FAQ

Frequently Asked Questions

IFRS 1

 

1. What is effective period for reporting IFRS 1?

Background

The end of entity A’s first IFRS reporting period is 31 December 20X5. Entity A decides to present comparative information in those financial statements for one year only. Therefore, its date of transition to IFRSs is the beginning of business on 1 January 20X4 (or, equivalently, close of business on 31 December 20X3). Entity A presented financial statements in accordance with its previous GAAP annually to 31 December each year up to, and including, 31 December 20X4.

Application:

Entity A is required to apply the IFRSs effective for periods ending on 31 December 20X5 in:

(a) Preparing and presenting its opening IFRS statement of financial position at 1 January 20X4; and

(b) preparing and presenting its statement of financial position for 31 December 20X5 (including comparative amounts for 20X4), statement of comprehensive income, statement of changes in equity and statement of cash flows for the year to 31 December 20X5 (including comparative amounts for 20X4) and disclosures (including comparative information for 20X4). If a new IFRS is not yet mandatory but permits early application, entity A is permitted, but not required, to apply that IFRS in its first IFRS financial statements.

 

 

2. How will first set of IFRS financial statements be prepared?

In the first set of financial statements prepared under IFRS, an entity shall apply the latest version of IFRS effective at reporting date and as a general rule apply them retrospectively subject to exemptions under IFRS1. Opening balance sheet shall be prepared in accordance with IFRS at the date of transition. Date of transition is the beginning of the earliest financial reporting period. The entity shall recognize all assets and liabilities in accordance with IFRS and derecognize those which are not in accordance with IFRS. Assets and liabilities shall be measured as per IFRS. Reconciliation is required to be prepared between previous GAAP and IFRS for equity and profit and loss with explanations for the same.

 

 

3. How would subsequent Measurement of Acquired Finished Goods Inventory measured?

Background:

Pattern on 1 December 2011, Entity A, a US GAAP reporter, purchased 100 units of finished goods inventory at $1.00/unit. On 15 December 2011, it purchased an additional 100 units of finished goods inventory at $1.20/unit. Entity A accounts for its inventory using the last-in, first-out (LIFO) cost formula and uses the specific identification method for purposes of determining LIFO cost. On 21 December 2011, Entity A sold 60 units and recorded a debit to cost of goods sold and a credit to inventory of $72 (60 units * $1.20/unit). The ending LIFO inventory balance in Entity A’s consolidated US GAAP financial statements as of 1 January 2012 was $148 [(100 units * $1.00/unit) + (40 units * $1.20/unit)].

Application:

Entity A will become a first-time adopter and will present its first IFRS financial statements as of and for the year ending 31 December 2014. In preparing its opening IFRS balance sheet as of 1 January 2012, Entity A must determine whether it will subsequently account for the finished goods inventory using either the first-in, first-out (FIFO) or weighted average cost formula under IAS 2.(LIFO is not permitted.) If Entity A elects to use the FIFO cost formula, the carrying amount of the inventory in the opening IFRS balance sheet as of 1 January 2012 must be restated to its FIFO cost or $160 [(40 units * $1.00/unit) + (100 units * $1.20/unit)]. The difference between the LIFO and FIFO ending inventory balances of $12 would be recorded as an adjustment to retained earnings (before any adjustment for income taxes). (b) preparing and presenting its statement of financial position for 31 December 20X5 (including comparative amounts for 20X4), statement of comprehensive income, statement of changes in equity and statement of cash flows for the year to 31 December 20X5 (including comparative amounts for 20X4) and disclosures (including comparative information for 20X4). If a new IFRS is not yet mandatory but permits early application, entity A is permitted, but not required, to apply that IFRS in its first IFRS financial statements.

