derecognises the assets and liabilities of the former subsidiary from the consolidated statement of financial position
recognises any investment retained in the former subsidiary at its fair value when control is lost and subsequently accounts for it and for
any amounts owed by or to the former subsidiary in accordance with relevant IFRSs. That fair value is regarded as the fair value on initial
recognition of a financial asset in accordance with IFRS 9Financial Instruments or, when appropriate, the cost on initial recognition of an
investment in an associate or joint venture
recognises the gain or loss associated with the loss of control attributable to the former controlling interest.
Investment entities consolidation exemption
[Note: The investment entity consolidation exemption was introduced by Investment Entities, issued on 31 October 2012 and effective for annual
periods beginning on or after 1 January 2014.]
IFRS 10 contains special accounting requirements for investment entities. Where an entity meets the definition of an 'investment entity' (see above), it
does not consolidate its subsidiaries, or apply IFRS 3Business Combinations when it obtains control of another entity. [IFRS 10:31]
An entity is required to consider all facts and circumstances when assessing whether it is an investment entity, including its purpose and design. IFRS
10 provides that an investment entity should have the following typical characteristics [IFRS 10:28]:
it has more than one investment
it has more than one investor
it has investors that are not related parties of the entity
it has ownership interests in the form of equity or similar interests.
The absence of any of these typical characteristics does not necessarily disqualify an entity from being classified as an investment entity.
An investment entity is required to measure an investment in a subsidiary at fair value through profit or loss in accordance with IFRS 9Financial
Instruments or IAS 39Financial Instruments: Recognition and Measurement. However, an investment entity is still required to consolidate a subsidiary
where that subsidiary provides services that relate to the investment entitys investment activities. [IFRS 10:31-32]
Because an investment entity is not required to consolidate its subsidiaries, intragroup related party transactions and outstanding balances are not
eliminated [IAS 24.4, IAS 39.80].
Special requirements apply where an entity becomes, or ceases to be, an investment entity. [IFRS 10:B100-B101]
The exemption from consolidation only applies to the investment entity itself. Accordingly, a parent of an investment entity is required to consolidate
all entities that it controls, including those controlled through an investment entity subsidiary, unless the parent itself is an investment entity. [IFRS
10:33]
Disclosure
There are no disclosures specified in IFRS 10. Instead, IFRS 12Disclosure of Interests in Other Entities outlines the disclosures required.
Applicability and early adoption
Note: This section has been updated to reflect the amendments to IFRS 10 made in June 2012 and October 2012.
IFRS 10 is applicable to annual reporting periods beginning on or after 1 January 2013 [IFRS 10:C1].
Retrospective application is generally required in accordance with IAS 8Accounting Policies, Changes in Accounting Estimates and Errors [IFRS
10:C2]. However, an entity is not required to make adjustments to the accounting for its involvement with entities that were previously consolidated and
continue to be consolidated, or entities that were previously unconsolidated and continue not to be consolidated at the date of initial application of the
IFRS [IFRS 10:C3].
Furthermore, an entity is not required to present the quantitative information required by paragraph 28(f) of IAS 8 for the annual period immediately
preceding the date of initial application of the standard (the beginning of the annual reporting period for which IFRS 10 is first applied) [IFRS 10:C2A-
C2B]. However, an entity may choose to present adjusted comparative information for earlier reporting periods, any must clearly identify any
unadjusted comparative information and explain the basis on which the comparative information has been prepared [IFRS 10.C6A-C6B].
IFRS 10 prescribes modified accounting on its first application in the following circumstances:
an entity consolidates an entity not previously consolidated [IFRS 10:C4-C4C]
an entity no longer consolidates an entity that was previously consolidated [IFRS 10:C5-C5A]
in relation to certain amendments to IAS 27 made in 2008 that have been carried forward into IFRS 10 [IFRS 10:C6].
An entity may apply IFRS 10 to an earlier accounting period, but if doing so it must disclose the fact that is has early adopted the standard and also
apply:
IFRS 11Joint Arrangements
IFRS 12Disclosure of Interests in Other Entities
IAS 27Separate Financial Statements (as amended in 2011)
IAS 28Investments in Associates and Joint Ventures (as amended in 2011).
The amendments made by Investment Entities are applicable to annual reporting periods beginning on or after 1 January 2014 [IFRS 10:C1B]. At the
date of initial application of the amendments, an entity assesses whether it is an investment entity on the basis of the facts and circumstances that exist
at that date and additional transitional provisions apply [IFRS 10:C3BC3F].
IAS 16 Property, Plant and Equipment
Overview
IAS 16 Property, Plant and Equipment outlines the accounting treatment for most types of property, plant and equipment. Property, plant and
equipment is initially measured at its cost, subsequently measured either using a cost or revaluation model, and depreciated so that its depreciable
amount is allocated on a systematic basis over its useful life.
IAS 16 was reissued in December 2003 and applies to annual periods beginning on or after 1 January 2005.
Summary of IAS 16
Objective of IAS 16
The objective of IAS 16 is to prescribe the accounting treatment for property, plant, and equipment. The principal issues are the recognition of assets,
the determination of their carrying amounts, and the depreciation charges and impairment losses to be recognised in relation to them.
Scope
IAS 16 applies to the accounting for property, plant and equipment, except where another standards requires or permits differing accounting treatments,
for example:
assets classified as held for sale in accordance with IFRS 5Non-current Assets Held for Sale and Discontinued Operations
biological assets related to agricultural activity accounted for under IAS 41Agriculture
exploration and evaluation assets recognised in accordance with IFRS 6Exploration for and Evaluation of Mineral Resources
mineral rights and mineral reserves such as oil, natural gas and similar non-regenerative resources.
The standard does apply to property, plant, and equipment used to develop or maintain the last three categories of assets. [IAS 16.3]
The cost model in IAS 16 also applies to investment property accounted for using the cost model under IAS 40Investment Property. [IAS 16.5]
The standard does apply to bearer plants but it does not apply to the produce on bearer plants. [IAS 16.3]
Note: Bearer plants were brought into the scope of IAS 16 by Agriculture: Bearer Plants (Amendments to IAS 16 and IAS 41), which applies to annual
periods beginning on or after 1 January 2016.
Recognition
Items of property, plant, and equipment should be recognised as assets when it is probable that: [IAS 16.7]
it is probable that the future economic benefits associated with the asset will flow to the entity, and
the cost of the asset can be measured reliably.
This recognition principle is applied to all property, plant, and equipment costs at the time they are incurred. These costs include costs incurred initially
to acquire or construct an item of property, plant and equipment and costs incurred subsequently to add to, replace part of, or service it.
IAS 16 does not prescribe the unit of measure for recognition what constitutes an item of property, plant, and equipment. [IAS 16.9] Note, however,
that if the cost model is used (see below) each part of an item of property, plant, and equipment with a cost that is significant in relation to the total cost
of the item must be depreciated separately. [IAS 16.43]
IAS 16 recognises that parts of some items of property, plant, and equipment may require replacement at regular intervals. The carrying amount of an
item of property, plant, and equipment will include the cost of replacing the part of such an item when that cost is incurred if the recognition criteria
(future benefits and measurement reliability) are met. The carrying amount of those parts that are replaced is derecognised in accordance with the
derecognition provisions of IAS 16.67-72. [IAS 16.13]
Also, continued operation of an item of property, plant, and equipment (for example, an aircraft) may require regular major inspections for faults
regardless of whether parts of the item are replaced. When each major inspection is performed, its cost is recognised in the carrying amount of the item
of property, plant, and equipment as a replacement if the recognition criteria are satisfied. If necessary, the estimated cost of a future similar inspection
may be used as an indication of what the cost of the existing inspection component was when the item was acquired or constructed. [IAS 16.14]
Initial measurement
An item of property, plant and equipment should initially be recorded at cost. [IAS 16.15] Cost includes all costs necessary to bring the asset to working
condition for its intended use. This would include not only its original purchase price but also costs of site preparation, delivery and handling,
installation, related professional fees for architects and engineers, and the estimated cost of dismantling and removing the asset and restoring the site
(see IAS 37Provisions, Contingent Liabilities and Contingent Assets). [IAS 16.16-17]
If payment for an item of property, plant, and equipment is deferred, interest at a market rate must be recognised or imputed. [IAS 16.23]
If an asset is acquired in exchange for another asset (whether similar or dissimilar in nature), the cost will be measured at the fair value unless (a) the
exchange transaction lacks commercial substance or (b) the fair value of neither the asset received nor the asset given up is reliably measurable. If the
acquired item is not measured at fair value, its cost is measured at the carrying amount of the asset given up. [IAS 16.24]
Measurement subsequent to initial recognition
IAS 16 permits two accounting models:
Cost model. The asset is carried at cost less accumulated depreciation and impairment. [IAS 16.30]
Revaluation model. The asset is carried at a revalued amount, being its fair value at the date of revaluation less subsequent depreciation
and impairment, provided that fair value can be measured reliably. [IAS 16.31]
The revaluation model
Under the revaluation model, revaluations should be carried out regularly, so that the carrying amount of an asset does not differ materially from its fair
value at the balance sheet date. [IAS 16.31]
If an item is revalued, the entire class of assets to which that asset belongs should be revalued. [IAS 16.36]
Revalued assets are depreciated in the same way as under the cost model (see below).
If a revaluation results in an increase in value, it should be credited to other comprehensive income and accumulated in equity under the heading
"revaluation surplus" unless it represents the reversal of a revaluation decrease of the same asset previously recognised as an expense, in which case it
should be recognised in profit or loss. [IAS 16.39]
A decrease arising as a result of a revaluation should be recognised as an expense to the extent that it exceeds any amount previously credited to the
revaluation surplus relating to the same asset. [IAS 16.40]
When a revalued asset is disposed of, any revaluation surplus may be transferred directly to retained earnings, or it may be left in equity under the
heading revaluation surplus. The transfer to retained earnings should not be made through profit or loss. [IAS 16.41]
Depreciation (cost and revaluation models)
For all depreciable assets:
The depreciable amount (cost less residual value) should be allocated on a systematic basis over the asset's useful life [IAS 16.50].