 

 

4. How would Changes in accounting estimates measured

Background:

Change in estimate Fact pattern In May 2010, Entity A, a US GAAP reporter, issued share-based compensation in the form of stock options to its employees. The options have a service condition and vest on a graded vesting schedule over 4 years (that is, 25% of the options are vested in May 2011, another 25% in May 2012, and so on). Under US GAAP, the entity’s accounting policy was to measure each tranche of the award separately, but then to recognize compensation expense over on a straight-line basis over the requisite period for the entire award (that is, four years). As of the grant date of the stock options, the entity believed the expected lives of the stock options ranged from two to six years. On 1 January 2012, Entity A estimates that the expected lives of those awards range from 1.5 to five years.

Application:

Entity A will become a first time adopter and will present its first IFRS financial statements as of and for the year ended 31 December 2014. Its date of transition to IFRS is 1 January 2012. As part of its adoption of IFRS, it must evaluate its share-based payment awards that are not yet vested as of its date of transition. Under IFRS, Entity A must recognize its compensation expense on a straight-line basis over the requisite service period for each separately vesting portion of the award as if the award was, in substance, multiple awards, (that is, “accelerated method”). Entity A therefore must apply the accelerated method under IFRS 2 to these share-based payment awards to adjust for the difference in accounting policy between the straight-line recognition and the accelerated recognition under IFRS 2. However, the fair value calculation must be based on the facts and circumstances that existed at the time the share-based payments were issued, not the date of adoption of IFRS. Therefore, Entity A may not adjust the value of the awards based on its revised estimates of the expected lives of the awards.

 

5. How should impact of changes in component accounting be given on transition to IFRS?

Background:

Entity A, a US GAAP reporter, purchased a building 10 years ago for which the historical cost is $1,200,000. Upon further evaluation, Entity A determines that the building had four separate components — heating and cooling, roof, electrical (including telephone and internet) and the remainder of the building. However, as permitted under US GAAP, Entity A has been depreciating the building as a single component over 40 years. Entity A will become a first-time adopter and will present its first IFRS financial statements as of and for the year ended 31 December 2014. Entity A has determined that the fair value of the building at the date of transition to IFRS (1 January 2012) is $1,100,000. (The fair value of the heating and cooling is $200,000, the roof is $100,000, electrical is $250,000 and the rest of the building is $550,000.)

Application:

Under IFRS 1, Entity A has the option to use the current fair value of the building and the individual components as its “deemed cost” in its opening IFRS balance sheet and to base the future component depreciation on that amount. A first-time adopter may prefer this approach when recalculation of historic depreciation using the component approach could be cumbersome.

Alternatively, if Entity A did not know the fair value of the building on its date of transition, but evaluated the building for impairment two years prior to the transition date (for example, on 1 January 2010), and determined the fair value of the building to be $900,000 at that time, Entity A may also elect to use that amount as the deemed cost at 1 January 2010 and calculate the appropriate depreciation amount under IFRS for each component from that date forward, as long as the valuation meets certain criteria. Under this approach, an entity would still have to determine the fair value of the building’s components as of the date of the impairment analysis in order to have the necessary information for its component depreciation calculations. If the first-time adopter elected to use either the current fair value or a previous valuation amount as the deemed cost, any adjustments to the historical carrying amount of the property, plant and equipment would be reflected in opening retained earnings at the transition date.

 

 

IFRS 2

1. How do you assign value to the stock options?

In the absence of observable market values, the answer is “use an option pricing model.” This, in turn, creates a whole host of new problems. Foremost is the fact that the outcome3 of any option-pricing model is an estimate. The widely-used Black-Scholes model was constructed for options with exact lifetimes, reliable estimates of volatility, and an underlying market in the security that allows an options trader to hedge by buying or selling the underlying stock. Therefore, the Black-Scholes model is inexact for employee options — these may not vest for years, may remain open for more years, can be heavily influenced by the activities of the employees themselves, and have other conditions attached to them not normally found in conventional options. Thus, any numbers generated by Black-Scholes must be viewed as estimates.

 

 

IFRS 15

1. One of the five criteria6 that must be met for a contract to exist is that it is probable the entity will collect the consideration to which it is entitled. What does this mean and how is this applied?

The inclusion of a collectability requirement in the identification of a contract incorporates an evaluation of the customer’s credit risk in determining whether a contract is, in fact, valid (i.e., whether it is probable that the consideration to which the entity is entitled in exchange for the goods or services will be collected). As a reminder, “probable” under IFRSs is regarded as “more likely than not to occur”. Introducing such a threshold requires entities to consider whether a contract is valid and represents a genuine transaction. Although this determination is subjective and requires judgment, IFRS 15 does provide guidance noting that this assessment is completed from the perspective of whether the customer has the “ability and intention” to pay the amount of consideration to which the company expects to be entitled. Questions have arisen in practice as to how the above guidance interacts with price concessions offered to a customer. Price concessions are referred to in Step 3 of the revenue model (determining the transaction price) and are a form of variable consideration. Offering a price concession to a customer does not necessarily imply the consideration is not “collectible”; it simply changes the total amount of consideration to which an entity expects to be entitled. An analysis of expected price concessions must often be made first in order to determine the consideration to which the entity expects to be entitled. Once the amount of consideration is determined (even if variable because of a price concession) then this consideration should be assessed in the context of a customer’s ability and intention to pay. Determining whether collectability is probable is a very important assessment under IFRS 15. If this criterion is not met, then revenue cannot be recognized (effectively precluding the use of the cash basis of accounting) and any consideration received is recorded as a liability (e.g., unearned revenue) until either of the following events has occurred:

• The entity has no remaining performance obligations and all or substantially all the consideration for the performance obligations in the contract has been received and is non-refundable [IFRS 15.15(a)].
• The contract is terminated and the consideration received is non-refundable [IFRS 15.15(b)].

 

2. IFRS 15 refers to a “performance obligation” as a promised good or service (i.e., promise in a contract) that is distinct. How should a promised good or service be identified?

A contract includes both explicitly and implicitly promised goods and services. An implicit promise is inferred from an entity’s customary business practices, published policies, specific statements, etc. and creates a valid expectation in the customer that there will be a transfer of a good or service to them. In identifying a promised good or service, judgment is required. For example, if an item or activity provides something of benefit to a customer, even if minor, should this be a “promised good or service” for the purposes of determining whether this is a performance obligation? The Basis for Conclusions on IFRS 15 specifies that “…all goods or services promised to a customer as a result of a contract give rise to performance obligations because those promises were made as part of the negotiated exchange between the entity and its customer”. Furthermore the Basis for Conclusions on IFRS 15 specifies that entities are “…not exempt from accounting for performance obligations that the entity might regard as being perfunctory or inconsequential. Instead, an entity should assess whether those performance obligations are immaterial to its financial statements”.

 

3. How should an entity determine whether a promise is a distinct performance obligation and should be accounted for separately or whether it should be bundled with other promises to be included in the application of the remaining steps of the model?

Once all promised goods or services either explicit or implicit in the contract are identified, an assessment must be completed as to whether these goods or services are performance obligations. In order to assess what constitutes a performance obligation, a determination must be made as to whether: • the good or service is distinct [IFRS 15.22(a)] • the good or service is part of a series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer [IFRS 15.22(b)]. In identifying performance obligations, judgment is again required. IFRS 15 notes that activities that must be undertaken to fulfill a contract (e.g., various administrative tasks) but do not result in a transfer of goods or services are not a promised good or service for the purpose of identifying performance obligations. IFRS 15.26 provides some examples of distinct goods and services. Good or Service Is Distinct IFRS 15 provides two very specific criteria that must both be met in order for a good or service to be considered distinct: • the customer must be able to benefit from the good or service either on its own or together with other readily available resources (i.e., capable of being distinct) [IFRS 15.27(a)] • the good or service is separately identifiable from other goods or services in the contract (i.e., distinct within the context of the contract) [IFRS 15.27(b)]. Factors that indicate a customer may be able to benefit from a good or service on its own or together with other readily available resources, include, the good or service can be: • used, consumed, or sold for an amount greater than scrap value • held in a way that generates economic benefits. The above can be achieved either by holding the good or receiving the service on its own (i.e., benefiting from the good or service on its own) or through the use of other readily available resources (i.e., benefiting from the good or service in conjunction with other readily available resources). A readily available resource is one that is generally sold separately. If a good or service is regularly sold separately this is also an indicator that the customer can benefit from this good or service on its own or with other readily available resources. Factors that indicate an entity’s promise to transfer a good or service to a customer is separately identifiable include, but are not limited to, the following: • The entity does not provide a significant service of integrating the good or service with other goods or services promised in the contract into a bundle of goods or services that represent the combined output for which the customer has contracted. In other words, the entity is not using the good or service as an input to produce or deliver the combined output specified by the customer [IFRS 15.29(a)]. • The good or service does not significantly modify or customize another good or service promised in the contract [IFRS 15.29(b)]. • The good or service is not highly dependent on, or highly interrelated with, other goods or services promised in the contract [IFRS 15.29(c)].