The residual value and the useful life of an asset should be reviewed at least at each financial year-end and, if expectations differ from previous
estimates, any change is accounted for prospectively as a change in estimate under IAS 8. [IAS 16.51]
The depreciation method used should reflect the pattern in which the asset's economic benefits are consumed by the entity [IAS 16.60]; a depreciation
method that is based on revenue that is generated by an activity that includes the use of an asset is not appropriate. [IAS 16.62A]
Note: The clarification regarding the revenue-based depreciation method was introduced by Clarification of Acceptable Methods of Depreciation and
Amortisation, which applies to annual periods beginning on or after 1 January 2016.
The depreciation method should be reviewed at least annually and, if the pattern of consumption of benefits has changed, the depreciation method
should be changed prospectively as a change in estimate under IAS 8. [IAS 16.61] Expected future reductions in selling prices could be indicative of a
higher rate of consumption of the future economic benefits embodied in an asset. [IAS 16.56]
Note: The guidance on expected future reductions in selling prices was introduced by Clarification of Acceptable Methods of Depreciation and
Amortisation, which applies to annual periods beginning on or after 1 January 2016.
Depreciation should be charged to profit or loss, unless it is included in the carrying amount of another asset [IAS 16.48].
Depreciation begins when the asset is available for use and continues until the asset is derecognised, even if it is idle. [IAS 16.55]
Recoverability of the carrying amount
IAS 16Property, Plant and Equipment requires impairment testing and, if necessary, recognition for property, plant, and equipment. An item of
property, plant, or equipment shall not be carried at more than recoverable amount. Recoverable amount is the higher of an asset's fair value less costs
to sell and its value in use.
Any claim for compensation from third parties for impairment is included in profit or loss when the claim becomes receivable. [IAS 16.65]
Derecognition (retirements and disposals)
An asset should be removed from the statement of financial position on disposal or when it is withdrawn from use and no future economic benefits are
expected from its disposal. The gain or loss on disposal is the difference between the proceeds and the carrying amount and should be recognised in
profit and loss. [IAS 16.67-71]
If an entity rents some assets and then ceases to rent them, the assets should be transferred to inventories at their carrying amounts as they become held
for sale in the ordinary course of business. [IAS 16.68A]
Disclosure
I nformation about each class of property, plant and equipment
For each class of property, plant, and equipment, disclose: [IAS 16.73]
basis for measuring carrying amount
depreciation method(s) used
useful lives or depreciation rates
gross carrying amount and accumulated depreciation and impairment losses
reconciliation of the carrying amount at the beginning and the end of the period, showing:
o additions
o disposals
o acquisitions through business combinations
o revaluation increases or decreases
o impairment losses
o reversals of impairment losses
o depreciation
o net foreign exchange differences on translation
o other movements
Additional disclosures
The following disclosures are also required: [IAS 16.74]
restrictions on title and items pledged as security for liabilities
expenditures to construct property, plant, and equipment during the period
contractual commitments to acquire property, plant, and equipment
compensation from third parties for items of property, plant, and equipment that were impaired, lost or given up that is included in profit
or loss.
IAS 16 also encourages, but does not require, a number of additional disclosures. [IAS 16.79]
Revalued property, plant and equipment
If property, plant, and equipment is stated at revalued amounts, certain additional disclosures are required: [IAS 16.77]
the effective date of the revaluation
whether an independent valuer was involved
for each revalued class of property, the carrying amount that would have been recognised had the assets been carried under the cost model
the revaluation surplus, including changes during the period and any restrictions on the distribution of the balance to shareholders.
Entities with property, plant and equipment stated at revalued amounts are also required to make disclosures under IFRS 13Fair Value Measurement.
IAS 14 Segment Reporting (Superseded)
Overview
IAS 14 Segment Reporting requires reporting of financial information by business or geographical area. It requires disclosures for 'primary' and
'secondary' segment reporting formats, with the primary format based on whether the entity's risks and returns are affected predominantly by the
products and services it produces or by the fact that it operates in different geographical areas.
IAS 14 was issued in August 1997, was applicable to annual periods beginning on or after 1 July 1998, and was superseded by IFRS 8Operating
Segments with effect from annual periods beginning on or after 1 January 2009.
Summary of IAS 14
Objective of IAS 14
The objective of IAS 14 (Revised 1997) is to establish principles for reporting financial information by line of business and by geographical area. It
applies to entities whose equity or debt securities are publicly traded and to entities in the process of issuing securities to the public. In addition, any
entity voluntarily providing segment information should comply with the requirements of the Standard.
Applicability
IAS 14 must be applied by entities whose debt or equity securities are publicly traded and those in the process of issuing such securities in public
securities markets. [IAS 14.3]
If an entity that is not publicly traded chooses to report segment information and claims that its financial statements conform to IFRSs, then it must
follow IAS 14 in full. [IAS 14.5]
Segment information need not be presented in the separate financial statements of a (a) parent, (b) subsidiary, (c) equity method associate, or (d) equity
method joint venture that are presented in the same report as the consolidated statements. [IAS 14.6-7]
Key definitions
Business segment: a component of an entity that (a) provides a single product or service or a group of related products and services and (b) that is
subject to risks and returns that are different from those of other business segments. [IAS 14.9]
Geographical segment: a component of an entity that (a) provides products and services within a particular economic environment and (b) that is
subject to risks and returns that are different from those of components operating in other economic environments. [IAS 14.9]
Reportable segment: a business segment or geographical segment for which IAS 14 requires segment information to be reported. [IAS 14.9]
Segment revenue: revenue, including intersegment revenue, that is directly attributable or reasonably allocable to a segment. Includes interest and
dividend income and related securities gains only if the segment is a financial segment (bank, insurance company, etc.). [IAS 14.16]
Segment expenses: expenses, including expenses relating to intersegment transactions, that (a) result from operating activities and (b) are directly
attributable or reasonably allocable to a segment. Includes interest expense and related securities losses only if the segment is a financial segment (bank,
insurance company, etc.). Segment expenses do not include:
interest
losses on sales of investments or debt extinguishments
losses on investments accounted for by the equity method
income taxes
general corporate administrative and head-office expenses that relate to the entity as a whole [IAS 14.16]
Segment result: segment revenue minus segment expenses, before deducting minority interest. [IAS 14.16]
Segment assets and segment liabilities: those operating assets (liabilities) that are directly attributable or reasonably allocable to a segment. [IAS
14.16]
Identifying business and geographical segments
An entity must look to its organisational structure and internal reporting system to identify reportable segments. In particular, IAS 14 presumes that
segmentation in internal financial reports prepared for the board of directors and chief executive officer should normally determine segments for
external financial reporting purposes. Only if internal segments are not along either product/service or geographical lines is further disaggregation
appropriate. [IAS 14.26]
Geographical segments may be based either on where the entity's assets are located or on where its customers are located. [IAS 14.14] Whichever basis
is used, several items of data must be presented on the other basis if significantly different. [IAS 14.71-72]
Primary and secondary segments
For most entities one basis of segmentation is primary and the other is secondary, with considerably less disclosure required for secondary segments.
The entity should determine whether business or geographical segments are to be used for its primary segment reporting format based on whether the
entity's risks and returns are affected predominantly by the products and services it produces or by the fact that it operates in different geographical
areas. The basis for identification of the predominant source and nature of risks and differing rates of return facing the entity will usually be the entity's
internal organisational and management structure and its system of internal financial reporting to senior management. [IAS 14.26-27]
Which segments are reportable?
The entity's reportable segments are its business and geographical segments for which a majority of their revenue is earned from sales to external
customers and for which: [IAS 14.35]
revenue from sales to external customers and from transactions with other segments is 10% or more of the total revenue, external and
internal, of all segments; or
segment result, whether profit or loss, is 10% or more the combined result of all segments in profit or the combined result of all segments
in loss, whichever is greater in absolute amount; or
assets are 10% or more of the total assets of all segments.
Segments deemed too small for separate reporting may be combined with each other, if related, but they may not be combined with other significant
segments for which information is reported internally. Alternatively, they may be separately reported. If neither combined nor separately reported, they
must be included as an unallocated reconciling item. [IAS 14.36]
If total external revenue attributable to reportable segments identified using the 10% thresholds outlined above is less than 75% of the total consolidated
or entity revenue, additional segments should be identified as reportable segments until at least 75% of total consolidated or entity revenue is included
in reportable segments. [IAS 14.37]
Vertically integrated segments (those that earn a majority of their revenue from intersegment transactions) may be, but need not be, reportable
segments. [IAS 14.39] If not separately reported, the selling segment is combined with the buying segment. [IAS 14.41]
IAS 14.42-43 contain special rules for identifying reportable segments in the years in which a segment reaches or loses 10% significance.
What accounting policies should a segment follow?
Segment accounting policies must be the same as those used in the consolidated financial statements. [IAS 14.44]
If assets used jointly by two or more segments are allocated to segments, the related revenue and expenses must also be allocated. [IAS 14.47]
What must be disclosed?