 

The Good or Service Is Part of a Series of Distinct Goods or Services This requirement aims to simplify the application of the five-step model in situations where an entity is providing substantially the same good or service over a period of time. For this requirement to apply, two specific criteria must be met: • each distinct good or service transferred in the series must meet the criterion for a performance obligation satisfied “over time” (discussed later) [IFRS 15.23(a)]. • The same method is used to measure progress toward satisfaction of the performance obligation to transfer each distinct good or service in the series [IFRS 15.23(b)].

 

4. What is the impact of sub-contracting work on the identification of performance obligations?

For example, assume that a vendor is offering a number of goods or services in a contract, and these are being offered as one solution to the customer. However, some of the individual goods or services required to create the customer solution can be sub-contracted out by the vendor. The sub-contracting of services may not result in a change in the assessment of whether a good or service is distinct. In the Basis for Conclusions on IFRS 15, the Boards specifically noted that construction-type and production-type contracts involve the transfer to the customer of many goods and services that are capable of being distinct (such as various building materials, labor or services and project management services). However, identifying each individual good or service as a promise would not faithfully represent the nature of the entity’s promise to the customer nor result in a useful depiction of the entity’s performance.

These subcontracting arrangements should still be assessed from the perspective of agency relationships (i.e., the subcontractor acting effectively as an agent). The principal/agent considerations noted in Appendix B of IFRS 15 should be considered. Appendix B, specifically notes: An entity that is a principal in a contract may satisfy a performance obligation by itself or it may engage another party (for example, a subcontractor) to satisfy some or all of a performance obligation on its behalf. When an entity that is a principal satisfies a performance obligation, the entity recognizes revenue in the gross amount of consideration to which it expects to be entitled in exchange for those goods or services transferred. Therefore, as long as the entity remains a principal, engaging another party to transfer some goods or services, does not change the identification of performance obligations.

 

5. What is meant by variable consideration?

Variable consideration encompasses any amount that is variable under a contract, including, for example, performance bonuses, penalties, discounts, rebates, price concessions, incentives and the customer’s right to return products. Variable consideration is considered to be a component of the transaction price. It is part of the consideration to which an entity expects to be entitled in exchange for transferring promised goods or services and therefore should be estimated and included in the transaction price for revenue recognition purposes. When the consideration receivable is variable, the entity must estimate the amount of the consideration using either the expected value (i.e., a probabilityweighted amount) or the most likely amount, depending on which method better predicts the amount of consideration. Some or all of the estimated amount of variable consideration is included in the transaction price but only to the extent that it is highly probable a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

 

If the consideration promised in a contract has an element of variability, whether it be explicitly stated in the contract or customers have a valid expectation (e.g., inferred from customary business practices) the entity will accept an amount lower than that stated in the contract, or there is an intention to offer a price concession to a customer, then the contract is considered to include “variable consideration” for the purposes of applying IFRS 15.