IAS 14 has detailed guidance as to which items of revenue and expense are included in segment revenue and segment expense. All companies will
report a standardised measure of segment result basically operating profit before interest, taxes, and head office expenses. For an entity's primary
segments, revised IAS 14 requires disclosure of: [IAS 14.51-67]
sales revenue (distinguishing between external and intersegment)
result
assets
the basis of intersegment pricing
liabilities
capital additions
depreciation and amortisation
significant unusual items
non-cash expenses other than depreciation
equity method income
Segment revenue includes "sales" from one segment to another. Under IAS 14, these intersegment transfers must be measured on the basis that the
entity actually used to price the transfers. [IAS 14.75]
For secondary segments, disclose: [IAS 14.69-72]
revenue
assets
capital additions
Other disclosure matters addressed in IAS 14:
Disclosure is required of external revenue for a segment that is not deemed a reportable segment because a majority of its sales are
intersegment sales but nonetheless its external sales are 10% or more of consolidated revenue. [IAS 14.74]
Special disclosures are required for changes in segment accounting policies. [IAS 14.76]
Where there has been a change in the identification of segments, prior year information should be restated. If this is not practicable,
segment data should be reported for both the old and new bases of segmentation in the year of change. [IAS 14.76]
Disclosure is required of the types of products and services included in each reported business segment and of the composition of each
reported geographical segment, both primary and secondary. [IAS 14.81]
An entity must present a reconciliation between information reported for segments and consolidated information. At a minimum: [IAS 14.67]
segment revenue should be reconciled to consolidated revenue
segment result should be reconciled to a comparable measure of consolidated operating profit or loss and consolidated net profit or loss
segment assets should be reconciled to entity assets
segment liabilities should be reconciled to entity liabilities.
IAS 39 Financial Instruments: Recognition and Measurement
Overview
IAS 39 Financial Instruments: Recognition and Measurement outlines the requirements for the recognition and measurement of financial assets,
financial liabilities, and some contracts to buy or sell non-financial items. Financial instruments are initially recognised when an entity becomes a party
to the contractual provisions of the instrument, and are classified into various categories depending upon the type of instrument, which then determines
the subsequent measurement of the instrument (typically amortised cost or fair value). Special rules apply to embedded derivatives and hedging
instruments.
IAS 39 was reissued in December 2003, applies to annual periods beginning on or after 1 January 2005, and will be superseded by IFRS 9Financial
Instruments once a mandatory application date of that standard is determined.
Summary of IAS 39
Scope
Scope exclusions
IAS 39 applies to all types of financial instruments except for the following, which are scoped out of IAS 39: [IAS 39.2]
interests in subsidiaries, associates, and joint ventures accounted for under IAS 27Consolidated and Separate Financial Statements,
IAS 28Investments in Associates, or IAS 31Interests in Joint Ventures (or, for periods beginning on or after 1 January 2013,
IFRS 10Consolidated Financial Statements, IAS 27Separate Financial Statements or IAS 28Investments in Associates and Joint Ventures);
however IAS 39 applies in cases where under those standards such interests are to be accounted for under IAS 39. The standard also applies
to most derivatives on an interest in a subsidiary, associate, or joint venture
employers' rights and obligations under employee benefit plans to which IAS 19Employee Benefits applies
forward contracts between an acquirer and selling shareholder to buy or sell an acquiree that will result in a business combination at a
future acquisition date
rights and obligations under insurance contracts, except IAS 39 does apply to financial instruments that take the form of an insurance (or
reinsurance) contract but that principally involve the transfer of financial risks and derivatives embedded in insurance contracts
financial instruments that meet the definition of own equity under IAS 32Financial Instruments: Presentation
financial instruments, contracts and obligations under share-based payment transactions to which IFRS 2Share-based Payment applies
rights to reimbursement payments to which IAS 37Provisions, Contingent Liabilities and Contingent Assets applies
Leases
IAS 39 applies to lease receivables and payables only in limited respects: [IAS 39.2(b)]
IAS 39 applies to lease receivables with respect to the derecognition and impairment provisions
IAS 39 applies to lease payables with respect to the derecognition provisions
IAS 39 applies to derivatives embedded in leases.
Financial guarantees
IAS 39 applies to financial guarantee contracts issued. However, if an issuer of financial guarantee contracts has previously asserted explicitly that it
regards such contracts as insurance contracts and has used accounting applicable to insurance contracts, the issuer may elect to apply either IAS 39 or
IFRS 4Insurance Contracts to such financial guarantee contracts. The issuer may make that election contract by contract, but the election for each
contract is irrevocable.
Accounting by the holder is excluded from the scope of IAS 39 and IFRS 4 (unless the contract is a reinsurance contract). Therefore, paragraphs 10-12
of IAS 8Accounting Policies, Changes in Accounting Estimates and Errors apply. Those paragraphs specify criteria to use in developing an accounting
policy if no IFRS applies specifically to an item.
Loan commitments
Loan commitments are outside the scope of IAS 39 if they cannot be settled net in cash or another financial instrument, they are not designated as
financial liabilities at fair value through profit or loss, and the entity does not have a past practice of selling the loans that resulted from the commitment
shortly after origination. An issuer of a commitment to provide a loan at a below-market interest rate is required initially to recognise the commitment
at its fair value; subsequently, the issuer will remeasure it at the higher of (a) the amount recognised under IAS 37 and (b) the amount initially
recognised less, where appropriate, cumulative amortisation recognised in accordance with IAS 18. An issuer of loan commitments must apply IAS 37
to other loan commitments that are not within the scope of IAS 39 (that is, those made at market or above). Loan commitments are subject to the
derecognition provisions of IAS 39. [IAS 39.4]
Contracts to buy or sell financial items
Contracts to buy or sell financial items are always within the scope of IAS 39 (unless one of the other exceptions applies).
Contracts to buy or sell non-financial items
Contracts to buy or sell non-financial items are within the scope of IAS 39 if they can be settled net in cash or another financial asset and are not
entered into and held for the purpose of the receipt or delivery of a non-financial item in accordance with the entity's expected purchase, sale, or usage
requirements. Contracts to buy or sell non-financial items are inside the scope if net settlement occurs. The following situations constitute net
settlement: [IAS 39.5-6]
the terms of the contract permit either counterparty to settle net
there is a past practice of net settling similar contracts
there is a past practice, for similar contracts, of taking delivery of the underlying and selling it within a short period after delivery to
generate a profit from short-term fluctuations in price, or from a dealer's margin, or
the non-financial item is readily convertible to cash
Weather derivatives
Although contracts requiring payment based on climatic, geological, or other physical variable were generally excluded from the original version of
IAS 39, they were added to the scope of the revised IAS 39 in December 2003 if they are not in the scope of IFRS 4. [IAS 39.AG1]
Definitions
IAS 39 incorporates the definitions of the following items from IAS 32Financial Instruments: Presentation: [IAS 39.8]
financial instrument
financial asset
financial liability
equity instrument.
Note: Where an entity applies IFRS 9Financial Instruments prior to its mandatory application date (1 January 2015), definitions of the following terms
are also incorporated from IFRS 9: derecognition, derivative, fair value, financial guarantee contract. The definition of those terms outlined below (as
relevant) are those from IAS 39.
Common examples of financial instruments within the scope of IAS 39
cash
demand and time deposits
commercial paper
accounts, notes, and loans receivable and payable
debt and equity securities. These are financial instruments from the perspectives of both the holder and the issuer. This category includes
investments in subsidiaries, associates, and joint ventures
asset backed securities such as collateralised mortgage obligations, repurchase agreements, and securitised packages of receivables
derivatives, including options, rights, warrants, futures contracts, forward contracts, and swaps.
A derivative is a financial instrument:
Whose value changes in response to the change in an underlying variable such as an interest rate, commodity or security price, or index;
That requires no initial investment, or one that is smaller than would be required for a contract with similar response to changes in market
factors; and
That is settled at a future date. [IAS 39.9]
Examples of derivatives
Forwards: Contracts to purchase or sell a specific quantity of a financial instrument, a commodity, or a foreign currency at a specified price determined
at the outset, with delivery or settlement at a specified future date. Settlement is at maturity by actual delivery of the item specified in the contract, or by
a net cash settlement.
Interest rate swaps and forward rate agreements: Contracts to exchange cash flows as of a specified date or a series of specified dates based on a
notional amount and fixed and floating rates.
Futures: Contracts similar to forwards but with the following differences: futures are generic exchange-traded, whereas forwards are individually
tailored. Futures are generally settled through an offsetting (reversing) trade, whereas forwards are generally settled by delivery of the underlying item
or cash settlement.
Options: Contracts that give the purchaser the right, but not the obligation, to buy (call option) or sell (put option) a specified quantity of a particular
financial instrument, commodity, or foreign currency, at a specified price (strike price), during or at a specified period of time. These can be
individually written or exchange-traded. The purchaser of the option pays the seller (writer) of the option a fee (premium) to compensate the seller for
the risk of payments under the option.
Caps and floors: These are contracts sometimes referred to as interest rate options. An interest rate cap will compensate the purchaser of the cap if
interest rates rise above a predetermined rate (strike rate) while an interest rate floor will compensate the purchaser if rates fall below a predetermined
rate.
Embedded derivatives
Some contracts that themselves are not financial instruments may nonetheless have financial instruments embedded in them. For example, a contract to
purchase a commodity at a fixed price for delivery at a future date has embedded in it a derivative that is indexed to the price of the commodity.
An embedded derivative is a feature within a contract, such that the cash flows associated with that feature behave in a similar fashion to a stand-alone
derivative. In the same way that derivatives must be accounted for at fair value on the balance sheet with changes recognised in the income statement,
so must some embedded derivatives. IAS 39 requires that an embedded derivative be separated from its host contract and accounted for as a derivative
when: [IAS 39.11]
the economic risks and characteristics of the embedded derivative are not closely related to those of the host contract
a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative, and
the entire instrument is not measured at fair value with changes in fair value recognised in the income statement
If an embedded derivative is separated, the host contract is accounted for under the appropriate standard (for instance, under IAS 39 if the host is a
financial instrument). Appendix A to IAS 39 provides examples of embedded derivatives that are closely related to their hosts, and of those that are not.
Examples of embedded derivatives that are not closely related to their hosts (and therefore must be separately accounted for) include:
the equity conversion option in debt convertible to ordinary shares (from the perspective of the holder only) [IAS 39.AG30(f)]
commodity indexed interest or principal payments in host debt contracts[IAS 39.AG30(e)]
cap and floor options in host debt contracts that are in-the-money when the instrument was issued [IAS 39.AG33(b)]
leveraged inflation adjustments to lease payments [IAS 39.AG33(f)]
currency derivatives in purchase or sale contracts for non-financial items where the foreign currency is not that of either counterparty to
the contract, is not the currency in which the related good or service is routinely denominated in commercial transactions around the
world, and is not the currency that is commonly used in such contracts in the economic environment in which the transaction takes place.