 

 

6. IFRS 15 has specific requirements when it comes to a “significant financing component”. How is this assessed?

The objective when adjusting the promised amount of consideration for a significant financing component is that revenue recognized should reflect the “cash selling price” of the particular good or service at the time the good or service is transferred. Contracts in which payment by the customer and performance by the entity occur at significantly different times will need to be assessed to determine whether the contract contains a significant financing component. In assessing whether a significant financing component exists, IFRS 15 requires an assessment of the relevant facts and circumstances. Factors that should be considered in this assessment include both of the following: a. the difference, if any, between the amount of promised consideration and the cash selling price of the promised goods or services [IFRS 15.61(a)]; and b. the combined effect of both of the following [IFRS 15.61(b)]: I. the expected length of time between when the entity transfers the promised goods or services to the customer and when the customer pays for those goods or services; and ii. The prevailing interest rates in the relevant market.

 

7. How are sales returns accounted for under IFRS 15?

Sales returns are a form of variable consideration. IFRS 15 provides specific guidance for this form of variable consideration. Entities in many industries (e.g., retail, industrial products, consumer products, etc.) often grant customers a right of return with purchased goods, which may result in one of the following: • a full or partial refund of any consideration paid • a credit applicable to amounts owed, or that will be owed, to the entity • another product in exchange (e.g., “stock rotation rights”). Under IFRS 15, when sales are made to customers with a right of return, the selling entity will need to account for them as follows:

1. Recognize revenue for the consideration to which the entity expects to be entitled. In making this assessment, entities must apply the guidance on variable consideration, including the constraint. Therefore, for the goods the entity estimates are going to be returned, no revenue is recognized (i.e., because it is highly probable that a significant revenue reversal will occur), rather a refund liability is recognized (refer to step 2 below).
2. Set up a liability for the amount of consideration the entity expects it will have to refund (i.e., products expected to be returned).
3. Set up an asset with a corresponding entry to cost of sales for the right to recover products when a refund liability is settled (i.e., this will be at the cost of the initial inventory less any expected costs to recover the products).

 

8. What are the requirements for accounting for non-cash consideration under IFRS 15?

IFRS 15 requires that non-cash consideration received be measured at the fair value of the consideration received. If fair value cannot be reasonably estimated, the consideration will be measured by reference to the stand-alone selling price of the good or service promised in the contract. The fair value of non-cash consideration may vary. If the non-cash consideration varies for reasons other than the form of the consideration, entities will apply the guidance in IFRS 15 related to constraining variable consideration. However, if fair value varies only due to the form, the variable constraint guidance in IFRS 15 would not apply.

 

9. IFRS 15 is based on the transfer of control as opposed to the transfer of risks and rewards. Does this mean the transfer of risks and rewards is no longer relevant?

The Boards determined that an assessment based on the transfer of control as opposed to the transfer of the risks and rewards of ownership was more appropriate for a number of reasons. One such reason was that an assessment based on the transfer of control would result in more consistent decisions about when goods or services are transferred. In practice, there is often difficulty in assessing whether an appropriate level of the risks and rewards of ownership has been transferred to the customer, especially in cases when the selling entity retains some of the risks and rewards (e.g., risks retained during transport under a Free-on-Board (FOB) shipping point arrangement).

 

1. How are gift cards accounted for under IFRS 15?

As gift cards are sold, a contract liability is recognized and as customers redeem the cards for goods or services, revenue is recognized because the related performance obligation has been satisfied. Customers may not always exercise their contractual rights to redeem the gift cards in full. IFRS 15 refers to this unredeemed amount (i.e., the unexercised rights) as “breakage”. If an entity expects to be entitled to such breakage amounts (i.e., customers are not expected to exercise their rights in full), the entity recognizes breakage in revenue based on the pattern of recognition of the goods and services transferred to the customers. To determine entitlement to such breakage amounts, entities should apply the guidance related to constraining variable consideration. Specifically, breakage can only be recognized if it is highly probable that recognizing breakage will not result in a significant reversal of the cumulative amount of revenue recognized. If an entity does not have sufficient information to predict whether it will be entitled to such breakage amounts, breakage will only be recognized as revenue when the likelihood of customers exercising the outstanding rights is remote.