[IAS 39.AG33(d)]
If IAS 39 requires that an embedded derivative be separated from its host contract, but the entity is unable to measure the embedded derivative
separately, the entire combined contract must be designated as a financial asset as at fair value through profit or loss). [IAS 39.12]
Classification as liability or equity
Since IAS 39 does not address accounting for equity instruments issued by the reporting enterprise but it does deal with accounting for financial
liabilities, classification of an instrument as liability or as equity is critical. IAS 32Financial Instruments: Presentation addresses the classification
question.
Classification of financial assets
IAS 39 requires financial assets to be classified in one of the following categories: [IAS 39.45]
Financial assets at fair value through profit or loss
Available-for-sale financial assets
Loans and receivables
Held-to-maturity investments
Those categories are used to determine how a particular financial asset is recognised and measured in the financial statements.
Financial assets at fair value through profit or loss. This category has two subcategories:
Designated. The first includes any financial asset that is designated on initial recognition as one to be measured at fair value with fair value
changes in profit or loss.
Held for trading. The second category includes financial assets that are held for trading. All derivatives (except those designated hedging
instruments) and financial assets acquired or held for the purpose of selling in the short term or for which there is a recent pattern of short-
term profit taking are held for trading. [IAS 39.9]
Available-for-sale financial assets (AFS) are any non-derivative financial assets designated on initial recognition as available for sale or any other
instruments that are not classified as as (a) loans and receivables, (b) held-to-maturity investments or (c) financial assets at fair value through profit or
loss. [IAS 39.9] AFS assets are measured at fair value in the balance sheet. Fair value changes on AFS assets are recognised directly in equity, through
the statement of changes in equity, except for interest on AFS assets (which is recognised in income on an effective yield basis), impairment losses and
(for interest-bearing AFS debt instruments) foreign exchange gains or losses. The cumulative gain or loss that was recognised in equity is recognised in
profit or loss when an available-for-sale financial asset is derecognised. [IAS 39.55(b)]
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than held
for trading or designated on initial recognition as assets at fair value through profit or loss or as available-for-sale. Loans and receivables for which the
holder may not recover substantially all of its initial investment, other than because of credit deterioration, should be classified as available-for-
sale.[IAS 39.9] Loans and receivables are measured at amortised cost. [IAS 39.46(a)]
Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments that an entity intends and is able to hold to
maturity and that do not meet the definition of loans and receivables and are not designated on initial recognition as assets at fair value through profit or
loss or as available for sale. Held-to-maturity investments are measured at amortised cost. If an entity sells a held-to-maturity investment other than in
insignificant amounts or as a consequence of a non-recurring, isolated event beyond its control that could not be reasonably anticipated, all of its other
held-to-maturity investments must be reclassified as available-for-sale for the current and next two financial reporting years. [IAS 39.9] Held-to-
maturity investments are measured at amortised cost. [IAS 39.46(b)]
Classification of financial liabilities
IAS 39 recognises two classes of financial liabilities: [IAS 39.47]
Financial liabilities at fair value through profit or loss
Other financial liabilities measured at amortised cost using the effective interest method
The category of financial liability at fair value through profit or loss has two subcategories:
Designated. a financial liability that is designated by the entity as a liability at fair value through profit or loss upon initial recognition
Held for trading. a financial liability classified as held for trading, such as an obligation for securities borrowed in a short sale, which have to
be returned in the future
Initial recognition
IAS 39 requires recognition of a financial asset or a financial liability when, and only when, the entity becomes a party to the contractual provisions of
the instrument, subject to the following provisions in respect of regular way purchases. [IAS 39.14]
Regular way purchases or sales of a financial asset. A regular way purchase or sale of financial assets is recognised and derecognised using either
trade date or settlement date accounting. [IAS 39.38] The method used is to be applied consistently for all purchases and sales of financial assets that
belong to the same category of financial asset as defined in IAS 39 (note that for this purpose assets held for trading form a different category from
assets designated at fair value through profit or loss). The choice of method is an accounting policy. [IAS 39.38]
IAS 39 requires that all financial assets and all financial liabilities be recognised on the balance sheet. That includes all derivatives. Historically, in
many parts of the world, derivatives have not been recognised on company balance sheets. The argument has been that at the time the derivative
contract was entered into, there was no amount of cash or other assets paid. Zero cost justified non-recognition, notwithstanding that as time passes and
the value of the underlying variable (rate, price, or index) changes, the derivative has a positive (asset) or negative (liability) value.
Initial measurement
Initially, financial assets and liabilities should be measured at fair value (including transaction costs, for assets and liabilities not measured at fair value
through profit or loss). [IAS 39.43]
Measurement subsequent to initial recognition
Subsequently, financial assets and liabilities (including derivatives) should be measured at fair value, with the following exceptions: [IAS 39.46-47]
Loans and receivables, held-to-maturity investments, and non-derivative financial liabilities should be measured at amortised cost using the
effective interest method.
Investments in equity instruments with no reliable fair value measurement (and derivatives indexed to such equity instruments) should be
measured at cost.
Financial assets and liabilities that are designated as a hedged item or hedging instrument are subject to measurement under the hedge
accounting requirements of the IAS 39.
Financial liabilities that arise when a transfer of a financial asset does not qualify for derecognition, or that are accounted for using the
continuing-involvement method, are subject to particular measurement requirements.
Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length
transaction. [IAS 39.9] IAS 39 provides a hierarchy to be used in determining the fair value for a financial instrument: [IAS 39 Appendix A, paragraphs
AG69-82]
Quoted market prices in an active market are the best evidence of fair value and should be used, where they exist, to measure the financial
instrument.
If a market for a financial instrument is not active, an entity establishes fair value by using a valuation technique that makes maximum use
of market inputs and includes recent arm's length market transactions, reference to the current fair value of another instrument that is
substantially the same, discounted cash flow analysis, and option pricing models. An acceptable valuation technique incorporates all factors
that market participants would consider in setting a price and is consistent with accepted economic methodologies for pricing financial
instruments.
If there is no active market for an equity instrument and the range of reasonable fair values is significant and these estimates cannot be
made reliably, then an entity must measure the equity instrument at cost less impairment.
Amortised cost is calculated using the effective interest method. The effective interest rate is the rate that exactly discounts estimated future cash
payments or receipts through the expected life of the financial instrument to the net carrying amount of the financial asset or liability. Financial assets
that are not carried at fair value though profit and loss are subject to an impairment test. If expected life cannot be determined reliably, then the
contractual life is used.
IAS 39 fair value option
IAS 39 permits entities to designate, at the time of acquisition or issuance, any financial asset or financial liability to be measured at fair value, with
value changes recognised in profit or loss. This option is available even if the financial asset or financial liability would ordinarily, by its nature, be
measured at amortised cost but only if fair value can be reliably measured.
In June 2005 the IASB issued its amendment to IAS 39 to restrict the use of the option to designate any financial asset or any financial liability to be
measured at fair value through profit and loss (the fair value option). The revisions limit the use of the option to those financial instruments that meet
certain conditions: [IAS 39.9]
the fair value option designation eliminates or significantly reduces an accounting mismatch, or
a group of financial assets, financial liabilities or both is managed and its performance is evaluated on a fair value basis by entity's
management.
Once an instrument is put in the fair-value-through-profit-and-loss category, it cannot be reclassified out with some exceptions. [IAS 39.50] In October
2008, the IASB issued amendments to IAS 39. The amendments permit reclassification of some financial instruments out of the fair-value-through-
profit-or-loss category (FVTPL) and out of the available-for-sale category for more detail see IAS 39.50(c). In the event of reclassification, additional
disclosures are required under IFRS 7Financial Instruments: Disclosures. In March 2009 the IASB clarified that reclassifications of financial assets
under the October 2008 amendments (see above): on reclassification of a financial asset out of the 'fair value through profit or loss' category, all
embedded derivatives have to be (re)assessed and, if necessary, separately accounted for in financial statements.
IAS 39 available for sale option for loans and receivables
IAS 39 permits entities to designate, at the time of acquisition, any loan or receivable as available for sale, in which case it is measured at fair value
with changes in fair value recognised in equity.
Impairment
A financial asset or group of assets is impaired, and impairment losses are recognised, only if there is objective evidence as a result of one or more
events that occurred after the initial recognition of the asset. An entity is required to assess at each balance sheet date whether there is any objective
evidence of impairment. If any such evidence exists, the entity is required to do a detailed impairment calculation to determine whether an impairment
loss should be recognised. [IAS 39.58] The amount of the loss is measured as the difference between the asset's carrying amount and the present value
of estimated cash flows discounted at the financial asset's original effective interest rate. [IAS 39.63]
Assets that are individually assessed and for which no impairment exists are grouped with financial assets with similar credit risk statistics and
collectively assessed for impairment. [IAS 39.64]
If, in a subsequent period, the amount of the impairment loss relating to a financial asset carried at amortised cost or a debt instrument carried as
available-for-sale decreases due to an event occurring after the impairment was originally recognised, the previously recognised impairment loss is
reversed through profit or loss. Impairments relating to investments in available-for-sale equity instruments are not reversed through profit or loss.
[IAS 39.65]
Financial guarantees
A financial guarantee contract is a contract that requires the issuer to make specified payments to reimburse the holder for a loss it incurs because a
specified debtor fails to make payment when due. [IAS 39.9]
Under IAS 39 as amended, financial guarantee contracts are recognised:
initially at fair value. If the financial guarantee contract was issued in a stand-alone arm's length transaction to an unrelated party, its fair
value at inception is likely to equal the consideration received, unless there is evidence to the contrary.
subsequently at the higher of (i) the amount determined in accordance with IAS 37Provisions, Contingent Liabilities and Contingent Assets
and (ii) the amount initially recognised less, when appropriate, cumulative amortisation recognised in accordance with IAS 18 Revenue. (If
specified criteria are met, the issuer may use the fair value option in IAS 39. Furthermore, different requirements continue to apply in the
specialised context of a 'failed' derecognition transaction.)
Some credit-related guarantees do not, as a precondition for payment, require that the holder is exposed to, and has incurred a loss on, the failure of the
debtor to make payments on the guaranteed asset when due. An example of such a guarantee is a credit derivative that requires payments in response to
changes in a specified credit rating or credit index. These are derivatives and they must be measured at fair value under IAS 39.
Derecognition of a financial asset
The basic premise for the derecognition model in IAS 39 is to determine whether the asset under consideration for derecognition is: [IAS 39.16]
an asset in its entirety or
specifically identified cash flows from an asset or
a fully proportionate share of the cash flows from an asset or
a fully proportionate share of specifically identified cash flows from a financial asset
Once the asset under consideration for derecognition has been determined, an assessment is made as to whether the asset has been transferred, and if so,
whether the transfer of that asset is subsequently eligible for derecognition.
An asset is transferred if either the entity has transferred the contractual rights to receive the cash flows, or the entity has retained the contractual rights
to receive the cash flows from the asset, but has assumed a contractual obligation to pass those cash flows on under an arrangement that meets the
following three conditions: [IAS 39.17-19]
the entity has no obligation to pay amounts to the eventual recipient unless it collects equivalent amounts on the original asset
the entity is prohibited from selling or pledging the original asset (other than as security to the eventual recipient),
the entity has an obligation to remit those cash flows without material delay
Once an entity has determined that the asset has been transferred, it then determines whether or not it has transferred substantially all of the risks and
rewards of ownership of the asset. If substantially all the risks and rewards have been transferred, the asset is derecognised. If substantially all the risks
and rewards have been retained, derecognition of the asset is precluded. [IAS 39.20]
If the entity has neither retained nor transferred substantially all of the risks and rewards of the asset, then the entity must assess whether it has
relinquished control of the asset or not. If the entity does not control the asset then derecognition is appropriate; however if the entity has retained
control of the asset, then the entity continues to recognise the asset to the extent to which it has a continuing involvement in the asset. [IAS 39.30]
These various derecognition steps are summarised in the decision tree in AG36.
Derecognition of a financial liability
A financial liability should be removed from the balance sheet when, and only when, it is extinguished, that is, when the obligation specified in the
contract is either discharged or cancelled or expires. [IAS 39.39] Where there has been an exchange between an existing borrower and lender of debt
instruments with substantially different terms, or there has been a substantial modification of the terms of an existing financial liability, this transaction
is accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability. A gain or loss from
extinguishment of the original financial liability is recognised in profit or loss. [IAS 39.40-41]
Hedge accounting
IAS 39 permits hedge accounting under certain circumstances provided that the hedging relationship is: [IAS 39.88]
formally designated and documented, including the entity's risk management objective and strategy for undertaking the hedge,
identification of the hedging instrument, the hedged item, the nature of the risk being hedged, and how the entity will assess the hedging
instrument's effectiveness and
expected to be highly effective in achieving offsetting changes in fair value or cash flows attributable to the hedged risk as designated and
documented, and effectiveness can be reliably measured and
assessed on an ongoing basis and determined to have been highly effective
Hedging instruments
Hedging instrument is an instrument whose fair value or cash flows are expected to offset changes in the fair value or cash flows of a designated hedged
item. [IAS 39.9]
All derivative contracts with an external counterparty may be designated as hedging instruments except for some written options. A non-derivative
financial asset or liability may not be designated as a hedging instrument except as a hedge of foreign currency risk. [IAS 39.72]
For hedge accounting purposes, only instruments that involve a party external to the reporting entity can be designated as a hedging instrument. This
applies to intragroup transactions as well (with the exception of certain foreign currency hedges of forecast intragroup transactions see below).
However, they may qualify for hedge accounting in individual financial statements. [IAS 39.73]
Hedged items
Hedged item is an item that exposes the entity to risk of changes in fair value or future cash flows and is designated as being hedged. [IAS 39.9]
A hedged item can be: [IAS 39.78-82]
a single recognised asset or liability, firm commitment, highly probable transaction or a net investment in a foreign operation
a group of assets, liabilities, firm commitments, highly probable forecast transactions or net investments in foreign operations with similar
risk characteristics
a held-to-maturity investment for foreign currency or credit risk (but not for interest risk or prepayment risk)
a portion of the cash flows or fair value of a financial asset or financial liability or
a non-financial item for foreign currency risk only for all risks of the entire item
in a portfolio hedge of interest rate risk (Macro Hedge) only, a portion of the portfolio of financial assets or financial liabilities that share the
risk being hedged
In April 2005, the IASB amended IAS 39 to permit the foreign currency risk of a highly probable intragroup forecast transaction to qualify as the
hedged item in a cash flow hedge in consolidated financial statements provided that the transaction is denominated in a currency other than the
functional currency of the entity entering into that transaction and the foreign currency risk will affect consolidated financial statements. [IAS 39.80]
In 30 July 2008, the IASB amended IAS 39 to clarify two hedge accounting issues:
inflation in a financial hedged item
a one-sided risk in a hedged item.
Effectiveness
IAS 39 requires hedge effectiveness to be assessed both prospectively and retrospectively. To qualify for hedge accounting at the inception of a hedge
and, at a minimum, at each reporting date, the changes in the fair value or cash flows of the hedged item attributable to the hedged risk must be
expected to be highly effective in offsetting the changes in the fair value or cash flows of the hedging instrument on a prospective basis, and on a
retrospective basis where actual results are within a range of 80% to 125%.
All hedge ineffectiveness is recognised immediately in profit or loss (including ineffectiveness within the 80% to 125% window).
Categories of hedges
A fair value hedge is a hedge of the exposure to changes in fair value of a recognised asset or liability or a previously unrecognised firm commitment
or an identified portion of such an asset, liability or firm commitment, that is attributable to a particular risk and could affect profit or loss.
[IAS 39.86(a)] The gain or loss from the change in fair value of the hedging instrument is recognised immediately in profit or loss. At the same time the
carrying amount of the hedged item is adjusted for the corresponding gain or loss with respect to the hedged risk, which is also recognised immediately
in net profit or loss. [IAS 39.89]
A cash flow hedge is a hedge of the exposure to variability in cash flows that (i) is attributable to a particular risk associated with a recognised asset or
liability (such as all or some future interest payments on variable rate debt) or a highly probable forecast transaction and (ii) could affect profit or loss.
[IAS 39.86(b)] The portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognised in other
comprehensive income. [IAS 39.95]
If a hedge of a forecast transaction subsequently results in the recognition of a financial asset or a financial liability, any gain or loss on the hedging
instrument that was previously recognised directly in equity is 'recycled' into profit or loss in the same period(s) in which the financial asset or liability
affects profit or loss. [IAS 39.97]
If a hedge of a forecast transaction subsequently results in the recognition of a non-financial asset or non-financial liability, then the entity has an
accounting policy option that must be applied to all such hedges of forecast transactions: [IAS 39.98]
Same accounting as for recognition of a financial asset or financial liability any gain or loss on the hedging instrument that was previously
recognised in other comprehensive income is 'recycled' into profit or loss in the same period(s) in which the non-financial asset or liability
affects profit or loss.
'Basis adjustment' of the acquired non-financial asset or liability the gain or loss on the hedging instrument that was previously recognised
in other comprehensive income is removed from equity and is included in the initial cost or other carrying amount of the acquired non-
financial asset or liability.
A hedge of a net investment in a foreign operation as defined in IAS 21The Effects of Changes in Foreign Exchange Rates is accounted for similarly
to a cash flow hedge. [IAS 39.102]
A hedge of the foreign currency risk of a firm commitment may be accounted for as a fair value hedge or as a cash flow hedge.
Discontinuation of hedge accounting
Hedge accounting must be discontinued prospectively if: [IAS 39.91 and 39.101]
the hedging instrument expires or is sold, terminated, or exercised
the hedge no longer meets the hedge accounting criteria for example it is no longer effective
for cash flow hedges the forecast transaction is no longer expected to occur, or
the entity revokes the hedge designation
In June 2013, the IASB amended IAS 39 to make it clear that there is no need to discontinue hedge accounting if a hedging derivative is novated,
provided certain criteria are met. [IAS 39.91 and IAS 39.101]
For the purpose of measuring the carrying amount of the hedged item when fair value hedge accounting ceases, a revised effective interest rate is
calculated. [IAS 39.BC35A]
If hedge accounting ceases for a cash flow hedge relationship because the forecast transaction is no longer expected to occur, gains and losses deferred
in other comprehensive income must be taken to profit or loss immediately. If the transaction is still expected to occur and the hedge relationship
ceases, the amounts accumulated in equity will be retained in equity until the hedged item affects profit or loss. [IAS 39.101(c)]
If a hedged financial instrument that is measured at amortised cost has been adjusted for the gain or loss attributable to the hedged risk in a fair value
hedge, this adjustment is amortised to profit or loss based on a recalculated effective interest rate on this date such that the adjustment is fully amortised
by the maturity of the instrument. Amortisation may begin as soon as an adjustment exists and must begin no later than when the hedged item ceases to
be adjusted for changes in its fair value attributable to the risks being hedged.
Disclosure
In 2003 all disclosures about financial instruments were moved to IAS 32, so IAS 32 was renamed Financial Instruments: Disclosure and Presentation.
In 2005, the IASB issued IFRS 7 Financial Instruments: Disclosures to replace the disclosure portions of IAS 32 effective 1 January 2007. IFRS 7 also
superseded IAS 30Disclosures in the Financial Statements of Banks and Similar Financial Institutions.