 

1. How are warranties accounted for under IFRS 15?

The guidance in IFRS 15 on warranties has been developed acknowledging the different types of warranties. Under IFRS 15, warranties are grouped in two types: assurance and service. What distinguishes them is whether the warranty simply provides assurance the product complies with agreed-upon specifications or whether it provides a service in addition to the assurance. If the customer has the option to purchase the warranty, the warranty is a “service-type” warranty and will need to be accounted for as a separate performance obligation. If the customer does not have the option to purchase the warranty separately, then the warranty may not provide a distinct service and may simply provide assurance regarding the existing product. An assessment is therefore required to determine whether the customer is still receiving a service. Examples of factors to be considered in completing this assessment include: • whether the warranty is required by law • the length of the warranty coverage period • the nature of the tasks the entity promises to perform. If it is determined that no distinct service is provided, such warranties are referred to as “assurance-type” warranties. Such warranties will be accounted for in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets.

 

2. How should “bad debts” be presented under IFRS 15? Are they offset against revenue?

“Bad debts” are recognized as a result of customer credit risk. However, this is not a credit risk existing at the inception of the contract and therefore is different from the evaluation of credit risk completed at inception (i.e., collectability threshold assessed as part of Step 1 of the IFRS 15 revenue model). This topic was contemplated by the Boards in drafting IFRS 15. In the end, the Boards concluded that impairment losses (which may include bad debts) should be recognized as an expense. Gross revenue is not adjusted for these amounts since revenue should be recognized at the amount at which the entity expects to be entitled (and not the amount it receives). This amount should not be adjusted by amounts the entity was not able to collect. Additionally the portion of the impairment losses recognized that relate to short-term receivables from contracts with customers (i.e., effectively bad debts) should be disclosed separately in the financial statements notes (i.e., separate from other impairment losses), since this provides users with information on receivables management (i.e., bad debts).

 

 

IFRS 10

 

1. Will fewer or greater number of entities be consolidated under IFRS 10 as compared to IAS 27 Consolidated and Separate Financial Statements and SIC-12 Consolidation—Special Purpose Entities?

It depends. IFRS 10 will affect some entities more than others. The consolidation conclusion is not expected to change for most straightforward situations. However, changes can result in more complex situations. For example, sometimes assessing power is straightforward, such as when power over an investee is obtained directly and solely from the voting rights granted by equity instruments such as shares, and can be assessed by considering the voting rights from those shareholdings. In other cases, the assessment will be more complex and require more than one factor to be considered, for example when power results from one or more contractual arrangements. IFRS 10 does not provide “bright-lines” and therefore requires consideration of many factors and the application of professional judgment.

 

2. If a company disposes of a subsidiary during an accounting period, does it still need to prepare consolidated financial statements up to the date of disposal?

Yes. IFRS 10 requires that the income and expenses of a subsidiary should be included in the consolidated financial statements until the date on which the parent ceases to control the subsidiary. However, on adoption of IFRS 10, certain transitional relief exists where the subsidiary is disposed of prior to the date of initial application. For each investee, an entity performs the assessment of control (i.e., whether the investee should be consolidated) at the beginning of the annual period in which IFRS 10 is first applied. If an entity with a calendar year-end has not early adopted IFRS 10, then this date is January 1, 2013. This means that there is no need to perform the consolidation assessment at an earlier date, which avoids the need to consolidate and then deconsolidate a controlling interest that was disposed of in the comparative period.

 

3. When potential voting rights are “out of the money”, can such rights still be considered substantive?

Yes. For a right to be substantive, the holder must have the practical ability to exercise that right when decisions about the direction of the relevant activities need to be made. Rights are more likely to be substantive when they are “in the money”, however sometimes rights can be substantive, even though the rights are “out of the money” (e.g., because the investor could benefit for other reasons such as by realizing synergies between the investor and the investee). It is necessary to exercise judgment based on a careful analysis of all of the relevant facts and circumstances. Common examples of potential voting rights include rights that result from the exercise of an option or conversion feature of a convertible instrument.