IAS 19 Employee Benefits (1998) (superseded)
Overview
IAS 19 Employee Benefits (1998) outlines the accounting requirements for employee benefits, including short-term benefits (e.g. wages and salaries,
annual leave), post-employment benefits such as retirement benefits, other long-term benefits (e.g. long service leave) and termination benefits. The
standard establishes the principle that the cost of providing employee benefits should be recognised in the period in which the benefit is earned by the
employee, rather than when it is paid or payable, and outlines how each category of employee benefits are measured, providing detailed guidance in
particular about post-employment benefits.
IAS 19 (1998) is superseded by an amended version, IAS 19Employee Benefits (2011), effective for annual periods beginning on or after 1
January 2013.
Summary of IAS 19 (1998)
IAS 19 Employee Benefits (1998) is superseded by an amended version, IAS 19Employee Benefits (2011), effective for annual periods beginning on or
after 1 January 2013. The summary that follows refers to IAS 19 (1998). Readers interested in the requirements of IAS 19 Employee Benefits (2011)
should refer to our summary of IAS 19 (2011).
Objective of IAS 19
The objective of IAS 19 (1998) is to prescribe the accounting and disclosure for employee benefits (that is, all forms of consideration given by an entity
in exchange for service rendered by employees). The principle underlying all of the detailed requirements of the Standard is that the cost of providing
employee benefits should be recognised in the period in which the benefit is earned by the employee, rather than when it is paid or payable.
Scope
IAS 19 (1998) applies to (among other kinds of employee benefits):
wages and salaries
compensated absences (paid vacation and sick leave)
profit sharing plans
bonuses
medical and life insurance benefits during employment
housing benefits
free or subsidised goods or services given to employees
pension benefits
post-employment medical and life insurance benefits
long-service or sabbatical leave
'jubilee' benefits
deferred compensation programmes
termination benefits.
IAS 19 (1998) does not apply to employee benefits within the scope of IFRS 2Share-based Payment or the reporting by employee benefit plans (see
IAS 26Accounting and Reporting by Retirement Benefit Plans).
Basic principle of IAS 19 (1998)
The cost of providing employee benefits should be recognised in the period in which the benefit is earned by the employee, rather than when it is paid
or payable.
Short-term employee benefits
For short-term employee benefits (those payable within 12 months after service is rendered, such as wages, paid vacation and sick leave, bonuses, and
non-monetary benefits such as medical care and housing), the undiscounted amount of the benefits expected to be paid in respect of service rendered by
employees in a period should be recognised in that period. [IAS 19(1998).10] The expected cost of short-term compensated absences should be
recognised as the employees render service that increases their entitlement or, in the case of non-accumulating absences, when the absences occur.
[IAS 19(1998).11]
Profit-sharing and bonus payments
The entity should recognise the expected cost of profit-sharing and bonus payments when, and only when, it has a legal or constructive obligation to
make such payments as a result of past events and a reliable estimate of the expected cost can be made. [IAS 19(1998).17]
Types of post-employment benefit plans
The accounting treatment for a post-employment benefit plan depends on whether the plan is a defined contribution plan or a defined benefit plan:
Under a defined contribution plan, the entity pays fixed contributions into a fund but has no legal or constructive obligation to make further
payments if the fund does not have sufficient assets to pay all of the employees' entitlements to post-employment benefits
A defined benefit plan is a post-employment benefit plan other than a defined contribution plan. These would include both formal plans
and those informal practices that create a constructive obligation to the entity's employees.
Defined contribution plans
For defined contribution plans, the cost to be recognised in the period is the contribution payable in exchange for service rendered by employees during
the period. [IAS 19(1998).44]
If contributions to a defined contribution plan do not fall due within 12 months after the end of the period in which the employee renders the service,
they are discounted to their present value. [IAS 19(1998).45]
Defined benefit plans
For defined benefit plans, the amount recognised in the statement of financial position is the present value of the defined benefit obligation (that is, the
present value of expected future payments required to settle the obligation resulting from employee service in the current and prior periods), as adjusted
for unrecognised actuarial gains and losses and unrecognised past service cost, and reduced by the fair value of plan assets at the end of the reporting
period. [IAS 19(1998).54]
The present value of the defined benefit obligation should be determined using the Projected Unit Credit Method. [IAS 19(1998).64] Valuations should
be carried out with sufficient regularity such that the amounts recognised in the financial statements do not differ materially from those that would be
determined at the end of the reporting period. [IAS 19(1998).56] The assumptions used for the purposes of such valuations must be unbiased and
mutually compatible. [IAS 19(1998).72] The rate used to discount estimated cash flows is determined by reference to market yields at the end of the
reporting period on high quality corporate bonds, or where there is no deep market in such bonds, by reference to market yields on government bonds.
[IAS 19(1998).78]
On an ongoing basis, actuarial gains and losses arise that comprise experience adjustments (the effects of differences between the previous actuarial
assumptions and what has actually occurred) and the effects of changes in actuarial assumptions. In the long-term, actuarial gains and losses may offset
one another and, as a result, the entity is not required to recognise all such gains and losses in profit or loss immediately. IAS 19 (1998) specifies that if
the accumulated unrecognised actuarial gains and losses exceed 10% of the greater of the defined benefit obligation or the fair value of plan assets, a
portion of that net gain or loss is required to be recognised immediately as income or expense. The portion recognised is the excess divided by the
expected average remaining working lives of the participating employees. Actuarial gains and losses that do not breach the 10% limits described above
(the 'corridor') need not be recognised - although the entity may choose to do so. [IAS 19(1998).92-93]
In December 2004, the IASB issued amendments to IAS 19 (1998) to allow the option of recognising actuarial gains and losses in full in the period in
which they occur, outside profit or loss, in other comprehensive income. This option is similar to the requirements of the UK standard, FRS 17
Retirement Benefits. The Board concluded that, pending further work on post-employment benefits and on reporting comprehensive income, the
approach in FRS 17 should be available as an option to preparers of financial statements using IFRSs. [IAS 19(1998).93A]
Over the life of the plan, changes in benefits under the plan will result in increases or decreases in the entity's obligation.
Past service cost is the term used to describe the change in the obligation for employee service in prior periods, arising as a result of changes to plan
arrangements in the current period. Past service cost may be either positive (where benefits are introduced or improved) or negative (where existing
benefits are reduced). Past service cost is recognised immediately to the extent that it relates to former employees or to active employees already vested.
Otherwise, it is amortised on a straight-line basis over the average period until the amended benefits become vested. [IAS 19(1998).96]
Plan curtailments or settlements: Gains or losses resulting from curtailments or settlements of a plan are recognised when the curtailment or
settlement occurs. [IAS 19(1998).109-110] Curtailments are reductions in scope of employees covered or in benefits.
If the calculation of the statement of financial position amount set out above results in an asset, the amount recognised is limited to the net total of
unrecognised actuarial losses and past service cost, plus the present value of available refunds and reductions in future contributions to the plan.
[IAS 19(1998).58]
The IASB issued the final 'asset ceiling' amendment to IAS 19 (1998) in May 2002. The amendment prevents the recognition of gains solely as a result
of deferral of actuarial losses or past service cost, and prohibits the recognition of losses solely as a result of deferral of actuarial gains.
[IAS 19(1998).58A]
The amount recognised in the profit or loss (unless included in the cost of an asset under another Standard) in a period in respect of a defined benefit
plan is made up of the following components: [IAS 19(1998).61]
current service cost (the actuarial estimate of benefits earned by employee service in the period)
interest cost (the increase in the present value of the obligation as a result of moving one period closer to settlement)
expected return on plan assets* and on any reimbursement rights
actuarial gains and losses, to the extent recognised
past service cost, to the extent recognised
the effect of any plan curtailments or settlements
the effect of 'asset ceiling'
*The return on plan assets is interest, dividends and other revenue derived from the plan assets, together with realised and unrealised gains or losses on
the plan assets, less any costs of administering the plan (other than those included in the actuarial assumptions used to measure the defined benefit
obligation) and less any tax payable by the plan itself. [IAS 19(1998).7]
IAS 19 (1998) contains detailed disclosure requirements for defined benefit plans. [IAS 19(1998).120-125]
IAS 19 (1998) also provides guidance on allocating the cost in:
a multi-employer plan to the individual entities-employers [IAS 19(1998).29-33]
a group defined benefit plan to the entities in the group [IAS 19(1998).34-34B]
a state plan to participating entities [IAS 19(1998).36-38].
Other long-term benefits
IAS 19 (1998) requires a simplified application of the model described above for other long-term employee benefits. This method differs from the
accounting required for post-employment benefits in that: [IAS 19(1998).128-129]
actuarial gains and losses are recognised immediately without the application of a 'corridor' (as discussed above for post-employment
benefits)
all past service costs are recognised immediately.
Termination benefits
For termination benefits, IAS 19 (1998) specifies that amounts payable should be recognised when, and only when, the entity is demonstrably
committed to either: [IAS 19(1998).133]
terminate the employment of an employee or group of employees before the normal retirement date, or
provide termination benefits as a result of an offer made in order to encourage voluntary redundancy.
The entity will be demonstrably committed to a termination when, and only when, it has a detailed formal plan (meeting minimum outlined
requirements) for the termination and is without realistic possibility of withdrawal. [IAS 19(1998).134] Where termination benefits fall due after more
than 12 months after the balance sheet date, they are discounted. [IAS 19(1998).139]
IAS 32 Financial Instruments: Presentation
Overview
IAS 32 Financial Instruments: Presentation outlines the accounting requirements for the presentation of financial instruments, particularly as to the
classification of such instruments into financial assets, financial liabilities and equity instruments. The standard also provide guidance on the
classification of related interest, dividends and gains/losses, and when financial assets and financial liabilities can be offset.
IAS 32 was reissued in December 2003 and applies to annual periods beginning on or after 1 January 2005.