 

4. Are voting rights the primary factor to determine power?

Not necessarily. Power arises from a variety of rights which may include voting rights; potential voting rights (e.g., options or convertible instruments); rights to appoint, reassign or remove members of an investee’s key management personnel who have the ability to direct the relevant activities; decision-making rights within a management contract; rights to direct the investee to enter into, or veto any changes to, transactions for the benefit of the investor, etc... To determine whether an investor has rights sufficient to give it power, the investor should also consider the purpose and design of the investee

 

5. Are decision-making rights synonymous with a shareholder who holds common shares?

Not necessarily. Typically, common shareholders have decision-making rights; however, situations may arise where decision-making rights are held by those who hold no equity interest in the company (e.g., a lender who has decision-making rights by virtue of a loan agreement)

 

6. As a result of IFRS 10, has the definition of joint control changed in the scope of IFRS 11 Joint Arrangements?

Yes. Before assessing whether an entity has joint control over an arrangement, an entity first assesses whether the parties, or a group of the parties, control the arrangement (in accordance with the definition of control in IFRS 10).

 

 

IFRS 11

 

1. Is proportionate consolidation still an accounting policy choice?

IFRS 11 requires the use of the equity method of accounting for interests in joint ventures thereby eliminating the proportionate consolidation method (i.e., the accounting policy choice of proportionate consolidation for joint ventures has been removed). However, a party to a joint operation (i.e., joint operator) recognizes its own assets, liabilities and transactions, including its share of those incurred jointly. In other words, each party to the joint operation accounts for its share of the joint assets and its agreed share of any liabilities, and recognizes its share of revenues and expenses in accordance with the contractual arrangement.

 

2. What are the differences between proportionate consolidation and recognition of assets, liabilities, revenues and expenses arising from a joint operation?

In the majority of cases, accounting for assets and liabilities gives the same outcome as proportionate consolidation would have done. There are two main differences between recognizing assets, liabilities, revenues and expenses relating to a joint operation and proportionate consolidation. First, IFRS 11 requires an entity with an interest in a joint operation to recognize assets, liabilities, revenues and expenses of the joint operation as specified in the contractual arrangement, rather than automatically basing the recognition of all assets, liabilities, revenues and expenses on the ownership interest that the entity has in the joint operation. Second, the parties’ interests in a joint operation are recognized in their separate financial statements. There is no difference between amounts recognized in the parties’ separate financial statements and in the parties’ consolidated financial statements, whereas under IAS 31 the parties’ interests in jointly controlled entities in their separate financial statements were represented by an investment measured at cost or in accordance with IFRS 9 Financial Instruments (or IAS 39 Financial Instruments: Recognition and Measurement).

 

3. If a contract has a dispute resolution mechanism through arbitration, does the existence of such a mechanism prevent the arrangement from being jointly controlled and, consequently, from being a joint arrangement?

Not necessarily. Contractual arrangements might include clauses on the resolution of disputes, such as arbitration. These provisions may allow for decisions to be made in the absence of unanimous consent among the parties that have joint control. The existence of such provisions does not necessarily prevent the arrangement from being jointly controlled and, consequently, from being a joint arrangement.

 

 

IFRS 12

1. Are all IFRS 12 disclosures required for interim financial statements?

IAS 34 Interim Financial Reporting applies when an entity prepares interim financial statements. The objective of IAS 34 is to prescribe the minimum content of an interim financial report and to prescribe the principles for recognition and measurement in complete or condensed financial statements for an interim period. For a condensed set of financial statements, IAS 34 does not mandate the disclosures in IFRS 12. However, in complying with the objectives of IAS 34, an entity should provide an explanation of events and transactions that are significant to an understanding of the changes in financial position and performance of the entity since the end of the last annual reporting period. Information disclosed in relation to those events and transactions should update the relevant information presented in the most recent annual financial report. To comply with this objective, an entity should consider what IFRS 12 disclosures may need to be included in its interim financial statements. If there has been any change in accounting policy since the most recent annual financial statements, the interim financial report should include a description of the nature and effect of the change.

 

 

IFRS 13

 

1. Does IFRS 13 Fair Value Measurement apply to share-based payments?

No. The measurement and disclosure requirements of IFRS 13 do not apply to share-based payment transactions within the scope of IFRS 2 Share based Payment. Therefore, when applying IFRS 2 an entity measures fair value in accordance with IFRS 2, not IFRS 13

2. What is the difference between “transaction price” and “fair value”?

In many cases the transaction price will equal the fair value. However, fair value is an exit price (not entry price) and may not always be equal to the transaction price in certain situations. For example, the transaction price may not represent the fair value of an asset or a liability at initial recognition when any of the conditions set out in IFRS 13.B4 exists, such as:

— The transaction is between related parties, although the price in a related party transaction may be used as an input into a fair value measurement if the entity has evidence that the transaction was entered into at market terms.

— The transaction takes place under duress or the seller is forced to accept the price in the transaction. For example, that might be the case if the seller is experiencing financial difficulty.

— The unit of account represented by the transaction price is different from the unit of account for the asset or liability measured at fair value. For example, that might be the case if the asset or liability measured at fair value is only one of the elements in the transaction (e.g., in a business combination), the transaction includes unstated rights and privileges that are measured separately in accordance with another IFRS, or the transaction price includes transaction costs.

— The market in which the transaction takes place is different from the principal market (or most advantageous market). For example, those markets might be different if the entity is a dealer that enters into transactions with customers in the retail market, but the principal (or most advantageous) market for the exit transaction is with other dealers in the dealer market.

If another IFRS requires or permits an entity to measure an asset or a liability initially at fair value and the transaction price is different from the fair value on recognition (i.e., day 1), the difference is recognized in profit or loss (unless another applicable IFRS specifies otherwise).

 

3. Are transaction costs considered in determining “fair value”?

No. Transaction costs (e.g., broker fees) are not a component of fair value, although they are considered in determining the most advantageous market.

 

4. Does IFRS 13 require the use of a professional valuator?

No. The use of a professional valuator or appraiser is not a requirement of IFRS 13. However, such professionals can be beneficial in determining and supporting the fair value of assets and liabilities that are not quoted in an active market, for example.

5. Does IFRS 13 apply to provisions that are within the scope of IAS 37 Provisions, Contingent Liabilities and Contingent Assets?

No. Provisions within the scope of IAS 37 are not necessarily measured at fair value. Provisions are measured at the entity’s best estimate of the expenditure required to settle the present obligation at the end of the reporting period.

 

 

IFRS 3

1. How shall business combination achieved in stages accounted?

An acquirer sometimes obtains control of a target company in which it held an equity interest immediately before the acquisition date. For example, on 31 December 20X1, Entity A holds a 35 per cent non-controlling equity interest in Entity B. On that date, Entity A purchases an additional 40 per cent interest in Entity B, which gives it control of Entity B. This IFRS refers to such a transaction as a business combination achieved in stages, sometimes also referred to as a step acquisition. In a business combination achieved in stages, the acquirer shall again measure its previously held equity interest in the target companyat its acquisition-date fair value and recognize the resulting gain or loss, if any, in profit or loss. In prior reporting periods, the acquirer may have recognized changes in the value of its equity interest in the target companyin other comprehensive income (for example, because the investment was classified as available for sale). If so, the amount that was recognized in other comprehensive income shall be recognized on the same basis as would be required if the acquirer had disposed directly of the previously held equity interest

 

2. How to account for a business combination achieved without transfer of consideration?

In a business combination achieved by contract alone, the acquirer shall attribute to the owners of the target company the amount of the target companynet assets recognized in accordance with this IFRS. In other words, the equity interests in the target companyheld by parties other than the acquirer are a non-controlling interest in the acquirer’s post-combination financial statements even if the result is that all of the equity interests in the target companyare attributed to the non-controlling interest.

 

3. How are acquisition costs in business combination accounted?

The acquirer shall account for acquisition-related costs as expenses in the periods in which the costs are incurred and the services are received, with one exception. The costs to issue debt or equity securities shall be recognized in accordance with IAS 32 and IAS 39.