Summary of IAS 32
Objective of IAS 32
The stated objective of IAS 32 is to establish principles for presenting financial instruments as liabilities or equity and for offsetting financial assets and
liabilities. [IAS 32.1]
IAS 32 addresses this in a number of ways:
clarifying the classification of a financial instrument issued by an entity as a liability or as equity
prescribing the accounting for treasury shares (an entity's own repurchased shares)
prescribing strict conditions under which assets and liabilities may be offset in the balance sheet
IAS 32 is a companion to IAS 39Financial Instruments: Recognition and Measurement and IFRS 9Financial Instruments. IAS 39 deals with, among
other things, initial recognition of financial assets and liabilities, measurement subsequent to initial recognition, impairment, derecognition, and hedge
accounting. IAS 39 is progressively being replaced by IFRS 9 as the IASB completes the various phases of its financial instruments project.
Scope
IAS 32 applies in presenting and disclosing information about all types of financial instruments with the following exceptions: [IAS 32.4]
interests in subsidiaries, associates and joint ventures that are accounted for under IAS 27Consolidated and Separate Financial Statements,
IAS 28Investments in Associates or IAS 31Interests in Joint Ventures (or, for annual periods beginning on or after 1 January 2013,
IFRS 10Consolidated Financial Statements, IAS 27Separate Financial Statements and IAS 28Investments in Associates and Joint Ventures).
However, IAS 32 applies to all derivatives on interests in subsidiaries, associates, or joint ventures.
employers' rights and obligations under employee benefit plans (see IAS 19Employee Benefits)
insurance contracts(see IFRS 4Insurance Contracts). However, IAS 32 applies to derivatives that are embedded in insurance contracts if they
are required to be accounted separately by IAS 39
financial instruments that are within the scope of IFRS 4 because they contain a discretionary participation feature are only exempt from
applying paragraphs 15-32 and AG25-35 (analysing debt and equity components) but are subject to all other IAS 32 requirements
contracts and obligations under share-based payment transactions (see IFRS 2Share-based Payment) with the following exceptions:
o this standard applies to contracts within the scope of IAS 32.8-10 (see below)
o paragraphs 33-34 apply when accounting for treasury shares purchased, sold, issued or cancelled by employee share option plans
or similar arrangements
IAS 32 applies to those contracts to buy or sell a non-financial item that can be settled net in cash or another financial instrument, except for contracts
that were entered into and continue to be held for the purpose of the receipt or delivery of a non-financial item in accordance with the entity's expected
purchase, sale or usage requirements. [IAS 32.8]
Key definitions [IAS 32.11]
Financial instrument: a contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.
Financial asset: any asset that is:
cash
an equity instrument of another entity
a contractual right
o to receive cash or another financial asset from another entity; or
o to exchange financial assets or financial liabilities with another entity under conditions that are potentially favourable to the
entity; or
a contract that will or may be settled in the entity's own equity instruments and is:
o a non-derivative for which the entity is or may be obliged to receive a variable number of the entity's own equity instruments
o a derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed
number of the entity's own equity instruments. For this purpose the entity's own equity instruments do not include instruments
that are themselves contracts for the future receipt or delivery of the entity's own equity instruments
o puttable instruments classified as equity or certain liabilities arising on liquidation classified by IAS 32 as equity instruments
Financial liability: any liability that is:
a contractual obligation:
o to deliver cash or another financial asset to another entity; or
o to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the
entity; or
a contract that will or may be settled in the entity's own equity instruments and is
o a non-derivative for which the entity is or may be obliged to deliver a variable number of the entity's own equity instruments or
o a derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed
number of the entity's own equity instruments. For this purpose the entity's own equity instruments do not include: instruments
that are themselves contracts for the future receipt or delivery of the entity's own equity instruments; puttable instruments
classified as equity or certain liabilities arising on liquidation classified by IAS 32 as equity instruments
Equity instrument: Any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities.
Fair value: the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length
transaction.
The definition of financial instrument used in IAS 32 is the same as that in IAS 39.
Puttable instrument: a financial instrument that gives the holder the right to put the instrument back to the issuer for cash or another financial asset or
is automatically put back to the issuer on occurrence of an uncertain future event or the death or retirement of the instrument holder.
Classification as liability or equity
The fundamental principle of IAS 32 is that a financial instrument should be classified as either a financial liability or an equity instrument according to
the substance of the contract, not its legal form, and the definitions of financial liability and equity instrument. Two exceptions from this principle are
certain puttable instruments meeting specific criteria and certain obligations arising on liquidation (see below). The entity must make the decision at the
time the instrument is initially recognised. The classification is not subsequently changed based on changed circumstances. [IAS 32.15]
A financial instrument is an equity instrument only if (a) the instrument includes no contractual obligation to deliver cash or another financial asset to
another entity and (b) if the instrument will or may be settled in the issuer's own equity instruments, it is either:
a non-derivative that includes no contractual obligation for the issuer to deliver a variable number of its own equity instruments; or
a derivative that will be settled only by the issuer exchanging a fixed amount of cash or another financial asset for a fixed number of its own
equity instruments. [IAS 32.16]
Illustration preference shares
If an entity issues preference (preferred) shares that pay a fixed rate of dividend and that have a mandatory redemption feature at a future date, the
substance is that they are a contractual obligation to deliver cash and, therefore, should be recognised as a liability. [IAS 32.18(a)] In contrast,
preference shares that do not have a fixed maturity, and where the issuer does not have a contractual obligation to make any payment are equity. In this
example even though both instruments are legally termed preference shares they have different contractual terms and one is a financial liability while
the other is equity.
Illustration issuance of fixed monetary amount of equity instruments
A contractual right or obligation to receive or deliver a number of its own shares or other equity instruments that varies so that the fair value of the
entity's own equity instruments to be received or delivered equals the fixed monetary amount of the contractual right or obligation is a financial liability.
[IAS 32.20]
Illustration one party has a choice over how an instrument is settled
When a derivative financial instrument gives one party a choice over how it is settled (for instance, the issuer or the holder can choose settlement net in
cash or by exchanging shares for cash), it is a financial asset or a financial liability unless all of the settlement alternatives would result in it being an
equity instrument. [IAS 32.26]
Contingent settlement provisions
If, as a result of contingent settlement provisions, the issuer does not have an unconditional right to avoid settlement by delivery of cash or other
financial instrument (or otherwise to settle in a way that it would be a financial liability) the instrument is a financial liability of the issuer, unless:
the contingent settlement provision is not genuine or
the issuer can only be required to settle the obligation in the event of the issuer's liquidation or
the instrument has all the features and meets the conditions of IAS 32.16A and 16B for puttable instruments [IAS 32.25]
Puttable instruments and obligations arising on liquidation
In February 2008, the IASB amended IAS 32 and IAS 1 Presentation of Financial Statements with respect to the balance sheet classification of puttable
financial instruments and obligations arising only on liquidation. As a result of the amendments, some financial instruments that currently meet the
definition of a financial liability will be classified as equity because they represent the residual interest in the net assets of the entity. [IAS 32.16A-D]
Classifications of rights issues
In October 2009, the IASB issued an amendment to IAS 32 on the classification of rights issues. For rights issues offered for a fixed amount of foreign
currency current practice appears to require such issues to be accounted for as derivative liabilities. The amendment states that if such rights are issued
pro rata to an entity's all existing shareholders in the same class for a fixed amount of currency, they should be classified as equity regardless of the
currency in which the exercise price is denominated.
Compound financial instruments
Some financial instruments sometimes called compound instruments have both a liability and an equity component from the issuer's perspective. In
that case, IAS 32 requires that the component parts be accounted for and presented separately according to their substance based on the definitions of
liability and equity. The split is made at issuance and not revised for subsequent changes in market interest rates, share prices, or other event that
changes the likelihood that the conversion option will be exercised. [IAS 32.29-30]
To illustrate, a convertible bond contains two components. One is a financial liability, namely the issuer's contractual obligation to pay cash, and the
other is an equity instrument, namely the holder's option to convert into common shares. Another example is debt issued with detachable share purchase
warrants.
When the initial carrying amount of a compound financial instrument is required to be allocated to its equity and liability components, the equity
component is assigned the residual amount after deducting from the fair value of the instrument as a whole the amount separately determined for the
liability component. [IAS 32.32]
Interest, dividends, gains, and losses relating to an instrument classified as a liability should be reported in profit or loss. This means that dividend
payments on preferred shares classified as liabilities are treated as expenses. On the other hand, distributions (such as dividends) to holders of a
financial instrument classified as equity should be charged directly against equity, not against earnings. [IAS 32.35]
Transaction costs of an equity transaction are deducted from equity. Transaction costs related to an issue of a compound financial instrument are
allocated to the liability and equity components in proportion to the allocation of proceeds.
Treasury shares
The cost of an entity's own equity instruments that it has reacquired ('treasury shares') is deducted from equity. Gain or loss is not recognised on the
purchase, sale, issue, or cancellation of treasury shares. Treasury shares may be acquired and held by the entity or by other members of the consolidated
group. Consideration paid or received is recognised directly in equity. [IAS 32.33]
Offsetting
IAS 32 also prescribes rules for the offsetting of financial assets and financial liabilities. It specifies that a financial asset and a financial liability should
be offset and the net amount reported when, and only when, an entity: [IAS 32.42]
has a legally enforceable right to set off the amounts; and
intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously. [IAS 32.48]
Costs of issuing or reacquiring equity instruments
Costs of issuing or reacquiring equity instruments (other than in a business combination) are accounted for as a deduction from equity, net of any
related income tax benefit. [IAS 32.35]
Disclosures
Financial instruments disclosures are in IFRS 7 Financial Instruments: Disclosures, and no longer in IAS 32.
The disclosures relating to treasury shares are in IAS 1Presentation of Financial Statements and IAS 24Related Parties for share repurchases from
related parties. [IAS 32.34 and 39]



IAS 36 Impairment of Assets
Summary of IAS 36
Objective of IAS 36
To ensure that assets are carried at no more than their recoverable amount, and to define how recoverable amount is determined.
Scope
IAS 36 applies to all assets except: [IAS 36.2]
inventories (see IAS 2)
assets arising from construction contracts (see IAS 11)
deferred tax assets (see IAS 12)
assets arising from employee benefits (see IAS 19)
financial assets (see IAS 39)
investment property carried at fair value (see IAS 40)
agricultural assets carried at fair value (see IAS 41)
insurance contract assets (see IFRS 4)
non-current assets held for sale (see IFRS 5)
Therefore, IAS 36 applies to (among other assets):
land
buildings
machinery and equipment
investment property carried at cost
intangible assets
goodwill
investments in subsidiaries, associates, and joint ventures carried at cost
assets carried at revalued amounts under IAS 16 and IAS 38
Key definitions [IAS 36.6]
Impairment loss: the amount by which the carrying amount of an asset or cash-generating unit exceeds its recoverable amount
Carrying amount: the amount at which an asset is recognised in the balance sheet after deducting accumulated depreciation and accumulated
impairment losses
Recoverable amount: the higher of an asset's fair value less costs of disposal* (sometimes called net selling price) and its value in use
* Prior to consequential amendments made by IFRS 13 Fair Value Measurement, this was referred to as 'fair value less costs to sell'.
Fair value: the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date (see IFRS 13 Fair Value Measurement)
Value in use: the present value of the future cash flows expected to be derived from an asset or cash-generating unit
Identifying an asset that may be impaired
At the end of each reporting period, an entity is required to assess whether there is any indication that an asset may be impaired (i.e. its carrying amount
may be higher than its recoverable amount). IAS 36 has a list of external and internal indicators of impairment. If there is an indication that an asset
may be impaired, then the asset's recoverable amount must be calculated. [IAS 36.9]
The recoverable amounts of the following types of intangible assets are measured annually whether or not there is any indication that it may be
impaired. In some cases, the most recent detailed calculation of recoverable amount made in a preceding period may be used in the impairment test for
that asset in the current period: [IAS 36.10]
an intangible asset with an indefinite useful life
an intangible asset not yet available for use
goodwill acquired in a business combination
Indications of impairment [IAS 36.12]
External sources:
market value declines
negative changes in technology, markets, economy, or laws
increases in market interest rates
net assets of the company higher than market capitalisation
Internal sources:
obsolescence or physical damage
asset is idle, part of a restructuring or held for disposal
worse economic performance than expected
for investments in subsidiaries, joint ventures or associates, the carrying amount is higher than the carrying amount of the investee's assets,
or a dividend exceeds the total comprehensive income of the investee
These lists are not intended to be exhaustive. [IAS 36.13] Further, an indication that an asset may be impaired may indicate that the asset's useful life,
depreciation method, or residual value may need to be reviewed and adjusted. [IAS 36.17]
Determining recoverable amount
If fair value less costs of disposal or value in use is more than carrying amount, it is not necessary to calculate the other amount. The asset is
not impaired. [IAS 36.19]
If fair value less costs of disposal cannot be determined, then recoverable amount is value in use. [IAS 36.20]
For assets to be disposed of, recoverable amount is fair value less costs of disposal. [IAS 36.21]
Fair value less costs of disposal
Fair value is determined in accordance with IFRS 13 Fair Value Measurement
Costs of disposal are the direct added costs only (not existing costs or overhead). [IAS 36.28]
Value in use
The calculation of value in use should reflect the following elements: [IAS 36.30]
an estimate of the future cash flows the entity expects to derive from the asset
expectations about possible variations in the amount or timing of those future cash flows
the time value of money, represented by the current market risk-free rate of interest
the price for bearing the uncertainty inherent in the asset
other factors, such as illiquidity, that market participants would reflect in pricing the future cash flows the entity expects to derive from the
asset
Cash flow projections should be based on reasonable and supportable assumptions, the most recent budgets and forecasts, and extrapolation for periods
beyond budgeted projections. [IAS 36.33] IAS 36 presumes that budgets and forecasts should not go beyond five years; for periods after five years,
extrapolate from the earlier budgets. [IAS 36.35] Management should assess the reasonableness of its assumptions by examining the causes of
differences between past cash flow projections and actual cash flows. [IAS 36.34]
Cash flow projections should relate to the asset in its current condition future restructurings to which the entity is not committed and expenditures to
improve or enhance the asset's performance should not be anticipated. [IAS 36.44]
Estimates of future cash flows should not include cash inflows or outflows from financing activities, or income tax receipts or payments. [IAS 36.50]
Discount rate
In measuring value in use, the discount rate used should be the pre-tax rate that reflects current market assessments of the time value of money and the
risks specific to the asset. [IAS 36.55]
The discount rate should not reflect risks for which future cash flows have been adjusted and should equal the rate of return that investors would require
if they were to choose an investment that would generate cash flows equivalent to those expected from the asset. [IAS 36.56]
For impairment of an individual asset or portfolio of assets, the discount rate is the rate the entity would pay in a current market transaction to borrow
money to buy that specific asset or portfolio.
If a market-determined asset-specific rate is not available, a surrogate must be used that reflects the time value of money over the asset's life as well as
country risk, currency risk, price risk, and cash flow risk. The following would normally be considered: [IAS 36.57]
the entity's own weighted average cost of capital
the entity's incremental borrowing rate
other market borrowing rates.
Recognition of an impairment loss
An impairment loss is recognised whenever recoverable amount is below carrying amount. [IAS 36.59]
The impairment loss is recognised as an expense (unless it relates to a revalued asset where the impairment loss is treated as a revaluation
decrease). [IAS 36.60]
Adjust depreciation for future periods. [IAS 36.63]
Cash-generating units
Recoverable amount should be determined for the individual asset, if possible. [IAS 36.66]
If it is not possible to determine the recoverable amount (fair value less costs of disposal and value in use) for the individual asset, then determine
recoverable amount for the asset's cash-generating unit (CGU). [IAS 36.66] The CGU is the smallest identifiable group of assets that generates cash
inflows that are largely independent of the cash inflows from other assets or groups of assets. [IAS 36.6]
Impairment of goodwill
Goodwill should be tested for impairment annually. [IAS 36.96]
To test for impairment, goodwill must be allocated to each of the acquirer's cash-generating units, or groups of cash-generating units, that are expected
to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units or groups
of units. Each unit or group of units to which the goodwill is so allocated shall: [IAS 36.80]
represent the lowest level within the entity at which the goodwill is monitored for internal management purposes; and
not be larger than an operating segment determined in accordance with IFRS 8 Operating Segments.
A cash-generating unit to which goodwill has been allocated shall be tested for impairment at least annually by comparing the carrying amount of the
unit, including the goodwill, with the recoverable amount of the unit: [IAS 36.90]
If the recoverable amount of the unit exceeds the carrying amount of the unit, the unit and the goodwill allocated to that unit is not
impaired
If the carrying amount of the unit exceeds the recoverable amount of the unit, the entity must recognise an impairment loss.
The impairment loss is allocated to reduce the carrying amount of the assets of the unit (group of units) in the following order: [IAS 36.104]
first, reduce the carrying amount of any goodwill allocated to the cash-generating unit (group of units); and
then, reduce the carrying amounts of the other assets of the unit (group of units) pro rata on the basis.
The carrying amount of an asset should not be reduced below the highest of: [IAS 36.105]
its fair value less costs of disposal (if measurable)
its value in use (if measurable)
zero.
If the preceding rule is applied, further allocation of the impairment loss is made pro rata to the other assets of the unit (group of units).
Reversal of an impairment loss
Same approach as for the identification of impaired assets: assess at each balance sheet date whether there is an indication that an
impairment loss may have decreased. If so, calculate recoverable amount. [IAS 36.110]
No reversal for unwinding of discount. [IAS 36.116]
The increased carrying amount due to reversal should not be more than what the depreciated historical cost would have been if the
impairment had not been recognised. [IAS 36.117]
Reversal of an impairment loss is recognised in the profit or loss unless it relates to a revalued asset [IAS 36.119]
Adjust depreciation for future periods. [IAS 36.121]
Reversal of an impairment loss for goodwill is prohibited. [IAS 36.124]
Disclosure
Disclosure by class of assets: [IAS 36.126]
impairment losses recognised in profit or loss
impairment losses reversed in profit or loss
which line item(s) of the statement of comprehensive income
impairment losses on revalued assets recognised in other comprehensive income
impairment losses on revalued assets reversed in other comprehensive income
Disclosure by reportable segment: [IAS 36.129]
impairment losses recognised
impairment losses reversed
Other disclosures:
If an individual impairment loss (reversal) is material disclose: [IAS 36.130]
events and circumstances resulting in the impairment loss
amount of the loss or reversal
individual asset: nature and segment to which it relates
cash generating unit: description, amount of impairment loss (reversal) by class of assets and segment
if recoverable amount is fair value less costs of disposal, the level of the fair value hierarchy (from IFRS 13 Fair Value Measurement) within
which the fair value measurement is categorised, the valuation techniques used to measure fair value less costs of disposal and the key
assumptions used in the measurement of fair value measurements categorised within 'Level 2' and 'Level 3' of the fair value hierarchy*
if recoverable amount has been determined on the basis of value in use, or on the basis of fair value less costs of disposal using a present
value technique*, disclose the discount rate
* Amendments introduced by Recoverable Amount Disclosures for Non-Financial Assets, effective for annual periods beginning on or after 1 January
2014.
If impairment losses recognised (reversed) are material in aggregate to the financial statements as a whole, disclose: [IAS 36.131]
main classes of assets affected
main events and circumstances
Disclose detailed information about the estimates used to measure recoverable amounts of cash generating units containing goodwill or intangible assets
with indefinite useful lives. [IAS 36.134-35]